See accompanying notes to unaudited condensed consolidated financial statements.
See accompanying notes to unaudited condensed consolidated financial statements.
See accompanying notes to unaudited condensed consolidated financial statements.
See accompanying notes to unaudited condensed consolidated financial statements
See accompanying notes to unaudited condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. The Company and Basis of Presentation
The Company
Alphatec Holdings, Inc. (the “Company”), through its wholly owned subsidiaries, Alphatec Spine, Inc. (“Alphatec Spine”) and SafeOp Surgical, Inc. (“SafeOp”), is a medical technology company that designs, develops, and markets spinal fusion technology products and solutions for the treatment of spinal disorders associated with disease and degeneration, congenital deformities, and trauma. The Company markets its products in the U.S. via independent sales agents and a direct sales force.
On March 8, 2018, the Company completed its acquisition of SafeOp, a Delaware corporation, pursuant to a reverse triangular merger of SafeOp into a newly-created wholly-owned subsidiary of the Company, with SafeOp being the surviving corporation and a wholly-owned subsidiary of the Company. See Note 8 for further information.
On September 1, 2016, the Company completed the sale of its international distribution operations and agreements (collectively, the “International Business”) to Globus Medical Ireland, Ltd., a subsidiary of Globus Medical, Inc., and its affiliated entities (collectively “Globus”). As a result of this transaction, the International Business has been excluded from continuing operations for all periods presented in this Quarterly Report on Form 10-Q and is reported as discontinued operations. See Note 4 for additional information on the divestiture of the International Business.
Basis of Presentation
The accompanying condensed consolidated balance sheet as of December 31, 2018, which has been derived from audited financial statements, and the unaudited interim condensed consolidated financial statements have been prepared by the Company in accordance with U.S. generally accepted accounting principles (“GAAP”) and the rules and regulations of the Securities and Exchange Commission (“SEC”) related to a quarterly report on Form 10-Q. Certain information and note disclosures normally included in annual audited financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made in this Quarterly Report on Form 10-Q are adequate to make the information not misleading. The unaudited interim condensed consolidated financial statements reflect all adjustments, including normal recurring adjustments which, in the opinion of management, are necessary for a fair statement of the financial position and results of operations for the periods presented. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2018, which are included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 that was filed with the SEC on March 29, 2019. Operating results for the three months ended March 31, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019, or any other future periods.
Liquidity
The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern and do not include any adjustments that might result from the outcome of this uncertainty. A going concern basis of accounting contemplates the recovery of the Company’s assets and the satisfaction of its liabilities in the normal course of business.
The Company’s annual operating plan projects that its existing working capital at March 31, 2019 of $36.1 million (including cash of $16.4 million) along with the use of the Expanded Credit Facility with Squadron Medical Finance Solutions LLC (“Squadron”) of $30.0 million that closed on March 27, 2019 allows the Company to fund its operations through at least one year subsequent to the date the financial statements are issued.
The Company has incurred significant net losses since inception and has relied on its ability to fund its operations through revenues from the sale of its products, equity financings and debt financings. As the Company has historically incurred losses, successful transition to profitability is dependent upon achieving a level of revenues adequate to support the Company’s cost structure. This may not occur and, unless and until it does, the Company will continue to need to raise additional capital. Operating losses and negative cash flows may continue for at least the next year as the Company continues to incur costs related to the execution of its operating plan and introduction of new products. The Company’s inability to raise additional capital from outside sources will have a material adverse impact on its operations.
8
As more fully described in Note 5, the Company’s debt agreements include traditional lending and reporting covenants, including a financial covenant that requires the Compa
ny to maintain a minimum fixed charge coverage ratio beginning in April 2020 and a minimum liquidity covenant of $5.0 million effective through
March 2020. Should at any time the Company fail to maintain compliance with these covenants, the Company will ne
ed to seek waivers or amendments to the debt agreements. If the Company is unable to secure such waivers or amendments, it may be required to classify its obligations under the debt agreements in current liabilities on its consolidated balance sheet. The C
ompany may also be required to repay all or a portion of outstanding indebtedness under the debt agreements, which would require the Company to obtain further financing. There is no assurance that the Company will be able to obtain further financing, or d
o so on reasonable terms.
