UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
OR
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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:
(Exact name of registrant as specified in its charter)
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(State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification No.) |
(Address of principal executive offices, including zip code)
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(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 |
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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.
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).
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 |
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Non-accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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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
As of July 30, 2021, there were
ALPHATEC HOLDINGS, INC.
QUARTERLY REPORT ON FORM 10-Q
June 30, 2021
Table of Contents
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Item 1. |
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3 |
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Condensed Consolidated Balance Sheets as of June 30, 2021 (unaudited) and December 31, 2020 |
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4 |
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5 |
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6 |
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8 |
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Notes to Condensed Consolidated Financial Statements (unaudited) |
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9 |
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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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28 |
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Item 3. |
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35 |
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Item 4. |
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35 |
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Item 1. |
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36 |
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Item 1A. |
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36 |
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Item 2. |
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37 |
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Item 5. |
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37 |
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Item 6. |
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38 |
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39 |
2
PART I. FINANCIAL INFORMATION
Item 1. |
Financial Statements |
ALPHATEC HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except for par value data)
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June 30, 2021 |
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December 31, 2020 |
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Assets |
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(Unaudited) |
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Current assets: |
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Cash |
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$ |
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$ |
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Accounts receivable, net |
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Inventories, net |
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Prepaid expenses and other current assets |
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Withholding tax receivable from Officer |
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Current assets of discontinued operations |
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Total current assets |
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Property and equipment, net |
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Right-of-use asset |
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Goodwill |
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Intangible assets, net |
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Other assets |
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Noncurrent assets of discontinued operations |
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Total assets |
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$ |
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$ |
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Liabilities and Stockholders’ Equity |
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Current liabilities: |
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Accounts payable |
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$ |
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$ |
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Accrued expenses and other current liabilities |
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Contract liability |
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— |
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Short-term debt |
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Current portion of operating lease liability |
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Current liabilities of discontinued operations |
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Total current liabilities |
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Long-term debt |
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Operating lease liability, less current portion |
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Other long-term liabilities |
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Commitments and contingencies (Note 6) |
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Redeemable preferred stock, $ June 30, 2021 and December 31, 2020; at June 30, 2021 and December 31, 2020 |
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Stockholders' equity: |
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Common stock, $ |
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Treasury stock, |
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Additional paid-in capital |
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Shareholder note receivable |
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( |
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Accumulated other comprehensive income |
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( |
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Accumulated deficit |
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( |
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Total stockholders’ equity |
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Total liabilities and stockholders’ equity |
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$ |
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$ |
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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)
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Three Months Ended |
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Six Months Ended |
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June 30, |
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June 30, |
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2021 |
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2020 |
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2021 |
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2020 |
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Revenue: |
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Revenue from products and services |
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$ |
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$ |
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$ |
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$ |
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Revenue from international supply agreement |
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Total revenue |
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Cost of revenue |
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Gross profit |
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Operating expenses: |
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Research and development |
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Sales, general and administrative |
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Litigation-related expenses |
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Amortization of acquired intangible assets |
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Transaction-related expenses |
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( |
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Restructuring costs |
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— |
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— |
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Total operating expenses |
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Operating loss |
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( |
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( |
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Interest and other expense, net: |
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Interest expense, net |
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( |
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( |
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( |
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( |
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Other expense, net |
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( |
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( |
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( |
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( |
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Total interest and other expense, net |
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( |
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( |
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( |
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( |
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Net loss before taxes |
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( |
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( |
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( |
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Income tax provision |
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Net loss |
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$ |
( |
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$ |
( |
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$ |
( |
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$ |
( |
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Net loss per share, basic and diluted |
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$ |
( |
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$ |
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$ |
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$ |
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Weighted-average shares outstanding, basic and diluted |
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See accompanying notes to unaudited condensed consolidated financial statements.
4
ALPHATEC HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(UNAUDITED)
(In thousands)
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Three Months Ended |
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Six Months Ended |
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June 30, |
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June 30, |
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2021 |
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2020 |
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2021 |
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2020 |
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Net loss |
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$ |
( |
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$ |
( |
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$ |
( |
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$ |
( |
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Foreign currency translation adjustments |
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( |
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Comprehensive loss |
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$ |
( |
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$ |
( |
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$ |
( |
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$ |
( |
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See accompanying notes to unaudited condensed consolidated financial statements.
5
ALPHATEC HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(UNAUDITED)
(In thousands)
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Common stock |
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Additional paid-in |
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Shareholder note |
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Treasury |
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Accumulated other comprehensive |
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Accumulated |
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Total stockholders’ |
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Shares |
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Par Value |
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capital |
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receivable |
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stock |
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income (loss) |
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deficit |
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equity |
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Balance at January 1, 2021 |
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$ |
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$ |
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$ |
( |
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$ |
( |
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$ |
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$ |
( |
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$ |
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Stock-based compensation |
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— |
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— |
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— |
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— |
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— |
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— |
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Distributor equity incentives |
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— |
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— |
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— |
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— |
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— |
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— |
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Common stock issued for warrant exercises |
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— |
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— |
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— |
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— |
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— |
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Common stock issued for employee stock purchase plan and stock option exercises |
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— |
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— |
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— |
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— |
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— |
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Common stock issued for vesting of restricted stock awards, net of shares retained for tax liability |
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— |
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( |
) |
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— |
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— |
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— |
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— |
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( |
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Shareholder note receivable |
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— |
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— |
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— |
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— |
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— |
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— |
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Foreign currency translation adjustments |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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— |
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( |
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Net loss |
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— |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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( |
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Balance at March 31, 2021 |
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$ |
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$ |
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$ |
( |
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$ |
( |
) |
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$ |
( |
) |
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$ |
( |
) |
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$ |
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Stock-based compensation |
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— |
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— |
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— |
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— |
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— |
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— |
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Distributor equity incentives |
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— |
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— |
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— |
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— |
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— |
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— |
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Common stock issued for employee stock purchase plan and stock option exercises |
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— |
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— |
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— |
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— |
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— |
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Common stock issued for vesting of performance and restricted stock awards, net of shares retained for tax liability |
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— |
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( |
) |
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— |
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— |
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— |
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— |
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( |
) |
Common stock issued for warrant exercises |
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— |
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— |
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— |
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— |
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— |
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Issuance of common stock for public offering, net of offering costs of $ |
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— |
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— |
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— |
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— |
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Shareholder note receivable |
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— |
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— |
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— |
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— |
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— |
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— |
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Foreign currency translation adjustments |
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— |
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— |
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— |
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— |
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— |
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— |
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Net loss |
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— |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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( |
) |
Balance at June 30, 2021 |
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$ |
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$ |
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$ |
( |
) |
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$ |
( |
) |
|
$ |
( |
) |
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$ |
( |
) |
|
$ |
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6
ALPHATEC HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(UNAUDITED)
(In thousands)
|
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Common stock |
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Additional paid-in |
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Shareholder note |
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Treasury |
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Accumulated other comprehensive |
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Accumulated |
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Total stockholders’ |
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Shares |
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Par Value |
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capital |
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receivable |
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stock |
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income (loss) |
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deficit |
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equity |
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||||||||
Balance at January 1, 2020 |
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$ |
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$ |
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$ |
( |
) |
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$ |
( |
) |
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$ |
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$ |
( |
) |
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$ |
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Cumulative effect of change in accounting principle |
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— |
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— |
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— |
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— |
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— |
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— |
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( |
) |
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( |
) |
Stock-based compensation |
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— |
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— |
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— |
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— |
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— |
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— |
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Distributor equity incentives |
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— |
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— |
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— |
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— |
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— |
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— |
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Common stock issued for warrant exercises |
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— |
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— |
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— |
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— |
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— |
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Common stock issued for stock option exercises |
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— |
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— |
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— |
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— |
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— |
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|
|
Common stock issued for vesting of restricted stock awards, net of shares retained for tax liability |
|
|
|
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
Foreign currency translation adjustments |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Balance at March 31, 2020 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
Stock-based compensation |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
Distributor equity incentives |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
Common stock issued for warrant exercises |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Common stock issued for employee stock purchase plan and stock option exercises |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
Common stock issued for vesting of restricted stock awards, net of shares retained for tax liability |
|
|
|
|
|
|
— |
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
Issuance of common stock warrants |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
Foreign currency translation adjustments |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
Net loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Balance at June 30, 2020 |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
See accompanying notes to unaudited condensed consolidated financial statements.
7
ALPHATEC HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
|
|
Six Months Ended June 30, |
|
|||||
|
|
2021 |
|
|
2020 |
|
||
Operating activities: |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
( |
) |
|
$ |
( |
) |
Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
Stock-based compensation |
|
|
|
|
|
|
|
|
Amortization of debt discount and debt issuance costs |
|
|
|
|
|
|
|
|
Amortization of right-of-use assets |
|
|
|
|
|
|
|
|
Provision for doubtful accounts |
|
|
|
|
|
|
|
|
Provision for excess and obsolete inventory |
|
|
|
|
|
|
|
|
Loss on disposal of instruments |
|
|
|
|
|
|
|
|
Loss on extinguishment of debt |
|
|
— |
|
|
|
|
|
Other |
|
|
|
|
|
|
— |
|
Changes in operating assets and liabilities, net of effects of acquisition: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
( |
) |
|
|
( |
) |
Inventories |
|
|
( |
) |
|
|
( |
) |
Prepaid expenses and other current assets |
|
|
|
|
|
|
( |
) |
Other assets |
|
|
|
|
|
|
— |
|
Accounts payable |
|
|
|
|
|
|
|
|
Accrued expenses and other current liabilities |
|
|
( |
) |
|
|
( |
) |
Lease liability |
|
|
( |
) |
|
|
( |
) |
Other long-term liabilities |
|
|
|
|
|
|
( |
) |
Net cash used in operating activities |
|
|
( |
) |
|
|
( |
) |
Investing activities: |
|
|
|
|
|
|
|
|
Purchase of property and equipment |
|
|
( |
) |
|
|
( |
) |
Acquisition of business, net of cash acquired |
|
|
( |
) |
|
|
— |
|
Purchase of OCEANE |
|
|
( |
) |
|
|
— |
|
Cash paid for investments |
|
|
( |
) |
|
|
— |
|
Settlement of forward contract |
|
|
( |
) |
|
|
— |
|
Net cash used in investing activities |
|
|
( |
) |
|
|
( |
) |
Financing activities: |
|
|
|
|
|
|
|
|
Proceeds from public offering |
|
|
|
|
|
|
— |
|
Net cash (paid) received from common stock exercises |
|
|
( |
) |
|
|
|
|
Borrowings under lines of credit |
|
|
— |
|
|
|
|
|
Repayments under lines of credit |
|
|
— |
|
|
|
( |
) |
Principal payments on capital lease obligations |
|
|
( |
) |
|
|
( |
) |
Proceeds from issuance of term debt, net |
|
|
— |
|
|
|
|
|
Principal payments on term loan and notes payable |
|
|
( |
) |
|
|
( |
) |
Net cash provided by financing activities |
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash |
|
|
|
|
|
|
|
|
Net decrease in cash |
|
|
( |
) |
|
|
( |
) |
Cash at beginning of period, including discontinued operations |
|
|
|
|
|
|
|
|
Cash at end of period, including discontinued operations |
|
$ |
|
|
|
$ |
|
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
|
|
|
$ |
|
|
Cash paid for income taxes |
|
$ |
|
|
|
$ |
|
|
Supplemental disclosure of noncash investing activities: |
|
|
|
|
|
|
|
|
Common stock issued with term loan draw |
|
$ |
— |
|
|
$ |
|
|
Purchases of property and equipment in accounts payable |
|
$ |
|
|
|
$ |
|
|
Recognition of lease liability |
|
$ |
|
|
|
$ |
— |
|
See accompanying notes to unaudited condensed consolidated financial statements.
