atec-10q_20200331.htm

 

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, 2020

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)

 

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

 

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  

 

As of May 04, 2020, there were 63,432,932 shares of the registrant’s common stock outstanding.

 


ALPHATEC HOLDINGS, INC.

QUARTERLY REPORT ON FORM 10-Q

March 31, 2020

Table of Contents

 

 

 

 

 

Page

 

 

PART I – FINANCIAL INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Financial Statements

 

3

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of March 31, 2020 (unaudited) and December 31, 2019

 

3

 

 

 

 

 

 

 

Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2020 and 2019 (unaudited)

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Loss for the Three Months Ended March 31, 2020 and 2019 (unaudited)

 

5

 

 

 

 

 

 

 

Condensed Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31, 2020
and 2019 (unaudited)

 

6

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2020
and 2019 (unaudited)

 

7

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

 

8

 

 

 

 

 

Item 2.

 

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

 

25

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

34

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

34

 

 

 

 

 

 

 

PART II – OTHER INFORMATION

 

 

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

36

 

 

 

 

 

Item 1A.

 

Risk Factors

 

36

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

37

 

 

 

 

 

Item 5.

 

Other Information

 

37

 

 

 

 

 

Item 6.

 

Exhibits

 

38

 

 

 

 

 

SIGNATURES

 

39

 

 

 

2


PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

ALPHATEC HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except for par value data) 

 

 

 

March 31, 2020

 

 

December 31, 2019

 

Assets

 

(Unaudited)

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

Cash

 

$

27,466

 

 

$

47,113

 

Accounts receivable, net

 

 

15,375

 

 

 

16,150

 

Inventories, net

 

 

37,872

 

 

 

34,854

 

Prepaid expenses and other current assets

 

 

10,646

 

 

 

9,880

 

Current assets of discontinued operations

 

 

353

 

 

 

321

 

Total current assets

 

 

91,712

 

 

 

108,318

 

Property and equipment, net

 

 

20,919

 

 

 

19,722

 

Right-of-use asset

 

 

1,601

 

 

 

1,860

 

Goodwill

 

 

13,897

 

 

 

13,897

 

Intangibles, net

 

 

25,165

 

 

 

25,605

 

Other assets

 

 

493

 

 

 

493

 

Noncurrent assets of discontinued operations

 

 

52

 

 

 

53

 

Total assets

 

$

153,839

 

 

$

169,948

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

11,800

 

 

$

7,772

 

Accrued expenses

 

 

23,772

 

 

 

26,416

 

Current portion of long-term debt

 

 

916

 

 

 

489

 

Current portion of lease liability

 

 

1,356

 

 

 

1,314

 

Current liabilities of discontinued operations

 

 

399

 

 

 

399

 

Total current liabilities

 

 

38,243

 

 

 

36,390

 

Long-term debt, less current portion

 

 

53,033

 

 

 

53,448

 

Operating lease liability, less current portion

 

 

559

 

 

 

925

 

Other long-term liabilities

 

 

10,971

 

 

 

11,951

 

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

   March 31, 2020 and December 31, 2019; 3,319 shares issued and outstanding

   at both March 31, 2020 and December 31, 2019

 

 

23,603

 

 

 

23,603

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

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

  at March 31, 2020 and December 31, 2019; 0 shares issued and

  outstanding at March 31, 2020 and December 31, 2019

 

 

 

 

 

 

Series B convertible preferred stock, $0.0001 par value; 45 shares authorized

  at March 31, 2020 and December 31, 2019; 0 shares issued and

  outstanding at March 31, 2020 and December 31, 2019

 

 

 

 

 

 

Common stock, $0.0001 par value; 200,000 authorized; 63,403 shares issued and 63,260

  outstanding at March 31, 2020, net of 143 unvested shares; and 61,718 shares issued and

  61,400 shares outstanding, net of 318 unvested shares at December 31, 2019

 

 

6

 

 

 

6

 

Treasury stock, 2 shares, at cost

 

 

(97

)

 

 

(97

)

Additional paid-in capital

 

 

611,091

 

 

 

606,558

 

Shareholder note receivable

 

 

(5,000

)

 

 

(5,000

)

Accumulated other comprehensive income

 

 

1,157

 