Reclassification
Certain amounts in the condensed consolidated statement of cash flows for the three months ended March 31, 2018 have been reclassified to conform to the current period's presentation. These reclassifications include the depreciation expense for surgical instruments, which was reclassified, to be consistent with industry practice, out of cost of revenues and into sales, general and administrative expense on the Company’s consolidated statements of operations. This resulted in a reclassification of $1.3 million of depreciation expense for the three months ended March 31, 2018. In addition, general and administrative expense for 2018 was combined into a single line item with sales and marketing expense for a new expense line titled “Sales, general and administrative expense” and litigation-related expenses primarily pertaining to the ongoing litigation with NuVasive, Inc. were classified out of selling, general and administrative expense on the Company’s consolidated statement of operations for the three months ended March 31, 2018 and onto its own expense line item. None of the adjustments had any effect on the prior period net loss.
2. Summary of Significant Accounting Policies
The Company’s significant accounting policies are described in Note 2 to its audited consolidated financial statements for the year ended December 31, 2018, which are included in the Company’s Annual Report on Form 10-K that was filed with the SEC on March 29, 2019. Except as discussed below, these accounting policies have not changed during the three months ended March 31, 2019.
Operating Lease
Effective January 1, 2019, the Company adopted ASC No. 2016‑02, Leases (Topic 842) (“ASU 2016‑02” or “ASC 842”), which supersedes the current accounting for leases, using the modified retrospective transition method. The Company has elected to apply the practical expedients allowed by the standard for existing leases. The new standard, while retaining two distinct types of leases, finance and operating, (i) requires lessees to record a right-of-use (“ROU”)asset and a related liability for the rights and obligations associated with a lease, regardless of lease classification, and recognize lease expense in a manner similar to current accounting, (ii) eliminates current real estate specific lease provisions, (iii) modifies the lease classification criteria and (iv) aligns many of the underlying lessor model principles with those in the new revenue standard. The Company determines the initial classification and measurement of its ROU asset and lease liabilities at the lease commencement date and thereafter, if modified. The Company recognizes a ROU asset for its operating leases with lease terms greater than 12 months. The lease term includes any renewal options and termination options that the Company is reasonably assured to exercise. The present value of lease payments is determined by using the incremental borrowing rate for operating leases determined by using the incremental borrowing rate of interest that the Company would pay to borrow on a collateralized basis an amount equal to the lease payments in a similar economic environment. The Company applied the new guidance to its existing facility lease at the time of adoption and recognized a ROU asset of $2.4 million and operating lease liability of $2.9 million as of March 31, 2019 and recorded a reversal of the previous deferred rent balance under the previous lease guidance of approximately $0.6 million.
Rent expense for operating leases is recognized on a straight-line basis over the reasonably assured lease term based on the total lease payments and is included in research and development and general and administrative expenses in the statements of operations.
Beneficial Conversion Feature – SafeOp Convertible Notes
In March 2019, the Company’s Convertible Note outstanding reached maturity and allowed for the noteholders to elect settlement in cash or shares of common stock. As the Convertible Note provided the holders the benefit to convert to shares of common stock, a beneficial conversion feature (“BCF”) with a calculated intrinsic fair value at issuance of $0.2 million existed as of the date the Convertible Note was able to be converted into shares of common stock. Although the holders elected for cash settlement, the BCF was required to be recognized as interest expense on the Company’s consolidated statement of operations and within additional paid-in-capital within the Company’s condensed consolidated statement of stockholders’ equity for the three months ended March 31, 2019.
9
Fair Value Measurements
T
he carrying amount of financial instruments consisting of cash, restricted cash, trade accounts receivable, prepaid expenses and other current assets, accounts payable, accrued expenses, accrued compensation and current portion of long-term debt included in the Company’s consolidated financial statements are reasonable estimates of fair value due to their short maturities. Based on the borrowing rates currently available to the Company for loans with similar terms, management believes the fair value of long-term debt approximates its carrying value.