8
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”), SafeOp Surgical, Inc. (“SafeOp”), and EOS imaging S.A. (“EOS”), is a medical technology company that designs, develops, and markets technology for the treatment of spinal disorders associated with disease and degeneration, congenital deformities, and trauma. The Company markets its products in the U.S. and internationally via independent sales agents and a direct sales force.
On September 1, 2016, the Company completed the sale of its previous international distribution operations and agreements to Globus Medical Ireland, Ltd., a subsidiary of Globus Medical, Inc., and its affiliated entities (collectively “Globus”). As a result of this transaction, the previous international distribution transactions are reported as discontinued operations in the condensed consolidated financial statements. See Note 5 for additional information on the divestiture of the previous international distribution business.
Recent Developments
On May 13, 2021, the Company acquired a controlling interest in EOS, pursuant to the Tender Offer Agreement (the “Tender Offer Agreement”) it entered on December 16, 2020, and subsequently purchased the remaining issued and outstanding ordinary shares for a
Basis of Presentation and Principles of Consolidation
The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. The Company translates the financial statements of its foreign subsidiaries using end-of-period exchange rates for assets and liabilities and average exchange rates during each reporting period for results of operations. All intercompany balances and transactions have been eliminated during consolidation.
The accompanying condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Pursuant to these rules and regulations, the Company has condensed or omitted certain information and footnotes it normally includes in its annual consolidated financial statements prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”). 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, 2020, which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 that was filed with the SEC on March 5, 2021. Operating results for the six months ended June 30, 2021 are not necessarily indicative of the results that may be expected for the year ending December 31, 2021, or any other future periods.
Reclassification
Certain amounts in the condensed consolidated financial statements for the three and six months ended June 30, 2020 have been reclassified to conform to the current period’s presentation. These reclassifications were immaterial and had no impact on previously reported results of operations or accumulated deficit.
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, 2020, which are included in the Company’s Annual Report on Form 10-K that was filed with the SEC on March 5, 2021. Except as discussed below, these accounting policies have not changed during the six months ended June 30, 2021.
Revenue Recognition
The Company recognizes revenue from products sales in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“Topic 606”). This standard applies
9
to all contracts with customers, except for contracts that are within the scope of other standards, such as leases, insurance, collaboration arrangements and financial instruments. Under Topic 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of Topic 606, the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer.
Sales are derived primarily from the sale of spinal implant products to hospitals and medical centers through direct sales representatives and independent distributor agents, and now includes imaging equipment and related services with the acquisition of EOS. Revenue is recognized when obligations under the terms of a contract with customers are satisfied, which occurs with the transfer of control of products to customers, either upon shipment of the product or delivery of the product to the customer depending on the shipping terms, or when the products are used in a surgical procedure (implanted in a patient). Revenue from the sale of imaging equipment is recognized as each distinct performance obligation is fulfilled and control transfers to the customer, beginning with shipment or delivery, depending on the terms. Revenue from other distinct performance obligations, such as maintenance on imaging equipment, training services, and other imaging related services, is recognized in the period the service is performed, and makes up less than
To the extent that the transaction price includes variable consideration, such as discounts, rebates, and customer payment penalties, the Company estimates the amount of variable consideration that should be included in the transaction price utilizing either the expected value method or the most likely amount method depending on the nature of the variable consideration. Variable consideration is included in the transaction price if, in the Company’s judgment, it is probable that a significant future reversal of cumulative revenue under the contract will not occur. Estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of our anticipated performance and all information that is reasonably available, including historical, current, and forecasted information.
The Company records a contract liability, or deferred revenue, when it has an obligation to provide a product or service to the customer and payment is received or due in advance of its performance. When the Company sells a product or service with a future performance obligation, revenue is deferred on the unfulfilled performance obligation and recognized over the related performance period. Generally, the Company does not have observable evidence of the standalone selling price related to its future service obligations; therefore, the Company estimates the selling price using an expected cost plus a margin approach. The transaction price is allocated using the relative standalone selling price method. The use of alternative estimates could result in a different amount of revenue deferral. The Company recognized $
The opening and closing balances of the Company’s contract liability are as follows:
Balance at January 1, 2021 |
|
$ |
— |
|
Contract liability assumed from EOS |
|
|
|
|
Payments received |
|
|
|
|
Revenue recognized |
|
|
( |
) |
Balance at June 30, 2021 |
|
$ |
|
|
10
Fair Value Measurements
The carrying amount of financial instruments consisting of cash, accounts receivable, prepaid expenses and other current assets, accounts payable, accrued expenses, and short-term debt included in the Company’s condensed 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: |
Quoted prices in active markets for identical assets or liabilities. |
|
Level 2: |
Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active; or other inputs that can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
|
Level 3: |
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
The following table presents information related to the Company’s liabilities measured at fair value on a recurring basis as of June 30, 2021 and December 31, 2020 (in thousands):
|
June 30, 2021 |
|
|||||||||||||
Liabilities: |
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
||||
Liability classified equity award (1) |
$ |
— |
|
|
|
— |
|
|
|
|
|
|
$ |
|
|
Foreign currency forward contract |
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
Total |
$ |
— |
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020 |
|
|||||||||||||
Liabilities: |
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
||||
Liability classified equity award (1) |
$ |
— |
|
|
|
— |
|
|
|
|
|
|
$ |
|
|
Foreign currency forward contract |
|
— |
|
|
|
|
|
|
|
— |
|
|
|
|
|
Total |
$ |
— |
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
(1) |
A portion of this award is being accreted over the requisite service period. |
The Company did not have any transfers of assets and liabilities between the levels of the fair value measurement hierarchy during the periods presented.
On March 16, 2021, the Company entered into
On December 18, 2020, the Company entered into a foreign currency forward contract, with a notional amount of $
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
11
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 $
The following table provides a reconciliation of liabilities measured at fair value using significant unobservable inputs (Level 3) for the three and six months ended June 30, 2021 (in thousands):
|
|
Level 3 Liabilities |
|
|
Balance at January 1, 2021 |
|
$ |
|
|
Vested portion of liability classified equity award |
|
|
|
|
Change in fair value measurement |
|
|
|
|
Balance at March 31, 2021 |
|
$ |
|
|
Vested portion of liability classified equity award |
|
|
|
|
Change in fair value measurement |
|
|
( |
) |
Balance at June 30, 2021 |
|
$ |
|
|
Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In August 2020, the FASB issued Accounting Standard Update (“ASU”) No. 2020-06, Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40) (“ASU 2020-06”), which simplifies the accounting for convertible instruments. The guidance removes certain accounting models that separate the embedded conversion features from the host contract for convertible instruments. ASU 2020-06 allows for a modified or full retrospective method of transition. This update is effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years, and early adoption is permitted. The Company early adopted ASU 2020-06 on
In January 2021, the FASB issued ASU No. 2021-01, Reference Rate Reform (Topic 848), which refines the scope of Topic 848 and provides clarification surrounding certain optional expedients and exceptions for contract modifications and hedge accounting that apply to contracts affected by the discounting transition. Under ASU 2021-01, modifications related to reference rate reform would not be considered an event that requires reassessment of previous accounting conclusions. The guidance also amends the expedients and exceptions in Topic 848 to tailor the existing guidance towards derivative instruments impacted by the discounting transition. The amendments in ASU 2021-01 are effective immediately for all entities and entities may choose to apply the amendments retrospectively as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively to new modifications from any date within an interim period that includes or is subsequent to January 7, 2021. There has been no effect to the condensed consolidated financial statements to date as a result of the adoption.
Recently Issued Accounting Pronouncements
In May 2021, the FASB issued ASU No. 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options. The guidance clarifies and reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified written call options (i.e. warrants) that remain equity classified after a modification or exchange and provides guidance that clarifies whether an issuer should account for a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange as (1) an adjustment to equity and, if so, the related earnings per share (EPS) effects, if any, or (2) an expense and, if so, the manner and pattern of recognition. The new guidance is effective for annual and interim periods beginning after December 15, 2021, and early adoption is permitted, including adoption in an interim period. The Company does not intend to early adopt the standard and is in the process of assessing the impact, if any, on its consolidated financial statements and related disclosures.
12
3. Business Combination
The Company recognizes assets acquired, liabilities assumed, and any noncontrolling interest at fair value at the date of acquisition.
On December 16, 2020, the Company entered into the Tender Offer Agreement with EOS, pursuant to which the Company agreed to commence a public tender offer (the “Offer”) to purchase all of the issued and outstanding ordinary shares, nominal value €
EOS, which now operates as a wholly owned subsidiary of the Company, is a global medical device company that designs, develops and markets innovative, low dose 2D/3D full body and weight-bearing imaging, rapid 3D modeling of EOS patient X-ray images, web-based patient-specific surgical planning, and integration of surgical plan into the operating room that collectively bridge the entire spectrum of care from imaging to post-operative assessment capabilities for orthopedic surgery. The Company plans to integrate this technology into its procedural approach to spine surgery in order to better inform and better achieve spinal alignment objectives in surgery.
The Company is still in the process of finalizing the purchase price allocation given the timing of the acquisition and the size and scope of the assets and liabilities subject to valuation. While the Company does not expect material changes in the outcome of the valuation, certain assumptions and findings that were in place at the date of acquisition may result in changes in the purchase price allocation.