 

 

1,088

 

Accumulated deficit

 

 

(579,727

)

 

 

(558,924

)

Total stockholders’ equity

 

 

27,430

 

 

 

43,631

 

Total liabilities and stockholders’ equity

 

$

153,839

 

 

$

169,948

 

 

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,

 

 

 

2020

 

 

2019

 

Revenue:

 

 

 

 

 

 

 

 

Revenue from U.S. products

 

$

29,070

 

 

$

22,955

 

Revenue from international supply agreement

 

 

1,045

 

 

 

1,600

 

Total revenue

 

 

30,115

 

 

 

24,555

 

Cost of revenue

 

 

9,084

 

 

 

7,987

 

Gross profit

 

 

21,031

 

 

 

16,568

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

 

3,749

 

 

 

3,372

 

Sales, general and administrative

 

 

28,003

 

 

 

21,097

 

Litigation-related

 

 

2,643

 

 

 

2,623

 

Amortization of intangible assets

 

 

172

 

 

 

182

 

Transaction-related

 

 

4,272

 

 

 

 

Restructuring

 

 

 

 

 

60

 

Total operating expenses

 

 

38,839

 

 

 

27,334

 

Operating loss

 

 

(17,808

)

 

 

(10,766

)

Other expense:

 

 

 

 

 

 

 

 

Other expense, net

 

 

(2,874

)

 

 

(2,119

)

Loss from continuing operations before taxes

 

 

(20,682

)

 

 

(12,885

)

Income tax provision

 

 

40

 

 

 

31

 

Loss from continuing operations

 

 

(20,722

)

 

 

(12,916

)

Loss from discontinued operations, net of applicable taxes

 

 

 

 

 

(52

)

Net loss

 

$

(20,722

)

 

$

(12,968

)

Loss per share, basic and diluted:

 

 

 

 

 

 

 

 

Continuing operations

 

$

(0.33

)

 

$

(0.29

)

Discontinued operations

 

$

(0.00

)

 

$

(0.00

)

Net loss per share, basic and diluted

 

$

(0.33

)

 

$

(0.29

)

Shares used in calculating basic and diluted net loss per share

 

 

62,568

 

 

 

45,020

 

 

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,

 

 

 

2020

 

 

2019

 

Net loss

 

$

(20,722

)

 

$

(12,968

)

Foreign currency translation adjustments related to continuing

   operations

 

 

69

 

 

 

75

 

Comprehensive loss

 

$

(20,653

)

 

$

(12,893

)

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

5


ALPHATEC HOLDINGS, INC.

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, 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

 

 

 

 

 

Balance at  January 1, 2020

 

 

61,400

 

 

$

6

 

 

 

 

 

$

 

 

 

 

 

$

 

 

$

606,558

 

 

$

(5,000

)

 

$

(97

)

 

$

1,088

 

 

$

(558,924

)

 

$

43,631

 

Cumulative effect of change in accounting principle

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(81

)

 

 

(81

)

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,630

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,630

 

Distributor equity incentives

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

70

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

70

 

Common stock issued for warrant

   exercises

 

 

1,390

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,158

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,158

 

Common stock issued for employee stock purchase plan and stock option exercises

 

 

76

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

83

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

83

 

Common stock issued for vesting of restricted stock awards, net of shares repurchased for tax liability

 

 

394

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(408

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(408

)

Foreign currency translation adjustments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

69

 

 

 

 

 

 

69

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(20,722

)

 

 

(20,722

)

Balance at March 31, 2020

 

 

63,260

 

 

$

6

 

 

 

 

 

$

 

 

 

 

 

$

 

 

$

611,091

 

 

$

(5,000

)

 

$

(97

)

 

$

1,157

 

 

$

(579,727

)

 

$

27,430

 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 

6


ALPHATEC HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(In thousands)

 

 

 

Three Months Ended March 31,

 

 

 

2020

 

 

2019

 

Operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(20,722

)

 

$

(12,968

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

2,454

 

 

 

1,785

 

Stock-based compensation

 

 

3,568

 

 

 

1,612

 

Amortization of debt discount and debt issuance costs

 

 

1,238

 

 

 

503

 

Amortization of right-of-use asset

 

 

259

 