Authoritative guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:
|
Level 1:
|
Observable inputs such as quoted prices in active markets;
|
|
Level 2:
|
Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
|
|
Level 3:
|
Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
|
The Company does not maintain any financial assets that are considered to be Level 1, Level 2 or Level 3 instruments as of March 31, 2019.
The fair value of the contingent consideration liability assumed in the SafeOp acquisition was recorded as part of the purchase price consideration of the acquisition.
The contingent consideration related to the SafeOp acquisition is classified within Level 3 of the fair value hierarchy as the Company is
using a probability-weighted income approach, utilizing significant unobservable inputs including the probability of achieving each of the potential milestones and an estimated discount rate related to the risks of the expected cash flows attributable to the milestones.
The following table provides a reconciliation of liabilities measured at fair value using significant unobservable inputs (Level 3) for the three months ended March 31, 2019 (in thousands):
|
|
Level 3
Liabilities
|
|
Balance at January 1, 2019
|
|
$
|
2,600
|
|
Settlement of Milestone #2
|
|
|
(2,889
|
)
|
Change in fair value measurement
|
|
|
289
|
|
Balance at March 31, 2019
|
|
$
|
—
|
|
During the three months ended March 31, 2019, the Company achieved the second of the two milestones which was settled through the issuance of 886,843 shares of the Company’s common stock. See Note 8 for further information.
Recent Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“
ASU”) 2016-02
, Leases (Topic 842)
, which changes several aspects of the accounting for leases, including the requirement that all leases with durations greater than twelve months be recognized on the balance sheet. The guidance is effective for annual and interim reporting periods in fiscal years beginning after December 15, 2018. The Company adopted the guidance effective January 1, 2019 and elected the optional transition method to account for the impact of the adoption with a cumulative-effect adjustment in the period of adoption and did not restate prior periods. The Company elected certain practical expedients permitted under the transition guidance. As part of the adoption, the Company recorded a ROU asset and liability upon adoption of the guidance pertaining to its long-term real estate lease for its corporate facilities. No cumulative-effect adjustment was needed.
Recently Issued Accounting Pronouncements
In January 2017, the FASB issued ASU 2017-04,
Intangibles – Goodwill and Other
, which eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value. The standard has tiered effective dates, starting in 2020 for calendar-year public business entities that meet the definition of an SEC filer. Early adoption is permitted for annual and interim goodwill impairment testing dates after January 1, 2017. The Company is in the process of determining the impacts the adoption will have on its consolidated financial statements as well as whether to early adopt the new guidance.
10
3. Select Condensed Consolidated Balance Sheet Details
Accounts Receivable, net
Accounts receivable, net consist of the following (in thousands):
|
|
March 31,
2019
|
|
|
December 31,
2018
|
|
Accounts receivable
|
|
$
|
13,966
|
|
|
$
|
15,291
|
|
Allowance for doubtful accounts
|
|
|
(206
|
)
|
|
|
(196
|
)
|
Accounts receivable, net
|
|
$
|
13,760
|
|
|
$
|
15,095
|
|
Inventories, net
Inventories, net consist of the following (in thousands):
|
|
March 31,
2019
|
|
|
December 31,
2018
|
|
Raw materials
|
|
$
|
5,862
|
|
|
$
|
5,813
|
|
Work-in-process
|
|
|
805
|
|
|
|
952
|
|
Finished goods
|
|
|
43,613
|
|
|
|
39,758
|
|
|
|
|
50,280
|
|
|
|
46,523
|
|
Less reserve for excess and obsolete finished goods
|
|
|
(19,114
|
)
|
|
|
(17,758
|
)
|
Inventories, net
|
|
$
|
31,166
|
|
|
$
|
28,765
|
|
Property and Equipment, net
Property and equipment, net consist of the following (in thousands except as indicated):
|
|
Useful lives
(in years)
|
|
|
March 31,
2019
|
|
|
December 31,
2018
|
|
Surgical instruments
|
|
|
4
|
|
|
$
|
52,441
|
|
|
$
|
54,848
|
|
Machinery and equipment
|
|
|
7
|
|
|
|
5,993
|
|
|
|
5,971
|
|
Computer equipment
|
|
|
3
|
|
|
|
3,307
|
|
|
|
3,104
|
|
Office furniture and equipment
|
|
|
5
|
|
|
|
1,195
|
|
|
|
1,155
|
|
Leasehold improvements
|
|
various
|
|
|
|
1,765
|
|
|
|
1,765
|
|
Construction in progress
|
|
n/a
|
|
|
|
53
|
|
|
|
92
|
|
|
|
|
|
|
|
|
64,754
|
|
|
|
66,935
|
|
Less accumulated depreciation and amortization
|
|
|
|
|
|
|
(51,933
|
)
|
|
|
(53,700
|
)
|
Property and equipment, net
|
|
|
|
|
|
$
|
12,821
|
|
|
$
|
13,235
|
|
Total depreciation expense was $1.6 million and $1.5 million for the three months ended March 31, 2019 and 2018, respectively. At both March 31, 2019 and December 31, 2018, assets recorded under capital leases of $0.1 million were included in the machinery and equipment balance. Amortization of assets under capital leases is included in depreciation expense.