(in thousands) |
As of May 13, 2021 |
|
|
Cash paid for purchase of EOS Shares in Initial Offer Period |
$ |
|
|
Cash paid for purchase of OCEANEs in Initial Offer Period |
|
|
|
Total cash paid in Initial Offer Period |
|
|
|
Fair value of investment in EOS Shares held before the Initial Offer Period |
|
|
|
Fair value of investment in OCEANEs held before the Initial Offer Period |
|
|
|
Total fair value of investment in EOS held before the Initial Offer Period |
|
|
|
Fair value of noncontrolling interest acquired subsequent to Initial Offer Period |
|
|
|
|
$ |
|
|
|
|
|
|
Cash and cash equivalents |
$ |
|
|
Accounts receivable |
|
|
|
Inventory |
|
|
|
Other current assets |
|
|
|
Property, plant and equipment, net |
|
|
|
Right-of-use asset |
|
|
|
Goodwill |
|
|
|
Definite-lived intangible assets: |
|
|
|
Developed technology |
|
|
|
Customer relationships |
|
|
|
Trade names |
|
|
|
Other noncurrent assets |
|
|
|
Contract liabilities |
|
|
|
Long-term debt |
|
|
|
Other liabilities assumed |
|
|
|
Total identifiable net assets |
$ |
|
|
The cash paid for the purchase of EOS exceeded the fair value of the net tangible and identifiable intangible assets acquired as part of the acquisition. As a result, the Company recorded goodwill in connection with the acquisition. Goodwill primarily consists of
13
expected revenue synergies resulting from the combination of product portfolios and cost synergies related to elimination of redundant facilities and functions associated with the combined entity. Goodwill recognized in this transaction is not deductible for tax purposes. The intangible assets acquired will be amortized on a straight-line basis over useful lives of
Acquisition costs of $
The following table presents the unaudited pro forma results for the three and six months ended June 30, 2021 and 2020, which combines the historical results of operations of the Company and its wholly owned subsidiaries as though the companies had been combined as of January 1, 2020. The pro forma information is presented for informational purposes only and is not indicative of the results of operations that may have been achieved if the acquisition had taken place at such time. The unaudited pro forma results presented include non-recurring adjustments directly attributable to the business combination, including $
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
(in thousands, except per share amounts) |
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
Total revenue |
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Net loss |
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
Net loss per share, basic and diluted |
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
4. Select Condensed Consolidated Balance Sheets Details
Accounts Receivable, net
Accounts receivable, net consist of the following (in thousands):
|
|
June 30, 2021 |
|
|
December 31, 2020 |
|
||
Accounts receivable |
|
$ |
|
|
|
$ |
|
|
Allowance for doubtful accounts |
|
|
( |
) |
|
|
( |
) |
Accounts receivable, net |
|
$ |
|
|
|
$ |
|
|
Inventories, net
Inventories, net consist of the following (in thousands):
|
|
June 30, 2021 |
|
|
December 31, 2020 |
|
||
Raw materials |
|
$ |
|
|
|
$ |
|
|
Work-in-process |
|
|
|
|
|
|
|
|
Finished goods |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less reserve for excess and obsolete finished goods |
|
|
( |
) |
|
|
( |
) |
Inventories, net |
|
$ |
|
|
|
$ |
|
|
14
Property and Equipment, net
Property and equipment, net consist of the following (in thousands, except as indicated):
|
|
Useful lives (in years) |
|
|
June 30, 2021 |
|
|
December 31, 2020 |
|
|||
Surgical instruments |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
Machinery and equipment |
|
|
|
|
|
|
|
|
|
|
|
|
Computer equipment |
|
|
|
|
|
|
|
|
|
|
|
|
Office furniture and equipment |
|
|
|
|
|
|
|
|
|
|
|
|
Leasehold improvements |
|
|
|
|
|
|
|
|
|
|
|
|
Construction in progress |
|
n/a |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less accumulated depreciation and amortization |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
Property and equipment, net |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
Total depreciation expense was $
Intangible Assets, net
Intangible assets, net consist of the following (in thousands, except as indicated):
|
|
Remaining Avg. Useful lives (in years) |
|
|
June 30, 2021 |
|
|
December 31, 2020 |
|
|||
Developed product technology |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
License agreements |
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks and trade names |
|
|
|
|
|
|
|
|
|
|
|
|
Customer-related |
|
|
|
|
|
|
|
|
|
|
|
|
Distribution network |
|
|
|
|
|
|
|
|
|
|
|
|
In process research and development |
|
|
|
|
|
|
|
|
|
|
|
|
Total gross amount |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
Less accumulated amortization |
|
|
|
|
|
|
( |
) |
|
|
( |
) |
Intangible assets, net |
|
|
|
|
|
$ |
|
|
|
$ |
|
|
During the six months ended June 30, 2021, in connection with the Company’s acquisition of EOS, as further described in Note 3, the Company recorded additions to definite-lived intangible assets and goodwill in the amount of $
Total amortization expense attributed to intangible assets was $
Year Ending December 31, |
|
|
|
|
Remainder of 2021 |
|
$ |
|
|
2022 |
|
|
|
|
2023 |
|
|
|
|
2024 |
|
|
|
|
2025 |
|
|
|
|
Thereafter |
|
|
|
|
|
|
$ |
|
|
15
Accrued Expenses
Accrued expenses consist of the following (in thousands):
|
|
June 30, 2021 |
|
|
December 31, 2020 |
|
||
Commissions and sales milestones |
|
$ |
|
|
|
$ |
|
|
Payroll and payroll related |
|
|
|
|
|
|
|
|
Litigation settlement obligation - short-term portion |
|
|
|
|
|
|
|
|
Professional fees |
|
|
|
|
|
|
|
|
Royalties |
|
|
|
|
|
|
|
|
Interest |
|
|
|
|
|
|
|
|
Administration fees |
|
|
|
|
|
|
|
|
Accrued manufacturing expense |
|
|
|
|
|
|
— |
|
Other |
|
|
|
|
|
|
|
|
Total accrued expenses |
|
$ |
|
|
|
$ |
|
|
Other Long-Term Liabilities
Other long-term liabilities consist of the following (in thousands):
|
|
June 30, 2021 |
|
|
December 31, 2020 |
|
||
Litigation settlement obligation - long-term portion |
|
$ |
|
|
|
$ |
|
|
Tax liabilities |
|
|
|
|
|
|
|
|
Royalties |
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
Other long-term liabilities |
|
$ |
|
|
|
$ |
|
|
5. Discontinued Operations
In connection with the sale of the previous international distribution business, the Company entered into a product manufacture and supply agreement (the “Supply Agreement”) with Globus, pursuant to which the Company supplies to Globus certain of its implants and instruments, previously offered for sale by the Company in international markets at agreed-upon prices for a minimum term of
6. Debt
MidCap Facility Agreement
On May 29, 2020, the Company repaid in full all amounts outstanding under the Amended Credit Facility with MidCap Funding IV, LLC (“MidCap”). The Company made a final payment of $
Squadron Medical Credit Agreement
On November 6, 2018, the Company entered into a term loan with Squadron Medical Finance Solutions, LLC (“Squadron Medical”), a provider of debt financing to growing companies in the orthopedic industry. The term loan was subsequently amended on March 27, 2019, May 29, 2020 and December 16, 2020 to expand the availability of additional term loans, extend the maturity,
16
remove all financial covenant requirements and, in the December 16, 2020 amendment, incorporate a debt exchange. In conjunction with the term loan amendment on December 16, 2020, the Company entered into a debt exchange agreement whereby the Company exchanged $
The term loan bears interest at
In connection with the initial 2018 financing, the Company issued warrants to Squadron Medical and a participant lender to purchase
The Company accounted for the March 27, 2019, May 29, 2020, and December 16, 2020 amendments of the term loan as debt modifications with continued amortization of the existing and inclusion of the new debt issuance costs amortized into interest expense utilizing the effective interest rate method. The Company determined that the $
As of June 30, 2021, the debt is recorded at its carrying value of $
Paycheck Protection Loan
On April 23, 2020, the Company received the proceeds from a loan in the amount of approximately $
All or a portion of the PPP Loan may be forgiven by the SBA upon application. The Company submitted its application for forgiveness of the loan in November 2020, which was still under review by the SBA as of June 30, 2021. Under the CARES Act, loan forgiveness is available for the sum of documented payroll costs, covered rent payments, covered mortgage interest and covered utilities during the twenty-four-week period, beginning on the date of the loan approval. For purposes of the CARES Act, payroll costs exclude compensation of an individual employee in excess of $
17
assurance can be provided that such loan forgiveness will be granted in whole or in part. As of June 30, 2021, $
Inventory Financing
In November 2018, the Company entered into an Inventory Financing Agreement with a key inventory and instrument components supplier whereby the Company was originally permitted to draw up to $
OCEANE Convertible Bonds
On May 31, 2018, EOS issued
The OCEANEs are convertible by their holders into new EOS Shares or exchangeable for existing EOS Shares, at the Company’s option, at an initial conversion rate of
If EOS undergoes a merger or demerger, the OCEANEs will be convertible into shares of the merged or new company or the beneficiary of such demerger. On May 13, 2021, EOS was acquired by the Company via a tender offer. The Company owned
Although the acquisition of EOS constituted a change of control, the holders of the OCEANEs did not redeem or convert the OCEANEs. Therefore, the Company continued to classify the OCEANEs as long-term debt on its condensed consolidated balance sheet as of June 30, 2021.
The carrying value of the outstanding OCEANEs of $
Other Debt Agreements
In January and April 2021, prior to the acquisition, EOS obtained
18
Reference Rate Reform
In July 2017, the U.K.’s Financial Conduct Authority (“FCA”), which regulates LIBOR, announced that it intends to phase out LIBOR by the end of 2021. On November 30, 2020, ICE Benchmark Administration (the “IBA”), with the support of the United States Federal Reserve and the FCA, announced plans to consult on ceasing publication of USD LIBOR on December 31, 2021 for only the one week and two-month USD LIBOR tenors, and on June 30, 2023 for all other USD LIBOR tenors. Various central bank committees and working groups continue to discuss replacement of benchmark rates, the process for amending existing LIBOR-based contracts, and the potential economic impacts of different alternatives. The Alternative Reference Rates Committee has identified the Secured Overnight Financing Rate (“SOFR”), as its preferred alternative rate for USD LIBOR. SOFR is a measure of the cost of borrowing cash overnight, collateralized by U.S. Treasury securities, and is based on directly observable U.S. Treasury-backed repurchase transactions.
The Company is evaluating the potential impact of the replacement of the LIBOR benchmark interest rate including risk management, internal operational readiness and monitoring the FASB’s standard-setting process to address financial reporting issues that might arise in connection with the transition from LIBOR to a new benchmark rate.
Principal payments remaining on the Company's debt are as follows as of June 30, 2021 (in thousands):
Remainder of 2021 |
|
$ |
|
|
2022 |
|
|
|
|
2023 |
|
|
|
|
2024 |
|
|
|
|
2025 |
|
|
|
|
Thereafter |
|
|
|
|
Total |
|
|
|
|
Less: unamortized debt discount and debt issuance costs |
|
|
( |
) |
Total |
|
|
|
|
Less: short-term debt |
|
|
( |
) |
Long-term debt |
|
$ |
|
|
7. Commitments and Contingencies
Leases
The Company determines if an arrangement is a lease at inception by assessing whether there is an identified asset and whether the contract conveys the right to control the use of the identified asset in exchange for consideration over a period of time.
The Company aggregates all lease and non-lease components for each class of underlying assets into a single lease component and variable charges for common area maintenance and other variable costs are recognized as expense as incurred. Total variable costs associated with leases for the three and six months ended June 30, 2021 were immaterial. The Company had an immaterial amount of financing leases as of June 30, 2021.