 

 

217

 

Provision for doubtful accounts

 

 

(5

)

 

 

66

 

Provision for excess and obsolete inventory

 

 

1,722

 

 

 

1,997

 

Deferred income tax benefit

 

 

 

 

 

4

 

Beneficial conversion feature from convertible notes

 

 

 

 

 

242

 

Loss (Gain) on disposal of instruments

 

 

32

 

 

 

(275

)

Accretion to contingent consideration

 

 

 

 

 

289

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

782

 

 

 

1,268

 

Inventories, net

 

 

(4,741

)

 

 

(4,398

)

Prepaid expenses and other current assets

 

 

(983

)

 

 

198

 

Other assets

 

 

 

 

 

69

 

Other long-term assets

 

 

 

 

 

(2,612

)

Accrued expenses and other

 

 

(2,643

)

 

 

(1,071

)

Accounts payable

 

 

3,414

 

 

 

3,319

 

Lease liability

 

 

(324

)

 

 

2,910

 

Other long-term liabilities

 

 

(1,099

)

 

 

(1,099

)

Net cash used in operating activities

 

 

(17,048

)

 

 

(7,944

)

Investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(2,629

)

 

 

(1,068

)

Net cash used in investing activities

 

 

(2,629

)

 

 

(1,068

)

Financing activities:

 

 

 

 

 

 

 

 

Proceeds from sale of common stock, net

 

 

833

 

 

 

14

 

Borrowings under lines of credit

 

 

29,544

 

 

 

26,433

 

Repayments under lines of credit

 

 

(30,408

)

 

 

(26,822

)

Principal payments on capital lease obligations

 

 

(8

)

 

 

(5

)

Debt issuance costs

 

 

 

 

 

(300

)

Principal payments on term loan and notes payable

 

 

 

 

 

(3,022

)

Net cash used in financing activities

 

 

(39

)

 

 

(3,702

)

Effect of exchange rate changes on cash

 

 

69

 

 

 

79

 

Net decrease in cash

 

 

(19,647

)

 

 

(12,635

)

Cash at beginning of period, including discontinued operations

 

 

47,113

 

 

 

29,054

 

Cash at end of period, including discontinued operations

 

$

27,466

 

 

$

16,419

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

1,646

 

 

$

1,357

 

Cash paid for income taxes

 

$

25

 

 

$

23

 

Supplemental disclosure of noncash investing and financing activities:

 

 

 

 

 

 

 

 

Common stock issued for achievement of SafeOp contingent consideration

 

$

 

 

$

2,889

 

Purchases of property and equipment in accounts payable

 

$

1,297

 

 

$

785

 

 

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 subsidiaries, Alphatec Spine, Inc. (“Alphatec Spine”) and SafeOp Surgical, Inc. (“SafeOp”), designs, develops, and markets technology for the treatment of spinal disorders. 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, 2019, 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, 2019, which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019 that was filed with the SEC on March 17, 2020. Operating results for the three months ended March 31, 2020 are not necessarily indicative of the results that may be expected for the year ending December 31, 2020, or any other future periods.

Liquidity

The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. These financial statements do not include any adjustments related to the recovery of the recorded assets or the classification of the liabilities that might be necessary should the Company be unable to continue as a going concern.

At each reporting period, the Company evaluates whether there are conditions or events that raise substantial doubt about the Company’s ability to continue as a going concern within twelve months after the date the consolidated financial statements are issued. The Company’s evaluation entails analyzing prospective operating budgets and forecasts for expectations of the Company’s cash needs and comparing those needs to the current cash and cash equivalent balances, and availability under existing credit facilities. The Company’s working capital at March 31, 2020 was $53.8 million (including cash of $27.5 million). In April 2020, the Company completed a $20 million draw on its credit facility with Squadron Medical Finance Solutions LLC (“Squadron Capital,” or “Squadron”).