11
Intangible Assets, net
Intangible assets, net consist of the following (in thousands, except as indicated):
|
|
Remaining
Avg. Useful
lives (in
years)
|
|
|
March 31,
2019
|
|
|
December 31,
2018
|
|
Developed technology
|
|
|
10
|
|
|
$
|
26,976
|
|
|
$
|
26,976
|
|
Intellectual property
|
|
|
—
|
|
|
|
1,004
|
|
|
|
1,004
|
|
License agreements
|
|
|
1
|
|
|
|
5,536
|
|
|
|
5,536
|
|
Trademarks and trade names
|
|
|
—
|
|
|
|
792
|
|
|
|
792
|
|
Customer-related
|
|
|
4
|
|
|
|
7,458
|
|
|
|
7,458
|
|
Distribution network
|
|
|
3
|
|
|
|
4,027
|
|
|
|
4,027
|
|
In process research and development
|
|
|
19
|
|
|
|
8,800
|
|
|
|
8,800
|
|
|
|
|
|
|
|
|
54,593
|
|
|
|
54,593
|
|
Less accumulated amortization
|
|
|
|
|
|
|
(28,367
|
)
|
|
|
(28,185
|
)
|
Intangible assets, net
|
|
|
|
|
|
$
|
26,226
|
|
|
$
|
26,408
|
|
Total amortization expense was $0.2 million and $0.3 million for the three months ended March 31, 2019 and 2018, respectively.
Future amortization expense related to intangible assets as of March 31, 2019 is as follows (in thousands):
Year Ending December 31,
|
|
|
|
|
Remainder of 2019
|
|
$
|
1,558
|
|
2020
|
|
|
1,890
|
|
2021
|
|
|
1,890
|
|
2022
|
|
|
1,890
|
|
2023
|
|
|
1,890
|
|
Thereafter
|
|
|
17,108
|
|
|
|
$
|
26,226
|
|
Accrued Expenses
Accrued expenses consist of the following (in thousands):
|
|
March 31,
2019
|
|
|
December 31,
2018
|
|
Commissions and sales milestones
|
|
$
|
3,885
|
|
|
$
|
3,594
|
|
Payroll and payroll related
|
|
|
3,419
|
|
|
|
3,222
|
|
Litigation settlement obligation
|
|
|
4,400
|
|
|
|
4,400
|
|
Professional fees
|
|
|
2,366
|
|
|
|
2,637
|
|
Royalties
|
|
|
1,471
|
|
|
|
1,354
|
|
Restructuring and severance accruals
|
|
|
162
|
|
|
|
710
|
|
Taxes
|
|
|
31
|
|
|
|
(3
|
)
|
Interest
|
|
|
127
|
|
|
|
261
|
|
Acquisition related - contingent consideration
|
|
|
-
|
|
|
|
2,600
|
|
Other
|
|
|
2,666
|
|
|
|
3,541
|
|
Total accrued expenses
|
|
$
|
18,527
|
|
|
$
|
22,316
|
|
4. Discontinued Operations
In connection with the sale of the International 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 (the “Products”), previously offered for sale by the Company in international markets at agreed-upon prices for a minimum term of three years, with the option for Globus to extend the term for up to two additional twelve month periods subject to Globus meeting specified purchase requirements. During the three months ended March 31, 2019, Globus notified the Company that it
12
will exercise the option to extend the agreement an additional twelve months through August 2020. In accordance with authoritative guidanc
e, sales to Globus are reported under continuing operations as the Company has continuing involvement under the Supply Agreement.