Operating Lease
The Company occupies approximately
On April 9, 2021, the Company entered into a new
19
commencement date. The Company is expected to occupy a proportionate share of the building upon commencement of the lease on
Future minimum annual lease payments under such leases are as follows as of June 30, 2021 (in thousands):
Remainder of 2021 |
|
$ |
|
|
2022 |
|
|
|
|
2023 |
|
|
|
|
2024 |
|
|
|
|
2025 |
|
|
|
|
Thereafter |
|
|
|
|
Total undiscounted lease payments |
|
|
|
|
Less: imputed interest |
|
|
( |
) |
Operating lease liability |
|
|
|
|
Less: current portion of operating lease liability |
|
|
( |
) |
Operating lease liability, less current portion |
|
$ |
|
|
The Company’s weighted-average remaining lease term and weighted-average discount rate as of June 30, 2021 and December 31, 2020 are as follows:
|
|
June 30, 2021 |
|
|
December 31, 2020 |
|
||
Weighted-average remaining lease term (years) |
|
|
|
|
|
|
|
|
Weighted-average discount rate |
|
|
|
% |
|
|
|
% |
Information related to the Company’s operating leases is as follows (in thousands):
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
Rent expense |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Cash paid for amounts included in measurement of lease liabilities |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Purchase Commitments
The Company entered into a distribution agreement with a third-party provider in January 2020 in which the Company is obligated to certain minimum purchase requirements related to inventory and equipment leases. As of June 30, 2021, the minimum purchase commitment required by the Company under the agreement was $
With the acquisition of EOS, the company assumed its inventory purchase commitment agreement with a third-party supplier. EOS is obligated to certain minimum purchase commitment requirements through
Litigation
The Company is and may become involved in various legal proceedings arising from its business activities. While management is not aware of any litigation matter that in and of itself would have a material adverse impact on the Company’s consolidated results of operations, cash flows or financial position, litigation is inherently unpredictable, and depending on the nature and timing of a proceeding, an unfavorable resolution could materially affect the Company’s future consolidated results of operations, cash flows or financial position in a particular period. The Company assesses contingencies to determine the degree of probability and range of
20
possible loss for potential accrual or disclosure in the Company’s consolidated financial statements. An estimated loss contingency is accrued in the Company’s consolidated financial statements if it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Because litigation is inherently unpredictable and unfavorable resolutions could occur, assessing contingencies is highly subjective and requires judgments about future events. When evaluating contingencies, the Company may be unable to provide a meaningful estimate due to a number of factors, including the procedural status of the matter in question, the presence of complex or novel legal theories, and/or the ongoing discovery and development of information important to the matters. In addition, damage amounts claimed in litigation against the Company may be unsupported, exaggerated or unrelated to reasonably possible outcomes, and as such are not meaningful indicators of the Company’s potential liability.
In February 2018, NuVasive, Inc. filed suit against the Company in the United States District Court for the Southern District of California (NuVasive, Inc. v. Alphatec Holdings, Inc. et al., Case No. 3:18-cv-00347-CAB-MDD (S.D. Cal.)), alleging that certain of the Company’s products (including components of its Battalion™ Lateral System), infringe, or contribute to the infringement of, U.S. Patent Nos. 7,819,801, 8,355,780, 8,439,832, 8,753,270, 9,833,227 (entitled “Surgical access system and related methods”), U.S. Patent No. 8,361,156 (entitled “Systems and methods for spinal fusion”), and U.S. Design Patent Nos. D652,519 (“Dilator”) and D750,252 (“Intervertebral Implant”). NuVasive seeks unspecified monetary damages and an injunction against future purported infringement.
In March 2018, the Company moved to dismiss NuVasive’s claims of infringement of its design patents for failure to state a cognizable legal claim. In May 2018, the Court ruled that NuVasive failed to state a plausible claim for infringement of the asserted design patents and dismissed those claims with prejudice. The Company filed its answer, affirmative defenses and counterclaims to NuVasive’s remaining claims in May 2018.
Also in March 2018, NuVasive moved for a preliminary injunction. In March 2018, the Court denied that motion without prejudice for failure to comply with the Court’s chambers rules. In April 2018, NuVasive again moved for a preliminary injunction. In July 2018, after a hearing on the matter in June 2018, the Court denied that motion on the grounds that NuVasive failed to establish either likelihood of success on the merits or that it would suffer irreparable harm absent injunction.
In September 2018, NuVasive filed an Amended Complaint, asserting additional infringement claims of U.S. Patent Nos. 9,924,859, 9,974,531 and 8,187,334. The Company filed its answer, affirmative defenses and counterclaims to these claims in October 2018. Also in October 2018, NuVasive moved to dismiss the Company’s counterclaims that NuVasive intentionally had misled the U.S. Patent and Trademark Office as a means of obtaining certain patents asserted against the Company. In January 2019, the Court denied NuVasive’s motion as to all but one counterclaim, but granted the Company leave to amend that counterclaim to cure dismissal. The Company amended that counterclaim in February 2019 and, that same month, NuVasive again moved to dismiss it. In March 2019, the Court denied NuVasive’s motion. NuVasive filed its Answer to the amended counterclaim in April 2019.
In December 2018, the Company filed a petition with the Patent Trial and Appeal Board (“PTAB”) challenging the validity of certain claims of the ’156 and ’334 Patents. In July 2019, PTAB instituted Inter Partes Review of the validity of asserted claims of the two patents at issue and held a hearing on the matter in April 2020. In July 2020, the PTAB ruled that all challenged claims of the ‘156 Patent were valid (not unpatentable) and ruled that several challenged claims of the ‘334 Patent were invalid, while finding that other challenged claims of the ‘334 Patent valid. NuVasive and the Company have both appealed the PTAB’s written decision on the matter. The Company filed its Principal Brief on February 8, 2021. NuVasive filed its Principal Brief on April 21, 2021. The appeals are currently pending before the U.S. Court of Appeals for the Federal Circuit.
In January 2020, NuVasive filed a Motion for Partial Summary Judgment of infringement and validity of the ’832, ’780 and ’270 Patents and the Company filed a Motion for Summary Judgment of non-infringement of all asserted claims and of invalidity of the ’832 Patent and for dismissal of NuVasive’s claim for lost profits and its allegations of assignor estoppel. In April 2020, the Court granted NuVasive’s Motion as to the alleged infringement of the ’832 Patent only and denied NuVasive’s Motion in all other respects. Also, in April 2020, the Court granted the Company’s Motion as to dismissal of the allegations of assignor estoppel and denied the Company’s Motion in all other respects.
In November 2020, NuVasive filed a Motion to Strike the Company’s Invalidity Contentions concerning the ’156 and ’334 Implant Patents. In April 2021, the Court denied NuVasive’s motion.
In January 2021, NuVasive filed a Motion for Partial Summary Judgment of infringement and validity of the ’156 and ’334 Implant Patents and the Company filed a Motion for Summary Judgment of invalidity of those same patents. These motions were argued to the Court on June 29, 2021 and are now pending before the Court. Trial has been set to begin December 6, 2021.
The Company believes that the allegations lack merit and intends to vigorously defend all claims asserted. A liability is recorded in the consolidated financial statements if it is believed to be probable that a loss has been incurred and the amount of the loss can be reasonably estimated. It is impossible at this time to assess whether the outcome of this proceeding will have a material adverse effect
21
on the Company’s consolidated results of operations, cash flows or financial position. Therefore, in accordance with authoritative accounting guidance, the Company has not recorded any accrual for a contingent liability associated with this legal proceeding based on its belief that a liability, while possible, is not probable and any range of potential future charge cannot be reasonably estimated at this time.
Indemnifications
In the normal course of business, the Company enters into agreements under which it occasionally indemnifies third-parties for intellectual property infringement claims or claims arising from breaches of representations or warranties. In addition, from time to time, the Company provides indemnity protection to third-parties for claims relating to past performance arising from undisclosed liabilities, product liabilities, environmental obligations, representations and warranties, and other claims. In these agreements, the scope and amount of remedy, or the period in which claims can be made, may be limited. It is not possible to determine the maximum potential amount of future payments, if any, due under these indemnities due to the conditional nature of the obligations and the unique facts and circumstances involved in each agreement.
In October 2017, NuVasive filed a lawsuit in Delaware Chancery Court against Mr. Miles, the Company’s Chairman and CEO, who was a former officer and board member of NuVasive. The Company itself was not initially a named defendant in this lawsuit; however, on June 28, 2018, NuVasive amended its complaint to add the Company as a defendant. On October 12, 2018, the Delaware Court ordered that NuVasive begin advancing legal fees for Mr. Miles’ defense in the lawsuit, as well as Mr. Miles’ legal fees incurred in pursuing advancement of his fees, pursuant to an indemnification agreement between NuVasive and Mr. Miles. As of June 30, 2021, the Company has
Royalties
The Company has entered into various intellectual property agreements requiring the payment of royalties based on the sale of products that utilize such intellectual property. These royalties primarily relate to products sold by Alphatec Spine and are based on fixed fees or are calculated either as a percentage of net sales or on a per-unit sold basis. Royalties are included on the accompanying condensed consolidated statements of operations as a component of cost of revenue. As of June 30, 2021, the Company is obligated to pay guaranteed minimum royalty payments under these agreements of approximately $
8. Orthotec Settlement
On September 26, 2014, the Company entered into a Settlement and Release Agreement, dated as of August 13, 2014, by and among the Company and its direct subsidiaries, including Alphatec Spine, Inc., Alphatec Holdings International C.V., Scient'x S.A.S. and Surgiview S.A.S.; HealthpointCapital, LLC, HealthpointCapital Partners, L.P., HealthpointCapital Partners II, L.P., John H. Foster and Mortimer Berkowitz III; and Orthotec, LLC and Patrick Bertranou, (the “Settlement Agreement”). Pursuant to the Settlement Agreement, the Company agreed to pay Orthotec, LLC $
As of June 30, 2021, the Company has made installment payments in the aggregate of $
22
A reconciliation of the total net settlement obligation is as follows (in thousands):
|
|
June 30, 2021 |
|
|
December 31, 2020 |
|
||
Litigation settlement obligation - short-term portion |
|
$ |
|
|
|
$ |
|
|
Litigation settlement obligation - long-term portion |
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
Future interest |
|
|
|
|
|
|
|
|
Total settlement obligation, gross |
|
|
|
|
|
|
|
|
Related party receivable - included in stockholders' equity |
|
|
( |
) |
|
|
( |
) |
Total settlement obligation, net |
|
$ |
|
|
|
$ |
|
|
9. Business Segment and Geographic Information
The Company operates in
Net revenue and property, plant and equipment, net, by geographic region were as follows:
|
|
Revenue |
|
|
Property and equipment, net |
|
||||||||||||||||||
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
|
June 30, |
|
|
December 31, |
|
||||||||||||
(in thousands) |
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||||
United States |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
International |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
Total |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
10. Net Loss Per Share
Basic net loss per share is calculated by dividing the net income or loss available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted net loss per share attributable to common stockholders is calculated by dividing net loss available to common stockholders by the diluted weighted-average number of common shares outstanding for the period.