8


The Company’s capital requirements over the next twelve months will depend on many factors, including the ability to achieve anticipated revenue, manage operating expense and the timing of required investments in inventory and instrument sets to support its customers. The Company has experienced negative operating cash flows for all historical periods presented and it expects these losses to continue into the foreseeable future, particularly as the COVID-19 pandemic impacts operations and surgical volumes. The severity of the impact of the COVID-19 pandemic on the Company’s business will depend on a number of factors, including, but not limited to, the duration, extent and severity of the pandemic and its impact on the Company's customers, all of which are uncertain and cannot be predicted. To reduce expenditures and preserve cash, the Company recently implemented several cost-containment measures, including expense management programs and reductions in projected inventory and capital spending. The company believes it has sufficient

As more fully described in Note 5, the Company’s existing credit agreements with MidCap Funding IV Trust (“MidCap”) and Squadron (collectively, the “current lenders”) include a financial covenant that required the Company to maintain a minimum cash balance of $5.0 million through March 31, 2020. The Company was in compliance with this covenant at March 31, 2020.  The minimum cash covenant converted to a minimum fixed charge coverage ratio as of April 1, 2020. The Company did not meet the fixed charge ratio as of April 2020 and is required to certify its debt covenant compliance with its lenders by May 31, 2020. In order to avoid a default on its existing credit agreements, the Company plans to refinance its existing debt. This factor indicates substantial doubt exists, but management’s plans are to refinance the debt.

On May 9, 2020, the Company executed a commitment letter for $35 million in additional secured financing from Squadron.  This capital will be made available under the same material terms and conditions as the existing term loan with Squadron. Under the terms of the amended facility, the maturity date on the entire term loan will be extended to May 2025. A portion of the proceeds from the expanded facility will be used to retire the Company’s outstanding obligation under its working capital revolver with MidCap Funding. The expanded Squadron credit facility, as proposed, does not include any financial covenants. ATEC expects this transaction to close before the end of May 2020.

Management believes the credit refinancing of existing debt under the commitment letter with Squadron is probable to occur, and as such, alleviates any substantial doubt about the Company’s ability to continue as a going concern.

COVID-19

The Company is subject to risks and uncertainties as a result of the COVID-19 pandemic. In late 2019, a novel strain of coronavirus, COVID-19, was reported to have surfaced in Wuhan, China. Since then, COVID-19 has spread to countries globally, including the United States and mostly all European countries. To date, COVID-19 has had, and may continue to have, an adverse impact on the Company’s operations, supply chains, distribution channels and expenses as a result of the preventive and precautionary measures that the Company, its customers, other businesses, and governments are taking, including the deferral of elective medical procedures and diversion of capital and other resources. As information surrounding COVID-19 continues to evolve, the extent of the impact on the Company's business is highly uncertain and difficult to predict. As a result of the pandemic, hospitals and health institutions are diverting resources and deferring elective surgical procedures to treat COVID-19 patients. To date, these measures have impacted, and will continue to impact, the abilities of these institutions to meet their normal recurring business obligations, including those to the Company. Furthermore, capital markets and economies worldwide have been negatively impacted by COVID-19, and it is possible this impact could cause a local and/or global economic recession. As the extent of such economic disruption continues to remain uncertain, the results of the COVID-19 pandemic could have a material adverse effect on the business.

The severity of the impact of the COVID-19 pandemic on the Company's business will depend on a number of factors, including, but not limited to, the duration, extent and severity of the pandemic and its impact on the Company's customers, all of which are uncertain and cannot be predicted. The Company's future results of operations and liquidity could be adversely impacted by delays in payments of outstanding receivable amounts beyond normal payment terms, supply chain disruptions and uncertain demand, and the impact of any initiatives or programs that the Company may undertake to address financial and operations challenges faced by its customers. As of the date of issuance of these condensed consolidated financial statements, the extent to which the pandemic may materially impact the Company's financial condition, liquidity, or results of operations is uncertain.

9


Reclassification

Certain amounts in the consolidated financial statements for the three months ended March 31, 2019 have been reclassified to conform to the current period's presentation. These reclassifications include stock-based compensation expense, which was reclassified to correctly present employee expenses consistent with their function, out of research and development and into sales, general and administrative expense on the Company’s consolidated statements of operations. This resulted in a reclassification of $0.1 million of stock compensation expense for the three months ended March 31, 2019. In addition, certain amounts in the Consolidated Statement of Cash Flow for the three months ended March 31, 2019 have been reclassified to conform to current period's presentation. 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, 2019, which are included in the Company’s Annual Report on Form 10-K that was filed with the SEC on March 17, 2020. Except as discussed below, these accounting policies have not changed during the three months ended March 31, 2020.