During the three months ended March 31, 2019, the Company recorded $1.6 million in revenue and $1.4 million in cost of revenue from the Supply Agreement in continuing operations. Included in the results of continuing operations for the three months ended March 31, 2018 are revenues of $2.1 million and cost of revenue of $2.0 million from the Supply Agreement. Sales, general and administrative expenses pertaining to discontinued operations on the Company’s condensed consolidated statements of operations were immaterial for the three months ended March 31, 2019 and 2018.
5. Debt
MidCap Facility Agreement
The Company’s Amended Credit Facility with MidCap provides for a revolving credit commitment up to $22.5 million and provided for a term loan commitment up to $5 million. As of March 31, 2019, $10.6 million was outstanding under the revolving line of credit. The principal balance outstanding under the revolving line of credit is due in December 2022.
Amounts outstanding under the revolving line of credit accrue interest at the London Interbank Offered Rate
(“
LIBOR”) plus 6.0%, reset monthly. At March 31, 2019, the revolving line of credit carried an interest rate of 8.50%, with interest payable monthly. The borrowing base is determined based on the value of domestic eligible accounts receivable.
As collateral for the Amended Credit Facility, MidCap has a first lien security interest in
accounts receivable
and a second lien on substantially all other assets.
At March 31, 2019, $1.2 million remains as an unamortized debt discount related to the Amended Credit Facility on the condensed consolidated balance sheet, which will be amortized over the remaining term of the Amended Credit Facility.
The Amended Credit Facility also includes 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 MidCap’s right to declare all outstanding obligations immediately due and payable.
On March 8, 2018, the Company entered into a Seventh Amendment to the Amended Credit Facility to extend the date that the financial covenants of the Amended Credit Facility are effective from April 2018 to April 2019, and established a minimum liquidity covenant of $5.0 million through March 2019.
On November 6, 2018, the Company entered into the Eighth Amendment to the MidCap Facility to extend the date that the financial covenants of the MidCap Facility are effective from April 2019 to April 2020, and extended the minimum liquidity covenant through March 2020.
The Company was in compliance with the covenants under the Amended Credit Facility at March 31, 2019.
Squadron Credit Agreement
On November 6, 2018, the Company closed a $35 million Term Loan with Squadron, a provider of debt financing to growing companies in the orthopedic industry. Net proceeds of approximately $34.1 million were used to retire the Company’s existing $29.2 million term debt with Globus, with the remainder of the proceeds used for general corporate purposes.
The debt has a five-year maturity and bears interest at LIBOR plus 8% (10.5% as of March 31, 2019) per annum. The credit agreement specifies a minimum interest rate of 10% and a maximum of 13% per year. Interest-only payments are due monthly through May 2021, followed by $10 million in principal payable in 29 equal monthly installments beginning June 2021 and a $25 million lump-sum payment payable at maturity in November 2023.
As collateral for the Term Loan, Squadron has a first lien security interest in substantially all assets except for
accounts receivable
.
The credit agreement also includes 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 Squadron’s right to declare all outstanding obligations immediately due and payable. Furthermore, the credit agreement contains various covenants, including monthly compliance certifications and compliance with government regulations and maintenance of insurance, and prohibitions against certain specified actions, including acquiring any new equipment financings over a specified amount. The credit agreement also contains various negative covenants including a $5 million minimum liquidity requirement through March 31, 2020. The minimum liquidity covenant will be replaced by a fixed charge ratio, pursuant to which operating cash to fixed charges (as defined) must equal at least 1:1 on a rolling 12-month basis, beginning April 2020.
