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Acquisitions
3 Months Ended
Mar. 31, 2013
Business Combinations [Abstract]  
Acquisitions

3. Acquisitions

Acquisition of Phygen, LLC

On November 6, 2012, the Company closed the transactions contemplated by the Asset Purchase Agreement (the “Asset Purchase Agreement”) with Phygen, LLC (“Phygen”), pursuant to which the Company agreed to purchase Phygen’s right, title and interest in and certain assets used by Phygen in connection with the design, development, marketing and distribution of certain of Phygen’s spinal implant products, together with the intellectual property rights, contractual rights, inventories and certain liabilities related thereto. At the closing of the transaction the Company issued to Phygen 4,069,087 unregistered shares of the Company’s common stock and paid to Phygen $2 million in cash. The Company placed 1,170,960 unregistered shares of the common stock into an escrow account, which will serve as security against any potential indemnification obligations of Phygen under the Asset Purchase Agreement for a period of 12 months following the closing. In addition, pursuant to the Asset Purchase Agreement, the Company paid to Phygen $4 million in cash in April 2013.

Based on the closing price of Alphatec’s common stock of $1.69 on November 6, 2012, cash consideration and contingent liabilities, the total purchase price for Phygen was as follows (in thousands):

 

Fair value of Alphatec common stock issued upon closing

   $ 8,856   

Cash consideration paid and payable

     5,900   

Contingent consideration

     3,654   
  

 

 

 

Total purchase price

   $ 18,410   
  

 

 

 

Under the acquisition method of accounting, the total purchase price allocated to Phygen’s net tangible and intangible assets was based on their estimated fair values at the date of the completion of the acquisition.

The following table summarizes the allocation of the preliminary purchase price (pending final valuation of intangible assets, deferred income taxes and inventory valuation) for Phygen and the estimated useful lives for the acquired intangible assets (in thousands):

 

     Useful lives
(in years)
     Estimated
Fair Value
 

Net tangible assets assumed

      $ 1,204   

Acquired intangibles:

     

Developed technology

     3         176   

Trademarks

     3         59   

Covenant not-to-compete

     3         384   

Customer-related intangibles

     12         6,239   

Distribution network

     12         2,366   

Goodwill

        7,982   
     

 

 

 

Total purchase price allocation

      $ 18,410   
     

 

 

 

The Company allocated $1.2 million to Phygen’s net tangible assets assumed, $9.2 million to identifiable intangible assets acquired and $3.7 million to contingent consideration. A value of $8.0 million, representing the difference between the total purchase price and the aggregate fair values assigned to the net tangible and intangible assets acquired, less liabilities and contingent consideration assumed, was assigned to goodwill. The Company acquired Phygen to expand its product offerings to Phygen’s existing surgeon base. This and other factors contributed to a purchase price for Phygen that resulted in the recognition of goodwill. The amount recorded as acquired intangibles and goodwill is expected to be deductible for tax purposes.

The Company increased the value of inventory it acquired from Phygen to its estimated fair value (“inventory step-up”), which represented an amount equivalent to estimated selling prices for the inventory less distribution related costs and a normative selling profit. Consistent with stock rotation, the inventory step-up will reverse ratably over six months and is included in the Company’s post-combination financial statements.

For the technology-related assets, the Company determined the values for each of these categories by estimating the present values of the net cash flows expected to be generated by each category of technology.

 

The Company calculated the value of the trademark by estimating the present value of future royalty costs that would be avoided by a market participant due to ownership of the trademarks acquired.

The Company calculated the value of the covenant not-to-compete by estimating the difference between the present value of future cash flows with and without the covenant not-to-compete in place.

The customer-related intangibles includes hospitals and distributors that take title to Phygen’s products. The Company determined the value of such customer-related intangibles by estimating the present value of expected future net cash flows derived from such customers.

The distribution network includes U.S.-based distributors that sell Phygen’s products to customers on a consignment basis. The Company determined the value of the intangibles related to the distribution network by estimating the difference between the present values of expected future net cash flows generated with and without the distribution network in place.

The Company calculated the value of the contingent consideration by estimating the present value of future minimum royalty payments due under licensing agreements entered into in connection with the Phygen acquisition. The Company will revalue the contingent consideration each reporting period with an offset to any increase or decrease in the statement of operations. This is a Level 3 measurement as significant assumptions used in the measurement include estimates of the royalty payments due.

Pro forma supplemental financial information is not provided as the impact of the Phygen acquisition was not material to operating results in the three months ended March 31, 2012.