Transaction-related Expenses

The Company expensed certain costs related to the tender offer for the acquisition of EOS Imaging, which primarily include third-party advisory fees, legal fees and commitment fees related to transaction financing arrangements.

Fair Value Measurements

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, 2020. During the second quarter of 2019, the Company issued a liability classified equity award to one of its executive officers. The award will be earned over a 4 year vesting period and upon a specific market condition. As the award will be cash settled, it is classified as a liability 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 the specified market condition with the valuation updated at each reporting period. The full fair value of the cash settled award was $0.6 million as of March 31, 2020 and is being recognized ratably as the underlying service period is provided.

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, 2020 (in thousands):

 

 

 

Level 3

Liabilities

 

Balance at January 1, 2020

 

$

266

 

Vested portion of liability classified equity award

 

 

107

 

Change in fair value measurement

 

 

(238

)

Balance at March 31, 2020

 

$

135

 

 

10


Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

In November 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2019-08, Compensation—Stock Compensation (Topic 718) and Revenue from Contracts with Customers (Topic 606), which clarifies that an entity must measure and classify share-based payment awards granted to a customer by applying the guidance in Topic 718. Accounting Standard Codification (“ASC”) 2019-08 is effective for annual reporting periods beginning after December 15, 2019, including interim reporting periods within those annual reporting periods. The Company adopted the guidance effective January 1, 2020 and recorded a cumulative adjustment of $0.1 million to accumulated deficit as of January 1, 2020.

In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other, which eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. The standard has tiered effective dates, starting in 2020 for calendar-year public business entities that meet the definition of an SEC filer. Early adoption is permitted for annual and interim goodwill impairment testing dates after January 1, 2017. The Company adopted the guidance effective January 1, 2020 as part of its process to assess impairment of Goodwill.

In August 2018, the FASB issued ASU 2018-15, Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40), which aligns the accounting for cloud computing implementation costs with that of costs to develop or obtain internal-use software, meaning such costs that are part of the application development stage are capitalized as an asset and amortized over the term of the arrangement, otherwise, such costs are expensed as incurred. It also clarifies the classification of amounts related to capitalized implementation costs in the financial statements. ASC 2018-15 is effective for annual reporting periods beginning after December 15, 2019, including interim reporting periods within those annual reporting periods. Early adoption is permitted.  The Company adopted the guidance effective January 1, 2020. It did not have a material impact on the Company’s consolidated financial statements.

Recently Issued Accounting Pronouncements

The Company has evaluated all recent accounting pronouncements issued by the Financial Accounting Standards Board in the form of Accounting Standards Updates through the date these financial statements were available to be issued and found no recent accounting pronouncements issued, but not yet effective that when adopted, would have a material impact on the financial statements of the Company.

3. Select Condensed Consolidated Balance Sheet Details

Accounts Receivable, net

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

 

 

 

March 31,

2020

 

 

December 31,

2019

 

Accounts receivable

 

$

15,664

 

 

$

16,436

 

Allowance for doubtful accounts

 

 

(289

)

 

 

(286

)

Accounts receivable, net

 

$

15,375

 

 

$

16,150

 

 

Inventories, net

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

 

 

 

March 31,

2020

 

 

December 31,

2019

 

Raw materials

 

$

5,402

 

 

$

5,822

 

Work-in-process

 

 

2,052

 

 

 

1,578

 

Finished goods

 

 

56,005

 

 

 

51,669

 

 

 

 

63,459

 

 

 

59,069

 

Less reserve for excess and obsolete finished goods

 

 

(25,587

)

 

 

(24,215

)

Inventories, net

 

$

37,872

 

 

$

34,854

 

 

11


Property and Equipment, net

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

 

 

 

Useful lives

(in years)

 

 

March 31,

2020

 

 

December 31,

2019

 

Surgical instruments

 

 

4

 

 

$

59,807

 

 

$

58,502

 

Machinery and equipment

 

 

7

 

 

 

6,426

 

 

 

6,038

 

Computer equipment

 

 

3

 

 

 

3,879

 

 

 

3,594