The Company was in compliance with the covenants under the credit agreement at March 31, 2019.
13
In connection with the financing, the Company issued warrants to Squadron to purchase 845,000 shares of common stock at a
n exercise price of $3.15 per share. The warrants have a seven-year term and are immediately exercisable. See Note 10 for further detail on the warrants.
As of March 31, 2019, the debt is recorded at its carrying value of $32.2 million, net of issuance costs, including all amounts paid to third parties to secure the debt and the fair value of the warrants issued. The debt issuance costs are being amortized into interest expense over the five-year term utilizing the effective interest rate method.
In March 2019, the Company closed on an expanded credit facility with Squadron for up to $30 million in additional secured financing.
This additional financing has been made available under the Company’s existing credit facility with Squadron.
No amounts have been drawn on the expanded credit facility as of March 31, 2019. Any amounts drawn will be used for general corporate purposes. The additional borrowings under the credit facility will mature concurrent with the current secured financing from Squadron and bear interest at the same rate and subject to the same 10% floor and 13% ceiling. For any draws taken, interest-only payments are due monthly through May 2021, followed by principal payable in 29 equal monthly installments beginning June 2021 and a lump-sum payment payable at maturity in November 2023.
At such time as the Company makes its first draw under the Expanded Credit Facility, the Company will issue to Squadron warrants to purchase 4.8 million shares of the Company’s common stock at an exercise price of $2.17 per share. The warrants will have a seven-year term and will be immediately exercisable upon issuance.
The Company accounted for the amendment as a debt modification with continued amortization of the existing and inclusion of the new debt issuance costs of $0.3 million amortized into interest expense utilizing the effective interest rate method. The warrants will be recorded upon issuance
utilizing the monte-carlo simulation model to value the warrants and they will be recorded within equity in accordance with authoritative accounting guidance and as a debt discount to the total amount outstanding under the Squadron agreements. The total debt discount will be amortized into interest expense through maturity of the debt utilizing the effective interest rate method.
Inventory Financing
The Company has an Inventory Financing Agreement with a key inventory and instrument components supplier whereby the Company may draw up to $3.0 million for the purchase of inventory to accrue interest at a rate of LIBOR plus 8% subject to the same 10% floor and 13% ceiling. All principal will become due and payable upon maturity on November 6, 2023 and all interest will be paid monthly. The obligation outstanding under the Inventory Financing Agreement as of March 31, 2019 was $0.8 million.
Principal payments remaining on the Company's debt were as follows as of March 31, 2019 (in thousands):
Year Ending December 31,
|
|
|
|
|
Remainder of 2019
|
|
$
|
566
|
|
2020
|
|
|
47
|
|
2021
|
|
|
4,483
|
|
2022
|
|
|
18,306
|
|
2023 and thereafter
|
|
|
23,617
|
|
Total
|
|
|
47,019
|
|
Add: capital lease principal payments
|
|
|
123
|
|
Less: unamortized debt discount and debt issuance costs
|
|
|
(3,964
|
)
|
Total
|
|
|
43,178
|
|
Less: current portion of long-term debt
|
|
|
(619
|
)
|
Long-term debt, net of current portion
|
|
$
|
42,559
|
|
6. Commitments and Contingencies
Capital Lease
The Company has one outstanding capital lease arrangement for the lease of equipment as of March 31, 2019 that matures in 2022. The lease bears interest at an annual rate of 6.40% per annum, is due in monthly principal and interest installments and is collateralized by the related equipment. The total capital lease commitment outstanding as of March 31, 2019 and December 31, 2018 was $0.1 million in both periods.
Operating Lease
The Company leases its buildings and certain equipment under operating leases which expire on various dates through 2021.
Upon the Company’s adoption of ASC 842 as of January 1, 2019, the Company recognized a ROU asset and lease liability for its building lease, assuming a 10.5% discount rate. Any short-term leases defined as 12 months or less or month-to-month leases were
14
excluded and continue to be expensed each month. Total costs associated with these leases for the three months ended March 31, 2019 was
immaterial.