The following table presents the computation of basic and diluted net loss per share (in thousands, except per share amounts):
|
|
Three Months Ended June 30, |
|
|
Six Months Ended June 30, |
|
||||||||||
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss, basic and diluted |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding, basic and diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share, basic and diluted: |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
23
The anti-dilutive securities not included in diluted net loss per share were as follows (in thousands):
|
|
As of June 30, |
|
|||||
|
|
2021 |
|
|
2020 |
|
||
Series A Convertible Preferred Stock |
|
|
|
|
|
|
|
|
Options to purchase common stock and employee stock purchase plan |
|
|
|
|
|
|
|
|
Unvested restricted share awards |
|
|
|
|
|
|
|
|
Warrants to purchase common stock |
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
11. Stock-Benefit Plans and Equity Transactions
Stock Benefit Plans
On June 17, 2020, the Company’s shareholders approved an amendment to the Company’s 2016 Equity Incentive Award Plan (the “2016 Equity Plan”), which increased the amount of shares of common stock available for issuance under the 2016 Equity Plan by
In 2007, the Company adopted the Alphatec Holdings, Inc. 2007 Amended and Restated Employee Stock Purchase Plan (the “ESPP”), which first was amended in May 2017. On June 16, 2021, the Company’s shareholders approved a second amendment to the ESPP which increased the amount of shares of common stock available for purchase under the ESPP by
Stock-Based Compensation
Total stock-based compensation for the periods presented were as follows (in thousands):
|
|
Three Months Ended |
|
|
Six Months Ended |
|
||||||||||
|
|
June 30, |
|
|
June 30, |
|
||||||||||
|
|
2021 |
|
|
2020 |
|
|
2021 |
|
|
2020 |
|
||||
Cost of revenues |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Research and development |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales, general and administrative |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Shares Reserved for Future Issuance
As of June 30, 2021, the Company’s shares of common stock reserved for future issuance were as follows (in thousands):
Stock options outstanding |
|
|
|
|
Unvested restricted stock award |
|
|
|
|
Employee stock purchase plan |
|
|
|
|
Series A convertible preferred stock |
|
|
|
|
Warrants outstanding |
|
|
|
|
Authorized for future grant under the Distributor and Development Services plans |
|
|
|
|
Authorized for future grant under the Management Objective Strategic Incentive Plan |
|
|
|
|
Authorized for future grant under the Company equity plans |
|
|
|
|
Total |
|
|
|
|
24
Warrants Outstanding
2017 PIPE Warrants
The 2017 Common Stock Warrants (the “2017 PIPE Warrants”) have a
2018 PIPE Warrants
The 2018 Common Stock Warrants (the “2018 PIPE Warrants”) have a
SafeOp Surgical Merger Warrants
In conjunction with the Company’s 2018 acquisition of SafeOp, the Company issued warrants to purchase
Squadron Medical Warrants
As further described in Note 6, during the year ended December 31, 2018, in connection with the initial debt financing with Squadron Medical and a participant lender, the Company issued warrants to purchase
Executive Warrants
In December 2017 the Company issued warrants to Mr. Patrick S. Miles, the Company’s Chairman and Chief Executive Officer, to purchase
25
A summary of all outstanding warrants for common stock as of June 30, 2021 were as follows:
|
|
Number of Warrants |
|
|
Strike Price |
|
Expiration |
||
2017 PIPE Warrants |
|
|
|
|
|
$ |
|
|
|
2018 PIPE Warrants |
|
|
|
|
|
$ |
|
|
|
SafeOp Surgical Merger Warrants |
|
|
|
|
|
$ |
|
|
|
2018 Squadron Medical Warrants |
|
|
|
|
|
$ |
|
|
|
2019 Squadron Medical Warrants |
|
|
|
|
|
$ |
|
|
|
2020 Squadron Medical Warrants |
|
|
|
|
|
$ |
|
|
|
Executive Warrants |
|
|
|
|
|
$ |
|
|
|
Other(1) |
|
|
|
|
|
$ |
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
(1) |
Weighted-average strike price. |
All outstanding warrants were deemed to qualify for equity classification under authoritative accounting guidance.
2017 Distributor Inducement Plan and 2017 Development Services Plan
Under the 2017 Distributor Inducement Plan, the Company is authorized to grant up to
Under the 2017 Development Services Plan, the Company is authorized to grant up to
2019 Management Objective Strategic Incentive Plan
Under the 2019 Management Objective Strategic Incentive Plan, the Company is authorized to grant up to
12. Income Taxes
To calculate its interim tax provision, at the end of each interim period the Company estimates the annual effective tax rate, adjusted for discrete items arising in that quarter, and applies that rate to its ordinary quarterly earnings. The computation of the annual estimated effective tax rate at each interim period requires certain estimates and significant judgment including, but not limited to, the expected operating income for the year, projections of the proportion of income earned and taxed in foreign jurisdictions, permanent and temporary differences between book and tax amounts, and the likelihood of recovering deferred tax assets generated in the current year. The accounting estimates used to compute the provision for income taxes may change as new events occur, additional information is obtained or the tax environment changes.
26
The Company’s effective tax rate from continuing operations was (
13. Related Party Transactions
In July 2016, the Company entered into a forbearance agreement with HealthpointCapital, LLC, HealthpointCapital Partners, L.P., and HealthpointCapital Partners II, L.P. (collectively, "HealthpointCapital"), pursuant to which HealthpointCapital, on behalf of the Company, paid $
During the second quarter of 2018, HealthpointCapital Partners, L.P., and HealthpointCapital Partners II, L.P. distributed its holdings in the Company’s common stock to its limited partners. As a result, the fund is no longer a shareholder of the Company as of June 30, 2021. The remaining $
In November 2018, the Company entered into a Term Loan and Financing agreement with affiliates of Squadron Capital, LLC. The Term Loan was amended in March 2019, May 2020 and December 2020, as further described in Note 6. Squadron Capital, LLC was a lead investor in the private placement of shares of the Company’s common stock that was closed on March 1, 2021. David Pelizzon, President and Director of Squadron Capital, LLC, currently serves on the Company’s Board of Directors.
Included on the condensed consolidated balance sheet as of June 30, 2021 is a $
14. Subsequent Event
In July 2021, the Company received confirmation from the SBA that the entire PPP Loan was forgiven. See Note 6 for further information on the PPP Loan.
27
Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
You should read the following management's discussion and analysis of our financial condition and results of operations in conjunction with our unaudited condensed consolidated financial statements and the related notes thereto that appear elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto and under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”), on March 5, 2021. In addition to historical information the following management’s discussion and analysis of our financial condition and results of operations includes forward-looking information that involves risks, uncertainties, and assumptions. Our actual results and the timing of events could differ materially from those anticipated by these forward-looking statements as a result of many factors, such as those set forth under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020 and any updates to those risk factors filed from time to time in our subsequent periodic and current reports filed with the SEC.
Overview
We are a medical technology company focused on the design, development, and advancement of technology for better surgical treatment of spinal disorders. We are dedicated to revolutionizing the approach to spine surgery through clinical distinction. We have a broad product portfolio designed to address the majority of the U.S. market for spinal disorders. We are focused on developing new approaches that integrate seamlessly with the SafeOp Neural InformatiX System to safely and reproducibly treat the spine’s various pathologies and achieve the goals of spine surgery. Our ultimate vision is to be the standard bearer in spine.
We intend to drive growth by capitalizing on our collective spine experience and investing in the research and development to continually differentiate our solutions and improve spine surgery. We believe our future success will be fueled by introducing market-shifting innovation to the spine market, and that we are well-positioned to capitalize on current spine market dynamics.
We market and sell our products through a network of independent distributors and direct sales representatives. An objective of our leadership team is to deliver increasingly consistent, predictable growth. To accomplish this, we have partnered more closely with new and existing distributors to create a more dedicated and loyal sales channel for the future. We have added, and intend to continue to add, new high-quality exclusive and dedicated distributors to expand future growth. We believe this will allow us to reach an untapped market of surgeons, hospitals, and national accounts across the U.S., as well as better penetrate existing accounts and territories.
Recent Developments
Acquisition of EOS
On May 13, 2021, we acquired a controlling interest in EOS imaging S.A. (“EOS”), pursuant to the Tender Offer Agreement (the “Tender Offer Agreement”) we entered on December 16, 2020, and we subsequently purchased the remaining issued and outstanding ordinary shares for a 100% interest in EOS. EOS, which now operates as our wholly owned subsidiary, is a global medical device company that designs, develops and markets innovative, low dose 2D/3D full body and weight-bearing imaging, rapid 3D modeling of EOS patient X-ray images, web-based patient-specific surgical planning, and integration of surgical plan into the operating room that collectively bridge the entire spectrum of care from imaging to post-operative assessment capabilities for orthopedic surgery. We plan to integrate this technology into our procedural approach to spine surgery in order to better inform and better achieve spinal alignment objectives in surgery.
COVID-19 Pandemic
Since the beginning of the COVID-19 pandemic, we have seen volatility in sales trends since elective surgeries that use our products have been impacted to varying degrees, particularly more during the earlier phases of the pandemic. Since the earlier phases of the pandemic, demand has since recovered to varying degrees as local conditions have improved and some geographies have re-opened following the development and administration of a vaccine to the general public, therefore allowing surgeons to resume surgeries.
We continue to monitor the impact of the COVID-19 pandemic on our business and recognize it may continue to negatively impact our business and results of operations during the remainder of 2021 and beyond. Given the present uncertainty surrounding the pandemic, we expect to continue to see volatility through at least the remaining duration of the pandemic as the impact on individual markets and responses to conditions by state and local governments continues to vary.
28
Revenue and Expense Components
The following is a description of the primary components of our revenue and expenses:
Revenue. We derive our revenue primarily from the sale of spinal surgery implants used in the treatment of spine disorders as well as the sale of medical imaging equipment which is used for surgical planning and post-operative assessment. Spinal implant products include pedicle screws and complementary implants, interbody devices, plates, and tissue-based materials. Medical imaging equipment includes our EOS full-body and weight-bearing x-ray imaging devices, and related services. Our revenue is generated by our direct sales force and independent distributors. Our products are requested directly by surgeons and shipped and billed to hospitals and surgical centers. Currently, most of our business is conducted with customers within markets in which we have experience and with payment terms that are customary to our business. We may defer revenue until the time of collection if circumstances related to payment terms, regional market risk or customer history indicate that collectability is not certain.
Cost of revenue. Cost of revenue consists of direct product costs, royalties, milestones and the amortization of purchased intangibles. Our product costs consist primarily of direct labor, overhead, and raw materials and components. The product costs of certain of our biologics products include the cost of procuring and processing human tissue. We incur royalties related to the technologies that we license from others and the products that are developed in part by surgeons with whom we collaborate in the product development process. Amortization of purchased intangibles consists of amortization of developed product technology.
Research and development expenses. Research and development expenses consist of costs associated with the design, development, testing, and enhancement of our products. Research and development expenses also include salaries and related employee benefits, research-related overhead expenses, fees paid to external service providers in both cash and equity, and costs associated with our Scientific Advisory Board and Executive Surgeon Panels.
Sales, general and administrative expenses. Sales, general and administrative expenses consist primarily of salaries and related employee benefits, sales commissions and support costs, depreciation of our surgical instruments, freight, regulatory affairs, quality assurance costs, professional service fees, travel, medical education, trade show and marketing costs, insurance and legal expenses.
Litigation-related expenses. Litigation-related expenses are costs incurred for our ongoing litigation, primarily with NuVasive, Inc.
Transaction-related expenses. Transaction-related expenses are certain costs incurred related primarily to the acquisition of EOS.
Restructuring. Restructuring expenses are costs incurred related primarily to severance, social plan benefits and related taxes in connection with cost rationalization efforts, as well as costs associated with the opening of our Memphis distribution center and closing costs related to our old headquarters office in Carlsbad, California.