The Company determines if an arrangement is a lease at inception. The Company has operating leases for its buildings and certain equipment with lease terms of one year to 5.5 years, some of which include options to extend and/or terminate the lease. The exercise of lease renewal options is at the Company’s sole discretion and were not included in the calculation of the Company’s lease liability as the Company is not able to determine without uncertainty if the renewal option will be exercised. The depreciable life of assets and leasehold improvements are limited to the expected term, unless there is a transfer of title or purchase option reasonably certain of exercise. The Company’s lease agreements do not contain any variable lease payments, residual value guarantees or any restrictive covenants.
The Company’s ROU asset represents the right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date of the lease or the ASC 842 adoption date, whichever is later, based on the present value of lease payments over the lease term. When readily determinable, the Company uses the implicit rate in determining the present value of lease payments, or 10.5% as of the adoption date. When leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the lease commencement date or adoption date, including the lease term. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
Future minimum annual lease payments under such leases are as follows as of March 31, 2019 (in thousands):
Undiscounted lease payments:
|
|
|
|
|
Year Ending December 31,
|
|
|
|
|
Remainder of 2019
|
|
$
|
1,033
|
|
2020
|
|
|
1,416
|
|
2021
|
|
|
849
|
|
Total undiscounted lease payments
|
|
|
3,298
|
|
Less: present value adjustment
|
|
|
(388
|
)
|
Operating lease liability
|
|
|
2,910
|
|
Less: current portion of operating lease liability
|
|
|
(1,132
|
)
|
Operating lease liability, less current portion
|
|
$
|
1,778
|
|
As of March 31, 2019, the Company’s remaining lease term is 2.3 years. Rent expense under operating leases for the three months ended March 31, 2019 and 2018 was $0.3 million for both periods.
The Company paid $0.3 million of cash payments related to its operating lease agreement
for the three months ended March 31, 2019.
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 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.
On February 13, 2018, NuVasive, Inc. filed suit against the Company in the United States District Court for the Southern District of California, alleging that certain of the Company’s products (including components of the 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
15
U.S. Design Patent Nos. D652,519 (“Dilator”) and D750,252 (“Intervertebral Implant”). NuVasive is seeking unspecified monetary damages and a court injunction against future infringement by the Company.
On March 8, 2018, the Company moved to dismiss NuVasive’s claims of infringement of its design patents on the grounds that those allegations fail to state a cognizable legal claim. On May 14, 2018, the Court ruled that NuVasive had failed to state a plausible claim for infringement of the asserted design patents and granted the Company’s motion to dismiss those claims with prejudice, as any further amendment would be futile. The Company filed its answer, affirmative defenses and counterclaims to NuVasive’s remaining claims on May 21, 2018.
On March 26, 2018, NuVasive moved for a preliminary injunction, which, on March 27, 2018, the Court denied without prejudice for failure to comply with the Court’s chambers rules. On April 5, 2018, NuVasive again moved for a preliminary injunction. The Court held a hearing on the matter, having been fully briefed, on June 21, 2018. On July 10, 2018, the Court ruled that NuVasive had failed to establish either likelihood of success on the merits of its remaining claims or that it would suffer irreparable harm in the absence of a preliminary injunction. Accordingly, the Court denied NuVasive’s motion for preliminary injunction.
On September 13, 2018, NuVasive filed an Amended Complaint for Patent Infringement, 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 NuVasive’s claims on October 12, 2018. On October 26, 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
. On January 30, 2019, the Court denied NuVasive’s motion as to all but one of the Company’s counterclaims. The Court granted NuVasive’s motion with respect to one counterclaim, but granted the Company leave to amend its counterclaim to cure the dismissal. The Company amended that counterclaim on February 14, 2019. On February 28, 2019, NuVasive moved to dismiss the amended counterclaim. On March 29, 2019, the Court denied NuVasive’s motion. NuVasive filed its Answer to the amended counterclaim on April 12, 2019.
On December 13, 2018, the Company filed a petition with the Patent Trial and Appeal Board (“PTAB”) challenging the validity of certain claims of
U.S. Patent No. 8,361,156.