Total interest and other expense, net. Total interest and other expense, net includes interest income, interest expense, gains and losses from foreign currency exchanges and other non-operating gains and losses.
Income tax provision. Income tax provision from continuing operations primarily consists of an estimate of state and foreign income taxes based on enacted state and foreign tax rates, as adjusted for allowable credits, deductions, uncertain tax positions, changes in the valuation of our deferred tax assets and liabilities, and changes in tax laws.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations is based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. On an on-going basis, we evaluate our estimates and assumptions, including those related to revenue recognition, allowances for accounts receivable, inventories and intangible assets, stock-based compensation and income taxes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumption conditions.
Critical accounting policies are those that, in management’s view, are most important in the portrayal of our financial condition and results of operations. Aside from the changes disclosed in Note 2 to the Notes to Condensed Consolidated Financial Statements included in Item 1, Part I of this Quarterly Report on Form 10-Q, management believes there have been no material changes during the three months ended June 30, 2021 to the critical accounting policies discussed in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on March 5, 2021.
29
Results of Operations
The tables below set forth certain statements of operations data for the periods indicated (in thousands). Our historical results are not necessarily indicative of the operating results that may be expected in the future.
|
|
Three Months Ended June 30, |
|
|
Increase (Decrease) |
|
|
Six Months Ended June 30, |
|
|
Increase (Decrease) |
|
||||||||||||||||||||
|
|
2021 |
|
|
2020 |
|
|
$ |
|
|
% |
|
|
2021 |
|
|
2020 |
|
|
$ |
|
|
% |
|
||||||||
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from products and services |
|
$ |
61,885 |
|
|
$ |
28,834 |
|
|
$ |
33,051 |
|
|
|
115 |
% |
|
$ |
105,601 |
|
|
$ |
57,904 |
|
|
$ |
47,697 |
|
|
|
82 |
% |
Revenue from international supply agreement |
|
|
364 |
|
|
|
795 |
|
|
|
(431 |
) |
|
|
(54 |
%) |
|
|
769 |
|
|
|
1,840 |
|
|
|
(1,071 |
) |
|
|
(58 |
%) |
Total revenue |
|
|
62,249 |
|
|
|
29,629 |
|
|
|
32,620 |
|
|
|
110 |
% |
|
|
106,370 |
|
|
|
59,744 |
|
|
|
46,626 |
|
|
|
78 |
% |
Cost of revenue |
|
|
21,184 |
|
|
|
8,787 |
|
|
|
12,397 |
|
|
|
141 |
% |
|
|
33,447 |
|
|
|
17,871 |
|
|
|
15,576 |
|
|
|
87 |
% |
Gross profit |
|
|
41,065 |
|
|
|
20,842 |
|
|
|
20,223 |
|
|
|
97 |
% |
|
|
72,923 |
|
|
|
41,873 |
|
|
|
31,050 |
|
|
|
74 |
% |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development |
|
|
7,839 |
|
|
|
4,237 |
|
|
|
3,602 |
|
|
|
85 |
% |
|
|
13,640 |
|
|
|
8,406 |
|
|
|
5,234 |
|
|
|
62 |
% |
Sales, general and administrative |
|
|
60,659 |
|
|
|
26,468 |
|
|
|
34,191 |
|
|
|
129 |
% |
|
|
101,085 |
|
|
|
54,051 |
|
|
|
47,034 |
|
|
|
87 |
% |
Litigation-related expenses |
|
|
1,167 |
|
|
|
1,304 |
|
|
|
(137 |
) |
|
|
(11 |
%) |
|
|
4,502 |
|
|
|
3,947 |
|
|
|
555 |
|
|
|
14 |
% |
Amortization of acquired intangible assets |
|
|
1,208 |
|
|
|
172 |
|
|
|
1,036 |
|
|
|
602 |
% |
|
|
1,380 |
|
|
|
344 |
|
|
|
1,036 |
|
|
|
301 |
% |
Transaction-related expenses |
|
|
4,771 |
|
|
|
(181 |
) |
|
|
4,952 |
|
|
|
(2736 |
%) |
|
|
5,783 |
|
|
|
4,091 |
|
|
|
1,692 |
|
|
|
41 |
% |
Restructuring costs |
|
|
1,173 |
|
|
|
— |
|
|
|
1,173 |
|
|
|
100 |
% |
|
|
1,331 |
|
|
|
— |
|
|
|
1,331 |
|
|
|
100 |
% |
Total operating expenses |
|
|
76,817 |
|
|
|
32,000 |
|
|
|
44,817 |
|
|
|
140 |
% |
|
|
127,721 |
|
|
|
70,839 |
|
|
|
56,882 |
|
|
|
80 |
% |
Operating loss |
|
|
(35,752 |
) |
|
|
(11,158 |
) |
|
|
(24,594 |
) |
|
|
220 |
% |
|
|
(54,798 |
) |
|
|
(28,966 |
) |
|
|
(25,832 |
) |
|
|
89 |
% |
Interest and other expense, net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net |
|
|
(2,394 |
) |
|
|
(3,032 |
) |
|
|
638 |
|
|
|
(21 |
%) |
|
|
(4,332 |
) |
|
|
(5,906 |
) |
|
|
1,574 |
|
|
|
(27 |
%) |
Other expenses |
|
|
(16 |
) |
|
|
(1,555 |
) |
|
|
1,539 |
|
|
|
(99 |
%) |
|
|
(1,905 |
) |
|
|
(1,555 |
) |
|
|
(350 |
) |
|
|
23 |
% |
Total interest and other expense, net |
|
|
(2,410 |
) |
|
|
(4,587 |
) |
|
|
2,177 |
|
|
|
(47 |
%) |
|
|
(6,237 |
) |
|
|
(7,461 |
) |
|
|
1,224 |
|
|
|
(16 |
%) |
Loss before taxes |
|
|
(38,162 |
) |
|
|
(15,745 |
) |
|
|
(22,417 |
) |
|
|
142 |
% |
|
|
(61,035 |
) |
|
|
(36,427 |
) |
|
|
(24,608 |
) |
|
|
68 |
% |
Income tax provision |
|
|
43 |
|
|
|
60 |
|
|
|
(17 |
) |
|
|
(28 |
%) |
|
|
73 |
|
|
|
100 |
|
|
|
(27 |
) |
|
|
(27 |
%) |
Net loss |
|
$ |
(38,205 |
) |
|
$ |
(15,805 |
) |
|
$ |
(22,400 |
) |
|
|
142 |
% |
|
$ |
(61,108 |
) |
|
$ |
(36,527 |
) |
|
$ |
(24,581 |
) |
|
|
67 |
% |
Three and Six Months Ended June 30, 2021 compared to the Three and Six Months Ended June 30, 2020
Total revenue. Revenue associated with our acquisition of EOS accounted for approximately 21% and 10% of the increase in total revenue for the three and six months ended June 30, 2021, respectively, compared to the same periods in 2020. Product volume for our business, excluding the EOS acquisition, increased our revenue by approximately 89% and 68% for the three and six months ended June 30, 2021, respectively, compared to the same periods in 2020, primarily due to the continued expansion of our new product portfolio, increases in our surgeon user base, and progress related to the transformation of our sales network.
Revenue from international supply agreement, which is attributed to sales to Globus under which we supply to Globus certain of its implants and instruments at agreed-upon prices for a minimum term of three years, decreased by $0.4 million, or 54%, during the three months ended June 30, 2021 compared to the three months ended June 30, 2020, and decreased by $1.1 million, or 58%, during the six months ended June 30, 2021 compared to the six months ended June 30, 2020. The decreases in revenue from the international supply agreement during the three and six months ended June 30, 2021 compared to the three and six months ended June 30, 2020 were primarily due to a reduction in sales volume and orders from Globus. As part of the supply agreement, Globus had the option to extend the term for up to two additional twelve-month periods subject to Globus meeting specified purchase requirements. During the second quarter of 2020, Globus notified us that it would exercise the option to extend the agreement for the second additional twelve-month period through August 2021, at which time the supply agreement will expire and revenue from Globus will discontinue.
Total cost of revenue. Total Cost of revenue, excluding EOS, increased by $6.8 million, or 77%, and by $10.0 million, or 56% during the three and six months ended June 30, 2021, respectively, as compared to the three and six months ended June 30, 2020, respectively. The increases are primarily due to increased product volume. Inventory expense associated with the purchase accounting of EOS accounted for approximately 20% and 10% of the total increases for the three and six months ended June 30, 2021, respectively. Cost of revenue associated with EOS operations accounted for approximately 44% and 21% of the increase for the three and six months ended June 30, 2021, respectively, as compared to the three and six months ended June 30, 2020, respectively.
Cost of revenue from the international supply agreement decreased by $0.4 million, or 55% during the three months ended June 30, 2021 as compared to the three months ended June 30, 2020, and decreased by $0.9 million, or 50% during the six months ended June 30, 2021 as compared to the six months ended June 30, 2020. The decreases in cost of revenue from the international supply agreement during the three and six months ended June 30, 2021 as compared to the three and six months ended June 30, 2020 were primarily due to a reduction in sales volume and related costs under the international supply agreement with Globus.
Research and development expenses. The increases during the three and six months ended June 30, 2021 as compared to the three and six months ended June 30, 2020 were primarily due to personnel and new project costs. Research and development expense
30
associated with EOS accounted for approximately 18% and 9% of the total increase for the three and six months ended June 30, 2021, respectively, as compared to the three and six months ended June 30, 2020, respectively.
Sales, general and administrative expenses. Sales, general and administrative expenses, excluding EOS, increased by $31.6 million, or 119%, and by $44.5 million, or 82%, during the three and six months ended June 30, 2021, respectively, compared to the three and six months ended June 30, 2020, respectively. The increases during the three and six months ended June 30, 2021 compared to the three and six months ended June 30, 2020 were primarily due to higher compensation-related costs and variable selling expenses associated with the increase in revenue, and our continued investment in building our strategic distribution channel. Additionally, we have increased our investment in our sales and marketing functions by increasing headcount to support the growth of our business. Sales, general and administrative expenses associated with EOS accounted for approximately 10% and 5% of the total increases for the three and six months ended June 30, 2021, respectively, as compared to the three and six months ended June 30, 2020, respectively.
Litigation expenses. Litigation expenses decreased by $0.1 million, or 11% during the three months ended June 30, 2021 as compared to the three months ended June 30, 2020, and increased by $0.6 million, or 14% during the six months ended June 30, 2021 as compared to the six months ended June 30, 2020. Litigation expense is primarily related to our ongoing litigation with NuVasive, Inc. and other legal activities.
Amortization of acquired intangible assets. Amortization of acquired intangible assets primarily includes amortization of intangibles acquired in the EOS acquisition.
Transaction-related expenses. The increases in transaction-related expenses for both the three and six months ended June 30, 2021 are primarily due to third-party advisory and legal fees related to our acquisition of EOS, which closed on May 13, 2021.
Restructuring costs. The increases in restructuring costs for both the three and six months ended June 30, 2021 are primarily due to severance, social plan benefits and related taxes in connection with cost rationalization efforts as well as costs associated with the opening of our Memphis distribution center and closing costs related to our old headquarters office.
Total interest and other expense, net. The decreases during the three and six months ended June 30, 2021 as compared to the three and six months ended June 30, 2020 were primarily due to lower interest expense related to lower outstanding debt balances, partially offset by foreign currency losses related to the forward contract settlement.
Income tax provision. Income tax provision for the three and six months ended June 30, 2021 was negligible and remained consistent compared to the three and six months ended June 30, 2020.
Liquidity and Capital Resources
Our principal sources of liquidity are our existing cash and additional borrowings available under our Term Loan. Our liquidity and capital structure are evaluated regularly within the context of our annual operating and strategic planning process. We consider the liquidity necessary to fund our operations, which include working capital needs, investments in research and development, investments in inventory and instrument sets to support our customers, as well as other operating costs. Our future capital requirements will depend on many factors including our rate of revenue growth, the timing and extent of spending to support development efforts, the expansion of sales, marketing and administrative activities, and the timing of introductions of new products and enhancements to existing products. As current borrowing sources become due, we may be required to access the capital markets for additional funding. If we are required to access the debt market, we expect to be able to secure reasonable borrowing rates.
Cash was $76.6 million and $107.8 million at June 30, 2021 and December 31, 2020, respectively. The $31.2 million decrease in cash was primarily due to the open market purchase of outstanding EOS Shares and OCEANEs in connection with our acquisition of EOS and increased activity related to our inventory and instrument set builds, partially offset by the closing of the private placement on March 1, 2021, which generated proceeds of $131.8 million, net of offering costs.
Available borrowings under our Term Loan were $40.0 million at June 30, 2021 and December 31, 2020. We believe that our existing funds, cash generated from our operations and our existing sources of and access to financing are adequate to satisfy our needs for working capital, capital expenditure and debt service requirements, and other business initiatives we plan to strategically pursue.
Squadron Credit Agreement, Paycheck Protection Loan and Other Debt and Commitments
We have an $85.0 million Term Loan with Squadron Medical which matures on June 30, 2026. The Term Loan bears interest at London Interbank Offered Rate (“LIBOR”) plus 8.0% per annum (subject to a 9.0% floor and 12.0% ceiling). Interest-only payments are due monthly until December 2023 and joined by $1.0 million monthly principal payments beginning December 2023. Any
31
remaining principal amounts of the Term Loan will be due on June 30, 2026. In addition to paying interest on outstanding principal on the Term Loan, we will pay a commitment fee at a rate of 1.0% per annum to Squadron Medical in respect of the unutilized Term Loan. As collateral for the Term Loan, Squadron Medical has a first lien security interest in all of our assets. Our obligation outstanding under the Term Loan as of June 30, 2021 was $45.0 million.
On April 23, 2020, we received the proceeds from a loan in the amount of approximately $4.3 million (the “PPP Loan”) from Silicon Valley Bank, as lender, pursuant to the Paycheck Protection Program (“PPP”) of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”). All or a portion of the PPP Loan may be forgiven by the SBA upon application. Under the CARES Act, loan forgiveness is available for the sum of documented payroll costs, covered rent payments, covered mortgage interest and covered utilities during the twenty-four-week period, beginning on the date of loan approval. We used all of the proceeds from the PPP Loan to retain employees and maintain payroll. We submitted our application for loan forgiveness in November 2020 and received confirmation from the SBA that the entire PPP Loan was forgiven in July 2021.
We entered into an Inventory Financing Agreement whereby we may draw up to $9.0 million for the purchase of inventory to accrue interest at a rate of LIBOR plus 8.0% and also includes a 9.0% floor and 12.0% ceiling. All principal will become due and payable upon maturity on November 6, 2023 and all interest will be paid monthly. Should we elect to prepay the Squadron Term Loan, all amounts due under the Inventory Financing Agreement will become mandatorily due. Our obligation outstanding under the Inventory Financing Agreement as of June 30, 2021 was $7.5 million.
We assumed $15.1 million (or €12.6 million) in OCEANEs debt with the acquisition of EOS. The OCEANEs bear interest at 6% per year, payable semiannually in arrears on May 31 and November 30 of each year. Unless either earlier converted or repurchased, the OCEANEs will mature on May 31, 2023.
We also assumed $5.6 million (or €4.7 million) in other debts with the acquisition of EOS that become due in the first quarter 2022.
As of June 30, 2021, we have made $47.2 million in Orthotec settlement payments and there remains an aggregate amount of $10.6 million in Orthotec settlement payments (including accrued and future interest) to be paid by us.
We entered into a distribution agreement with a third-party provider in January 2020 in which we are obligated to certain minimum purchase requirements related to inventory and equipment leases. As of June 30, 2021, the minimum purchase commitment required by us under the agreement was $1.8 million to be paid over a three-year period.
Our various debt agreements include several event of default provisions, such as payment default, insolvency conditions and a material adverse effect clause, which could cause interest to be charged at a rate which is up to five percentage points above the rate effective immediately before the event of default or result in our lenders’ rights to declare all outstanding obligations immediately due and payable We were in compliance with the covenants under the debt agreements at June 30, 2021.
Operating Activities
We used net cash of $35.1 million from operating activities for the six months ended June 30, 2021. During this period, net cash used in operating activities consisted primarily of cash used for inventory purchases and use of cash related to general working capital and settlement of operational payables and liabilities.
Investing Activities
We used cash of $124.8 million in investing activities for the six months ended June 30, 2021 which is primarily related to our acquisition of EOS, including the purchase of OCEANEs, the purchase of surgical instruments to support the commercial launch of new products, other investments, and the settlement of a forward contract.
Financing Activities
Financing activities provided $128.8 million of cash for the six months ended June 30, 2021, primarily related to proceeds from the closing of the Private Placement on March 1, 2021, partially offset by the net impact of cash paid in connection with exercises of common stock for net exercise tax withholdings and cash received for stock option and warrant exercises.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
32
Contractual obligations and commercial commitments
Total contractual obligations and commercial commitments as of June 30, 2021 are summarized in the following table (in thousands):
|
|
Payment Due by Year |
|
|||||||||||||||||||||||||
|
|
Total |
|
|
2021 (remainder) |
|
|
2022 |
|
|
2023 |
|
|
2024 |
|
|
2025 |
|
|
Thereafter |
|
|||||||
Inventory financing |
|
$ |
7,528 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
7,528 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
Squadron Medical Term Loan |
|
|
45,000 |
|
|
|
— |
|
|
|
— |
|
|
|
1,000 |
|
|
|
12,000 |
|
|
|
12,000 |
|
|
|
20,000 |
|
Interest expense |
|
|
19,806 |
|
|
|
3,541 |
|
|
|
4,799 |
|
|
|
4,737 |
|
|
|
3,522 |
|
|
|
2,416 |
|
|
|
791 |
|
Note payable |
|
|
880 |
|
|
|
815 |
|
|
|
23 |
|
|
|
24 |
|
|
|
18 |
|
|
|
— |
|
|
|
— |
|
Finance lease obligations |
|
|
503 |
|
|
|
94 |
|
|
|
195 |
|
|
|
158 |
|
|
|
56 |
|
|
|
— |
|
|
|
— |
|
Facility lease obligations (1) |
|
|
41,593 |
|
|
|
864 |
|
|
|
4,358 |
|
|
|
4,557 |
|
|
|
4,583 |
|
|
|
4,617 |
|
|
|
22,614 |
|
Purchase commitments (2) |
|
|
30,706 |
|
|
|
4,321 |
|
|
|
4,730 |
|
|
|
6,482 |
|
|
|
6,629 |
|
|
|
8,544 |
|
|
|
— |
|
Litigation settlement obligations, gross (3) |
|
|
10,633 |
|
|
|
1,800 |
|
|
|
4,400 |
|
|
|
4,400 |
|
|
|
33 |
|
|
|
— |
|
|
|
— |
|
Guaranteed minimum royalty obligations & milestones (4) |
|
|
6,089 |
|
|
|
696 |
|
|
|
670 |
|
|
|
670 |
|
|
|
670 |
|
|
|
3,088 |
|
|
|
295 |
|
License agreement milestones (5) |
|
|
2,150 |
|
|
|
550 |
|
|
|
1,090 |
|
|
|
390 |
|
|
|
40 |
|
|
|
40 |
|
|
|
40 |
|
OCEANEs |
|
|
15,090 |
|
|
|
— |
|
|
|
— |
|
|
|
15,090 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Other (6) |
|
|
5,891 |
|
|
|
— |
|
|
|
5,891 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total |
|
$ |
185,869 |
|
|
$ |
12,681 |
|
|
$ |
26,156 |
|
|
$ |
45,036 |
|
|
$ |
27,551 |
|
|
$ |
30,705 |
|
|
$ |
43,740 |
|
(1) |
Includes our new headquarters building lease that commenced in February 2021. |
(2) |
Includes inventory purchase commitments with vendors, including commitments of $28.8 million assumed with our acquisition of EOS. |
(3) |
Represents gross payments due to Orthotec, LLC pursuant to a Settlement and Release Agreement, dated as of August 13, 2014, by and among the Company and its direct subsidiaries, including Alphatec Spine, Inc., Alphatec Holdings International C.V., Scient'x S.A.S. and Surgiview S.A.S.; HealthpointCapital, LLC, HealthpointCapital Partners, L.P., HealthpointCapital Partners II, L.P., John H. Foster and Mortimer Berkowitz III; and Orthotec, LLC and Patrick Bertranou. In September 2014, the Company and HealthpointCapital entered into an agreement for joint payment of settlement whereby HealthpointCapital is obligated to pay $5.0 million of the settlement amount, which payments began in the fourth quarter of 2020 and continue through 2021. See Note 11 to the Notes to Condensed Consolidated Financial Statements included in Item 1, Part I of this Quarterly Report on Form 10-Q for further information. |
(4) |
Commitments representing cash and equity related royalty payments and are subject to attaining certain sales and equity milestones. |
(5) |
Commitments representing payments in cash that are subject to attaining certain sales milestones which we believe are reasonably likely to be achieved. |
(6) |
Commitments representing cash repayments of state sponsored COVID relief initiatives at EOS. |
Real Property Leases
On April 9, 2021, we entered into a new 7-year operating lease agreement for a new distribution center which consists of approximately 75,643 square feet of office and warehouse space in Memphis, Tennessee. The term of the new lease commenced on May 1, 2021 and will terminate on May 1, 2028, subject to two thirty-six-month options to renew which were not reasonably certain to be exercised. We expect to occupy a proportionate share of the building upon commencement of the lease on May 1, 2021 and we are expected to occupy 100% of the premises beginning in November 2022. Base rent under the new building lease will be commensurate with our proportionate share of occupancy of the new building and will increase annually by 3.0% throughout the remainder of the lease.
On December 4, 2019, we entered into a new lease agreement, or New Building Lease, for a new headquarters location which consists of 121,541 square feet of office, engineering, and research and development space in Carlsbad, California. The term of the New Building Lease commenced on February 1, 2021 and is expected to terminate January 31, 2031, subject to two sixty-month options to renew. Base rent under the New Building Lease for the first twelve months of the term will be $0.2 million per month subject to full abatement during months two through ten, and thereafter will increase annually by 3.0% throughout the remainder of the lease.
33
Recent Accounting Pronouncements
Aside from newly implemented accounting policies related to leases discussed above under “Critical Accounting Policies and Estimates” and for the changes disclosed in Note 2 to the Notes to Condensed Consolidated Financial Statements (Unaudited) under the heading “Recent Accounting Pronouncements,” there have been no new accounting pronouncements or changes to accounting pronouncements during the three months ended June 30, 2021, as compared to the recent accounting pronouncements described in the Company's Annual Report on Form 10-K for the year ended December 31, 2020, that was filed with the SEC on March 5, 2021.
Forward Looking Statements
This Quarterly Report on Form 10-Q incorporates a number of forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including statements regarding:
|
• |
our estimates regarding anticipated operating losses, future revenue, expenses, capital requirements, uses and sources of cash and liquidity, including our anticipated revenue growth and cost savings; |
|
• |
our ability to meet the affirmative and negative covenants under our credit facility; |
|
• |
our ability to ensure that we have effective disclosure controls and procedures; |
|
• |
our ability to meet our obligations under the Supply Agreement with Globus Medical, Inc.; |
|
• |
our ability to meet, and potential liability from not meeting, the payment obligations under the Orthotec LLC settlement agreement; |
|
• |
our ability to maintain compliance with the quality requirements of the U.S. Food and Drug Administration; |
|
• |
our ability to market, improve, grow, commercialize and achieve market acceptance of any of our products or any product candidates that we are developing or may develop in the future; |
|
• |
our beliefs about the features, strengths and benefits of our products; |
|
• |
our ability to continue to enhance our product offerings, outsource our manufacturing operations and expand the commercialization of our products, and the effect of our strategy; |
|
• |
our ability to successfully integrate, and realize benefits from licenses and acquisitions |
|
• |
the effect of any existing or future federal, state or international regulations on our ability to effectively conduct our business; |
|
• |
our estimates of market sizes and anticipated uses of our products; |
|
• |
our business strategy and our underlying assumptions about market data, demographic trends, reimbursement trends and pricing trends; |
|
• |
our ability to achieve profitability, and the potential need to raise additional funding; |
|
• |
our ability to maintain an adequate sales network for our products, including to attract and retain independent distributors; |
|
• |
our ability to enhance our U.S. distribution network; |
|
• |
our ability to increase the use and promotion of our products by training and educating spine surgeons and our sales network; |
|
• |
our ability to attract and retain a qualified management team, as well as other qualified personnel and advisors; |
|
• |
our ability to enter into licensing and business combination agreements with third parties and to successfully integrate the acquired technology and/or businesses; and |
|
• |
other factors discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 or any document incorporated by reference herein or therein. |
Any or all of our forward-looking statements in this Quarterly Report on Form 10-Q may turn out to be wrong. They can be affected by inaccurate assumptions and/or by known or unknown risks and uncertainties. Many factors mentioned in our discussion in this Quarterly Report on Form 10-Q will be important in determining future results. Consequently, no forward-looking statement can be guaranteed. Actual future results may vary materially from expected results.
34
We also provide a cautionary discussion of risks and uncertainties under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020 and any updates to those risk factors filed from time to time in our subsequent periodic and current reports filed with the SEC. These are factors that we think could cause our actual results to differ materially from expected results. Other factors besides those listed there could also adversely affect us.
Without limiting the foregoing, the words “believe,” “anticipate,” “plan,” “expect,” “estimate,” “may,” “will,” “should,” “could,” “would,” “seek,” “intend,” “continue,” “project,” and similar expressions are intended to identify forward-looking statements. There are a number of factors and uncertainties that could cause actual events or results to differ materially from those indicated by such forward-looking statements, many of which are beyond our control, including the factors set forth under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020 and any updates to those risk factors filed from time to time in our subsequent periodic and current reports filed with the SEC. In addition, the forward-looking statements contained herein represent our estimate only as of the date of this filing and should not be relied upon as representing our estimate as of any subsequent date. While we may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so to reflect actual results, changes in assumptions or changes in other factors affecting such forward-looking statements.
Item 3. |
Quantitative and Qualitative Disclosures About Market Risk |
Interest Rate Risk
Other outstanding debt consists of various variable rate instruments, including debt outstanding under the Term Loan with Squadron.
Our borrowings under our credit facilities expose us to market risk related to changes in interest rates. As of June 30, 2021, our outstanding floating rate indebtedness totaled $49.3 million. The primary base interest rate is the LIBOR rate. Assuming the outstanding balance on our floating rate indebtedness remains constant over a year, a 100-basis point increase in the interest rate would decrease pre-tax income and cash flow by approximately $0.5 million.
Commodity Price Risk
We purchase raw materials that are processed from commodities, such as titanium and stainless steel. These purchases expose us to fluctuations in commodity prices. Given the historical volatility of certain commodity prices, this exposure can impact our product costs. However, because our raw material prices comprise a small portion of our cost of revenue, we have not experienced any material impact on our results of operations from changes in commodity prices. A 10% change in commodity prices would not have had a material impact on our results of operations for the three and six months ended June 30, 2021.
Item 4. |
Controls and Procedures |
Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized and reported within the time lines specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving the desired control objectives, and in reaching a reasonable level of assurance, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we carried out an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as defined in SEC Rules 13a - 15(e) and 15d - 15(e)) as of June 30, 2021. Based on such evaluation, our management has concluded that as of June 30, 2021, the Company’s disclosure controls and procedures are effective.
Changes in Internal Control over Financial Reporting
There have been no changes to our internal control over financial reporting during the three months ended June 30, 2021 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Due to the timing of our acquisition of EOS, the internal control over financial reporting of the acquired company and its subsidiaries, including the portion of disclosure controls and procedures that related to internal control over financial reporting, was excluded from the evaluation of the effectiveness of the Company’s disclosure controls and procedures as of the period covered by this report. This exclusion is in accordance with the general guidance issued by the Staff of the SEC that an assessment of a recent business combination may be omitted from management's report on internal control over financial reporting in the first year of consolidation.
35
PART II. OTHER INFORMATION
Item 1. |
Legal Proceedings |
Litigation
We are and may become involved in various legal proceedings arising from our business activities. While the Company has no material accruals for pending litigation or claims for which accrual amounts are not disclosed in the Company’s condensed consolidated financial statements, litigation is inherently unpredictable, and depending on the nature and timing of a proceeding, an unfavorable resolution could materially affect our future consolidated results of operations, cash flows or financial position in a particular period. We assess contingencies to determine the degree of probability and range of possible loss for potential accrual or disclosure in our condensed consolidated financial statements. An estimated loss contingency is accrued in our condensed consolidated financial statements if it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Because litigation is inherently unpredictable and unfavorable resolutions could occur, assessing contingencies is highly subjective and requires judgments about future events. When evaluating contingencies, we may be unable to provide a meaningful estimate due to a number of factors, including the procedural status of the matter in question, the presence of complex or novel legal theories, and/or the ongoing discovery and development of information important to the matters. In addition, damage amounts claimed in litigation against us may be unsupported, exaggerated or unrelated to reasonably possible outcomes, and as such are not meaningful indicators of our potential liability.
Refer to Note 6 to the Notes to Condensed Consolidated Financial Statements included in Item 1, Part I of this Quarterly Report on Form 10-Q for further information regarding the NuVasive, Inc. litigation.
Item 1A. |
Risk Factors |
There have been no material changes to the risk factors described under Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, filed with the SEC on March 5, 2021 except for those noted below:
The business combination combined two companies that previously operated as independent public companies. The combined company will be required to devote significant management attention and resources to integrating our business practices and operations. In addition, we have incurred transaction-related and restructuring costs in connection with the business combination and will continue to incur such costs in connection with our integration. These expenses could, particularly in the near term, reduce the cost synergies that we achieve from the elimination of duplicative expenses and the realization of economies of scale and cost synergies related to the integration of the businesses following the completion of the business combination, and accordingly, any net synergies may not be achieved in the near term or at all. These integration expenses may result in us taking significant charges against earnings following the completion of the business combination, which could adversely affect our cash flows and operating results.
Our operations, both inside and outside the United States, are subject to risks inherent in conducting business globally and under the laws, regulations and customs of various jurisdictions and geographies. Our operations outside the United States are subject to special risks and restrictions, including, without limitation: fluctuations in currency values and foreign-currency exchange rates; exchange control regulations; changes in local political or economic conditions; governmental pricing directives; import and trade restrictions; import or export licensing requirements and trade policy; restrictions on the ability to repatriate funds; and other potentially detrimental domestic and foreign governmental practices or policies affecting U.S. companies doing business abroad, including the United States Foreign Corrupt Practices Act and the trade sanctions laws and regulations administered by the United States Department of the Treasury’s Office of Foreign Assets Control. Acts of terror or war may impair our ability to operate in particular countries or regions and may impede the flow of goods and services between countries. Customers in weakened economies may be unable to purchase our products, or it could become more expensive for them to purchase imported products in their local currency, or sell at competitive prices, and we may be unable to collect receivables from such customers. Further, changes in exchange rates may affect our net earnings, the book value of our assets outside the United States and our stockholders’ equity. Failure to comply with the laws and regulations that affect our global operations could have an adverse effect on our business, financial condition or results of operations.
Borrowings under certain of our funding arrangements bear an interest rate based on certain tenors of the London interbank offered rate (“LIBOR”) plus a credit spread. In July 2017, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, announced that, after 2021, it will stop compelling banks to submit rates for the calculation of LIBOR. The discontinuation, reform, or replacement of LIBOR could result in interest rate increases on our funding arrangements, which could adversely affect our cash flows and operating results.
36
Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds |
None.
Item 5. |
Other Information |
None.
37
Item 6. |
Exhibits |
Exhibit |
|
Number Exhibit Description |
|
|
|
10.1 |
|
|
|
|
|
31.1 |
|
|
|
|
|
31.2 |
|
|
|
|
|
32 |
|
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
|
|
|
101 |
|
The following materials from the Alphatec Holdings, Inc. Quarterly Report on Form 10-Q for the Three and Six Months Ended June 30, 2021, formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets (Unaudited) as of June 30, 2021 and December 31, 2020, (ii) Condensed Consolidated Statements of Operations (Unaudited) for the Three and Six Months Ended June 30, 2021 and 2020, (iii) Condensed Consolidated Statements of Comprehensive Loss (Unaudited) for the Six months ended June 30, 2021 and 2020, (iv) Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) for the Six months ended June 30, 2021 and 2020 (v) Condensed Consolidated Statements of Cash Flows (Unaudited) for the Six months ended June 30, 2021 and 2020, and (vi) Notes to Condensed Consolidated Financial Statements (Unaudited). |
|
|
|
104 |
|
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101.INS) |
|
|
|
(1) Incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed with the SEC on June 21, 2021. |
38
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
ALPHATEC HOLDINGS, INC. |
|
|
|
|
|
By: |
/s/ Patrick S. Miles |
|
|
Patrick S. Miles |
|
|
Chairman and Chief Executive Officer |
|
|
(principal executive officer) |
|
|
|
|
By: |
/s/ J. Todd Koning |
|
|
J. Todd Koning |
|
|
Executive Vice President and Chief Financial Officer |
|
|
(principal financial officer and principal accounting officer) |
Date: August 3, 2021
39