On December 21, 2018, the Company filed a similar petition with PTAB challenging the validity of certain claims of
U.S. Patent No. 8,187,334
. The Company expects the PTAB to issue its decisions on the matters in the second half of 2019.
On February 6, 2019, upon joint motion of the parties, the Court stayed all proceedings in this matter, except as noted above, pending PTAB’s determination of whether to institute
inter partes
review
of the asserted claims of the two patents at issue and vacated the trial date. The Company anticipates that the stay of proceedings will remain in effect until at least July 2019.
The Company believes that the allegations lack merit and intends to vigorously defend all claims asserted.
It is impossible at this time to assess whether the outcome of this proceeding will have a material adverse effect on the Company 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. As of March 31, 2019, the Company has not recorded any liability on the consolidated balance sheet related to this matter. On October 12, 2018, the Delaware Court ordered that NuVasive begin advancing a portion of the 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.
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 calculated either as a percentage of net sales or on a per-unit sold basis. Royalties are included on the accompanying
16
consolidated statements of operations as a component of cost of revenues. As of March 31, 2019, the Company is obligated to pay guaranteed m
inimum royalty payments under these agreements of approximately $5.8 million through 2023 and beyond.
7. 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 $49.0 million in cash, including initial cash payments totaling $1.75 million, which the Company previously paid in March 2014, and an additional lump sum payment of $15.75 million, which the Company previously paid in April 2014. The Company agreed to pay the remaining $31.5 million in 28 quarterly installments of $1.1 million and one additional quarterly installment of $0.7 million, commencing October 1, 2014. The payments set forth above are guaranteed by Stipulated Judgments held against the Company, HealthpointCapital Partners, L.P., HealthpointCapital Partners II, L.P., HealthpointCapital, LLC, John H. Foster and Mortimer Berkowitz III and, in the event of a default, will be entered and enforced against these entities and/or individuals in that order. In September 2014, the Company and HealthpointCapital entered into an agreement for joint payment of settlement whereby HealthpointCapital has agreed to contribute
$5 million to the $49 million settlement amount. The $5 million is classified within stockholders’ equity on the Company’s condensed consolidated balance sheet due to the related party nature with HealthpointCapital and its affiliates. See Note 12 for further information.
As of March 31, 2019, the Company has made installment payments in the aggregate of $37.3 million, with a remaining outstanding balance of $20.5 million (including interest). The Company has the right to prepay the amounts due without penalty. In addition, the unpaid balance of the amounts due accrues interest at the rate of 7% per year until paid in full. The accrued but unpaid interest will be paid in quarterly installments of $1.1 million (or the full amount of the accrued but unpaid interest if less than $1.1 million) following the full payment of the $31.5 million in quarterly installments described above. No interest will accrue on the accrued interest. The Settlement Agreement provides for mutual releases of all claims in the Orthotec, LLC v. Surgiview, S.A.S, et al. matter in the Superior Court of California, Los Angeles County and all other related litigation matters involving the Company and its directors and affiliates.
8.
Acquisition of SafeOp Surgical, Inc.
On March 9, 2018, the Company acquired SafeOp, a
privately-held provider of neuromonitoring technology designed to enable effective intra-operative nerve health assessment. At the time of the acquisition, SafeOp had FDA 510(k) approval for a somatosensory evoked potential (“SSEP”) monitoring technology. The Company has developed a product that will allow for both free run and triggered specific recording of muscle activity, also known as Electromyography (“EMG”). The Company received FDA clearance for SafeOp’s EMG technology in February 2019 to complement the SSEP solution, and anticipates commercialization of the combined technology solution in mid-2019. In addition to expanding the Company’s market presence in lateral spine surgery, the Company believes that the SafeOp solution will allow it to integrate neuromonitoring into its broader product portfolio and accelerate the transition to procedural integration of the entire portfolio.
Under the term of the definitive merger agreement, the Company agreed to pay $15.1 million in cash and agreed to issue 3,265,132 shares of common stock.
The Company paid the full $15.1 million in cash consideration during the year ended December 31, 2018. On March 8, 2018, the Company issued 2,975,209 shares of common stock valued at $9.8 million, based on the closing share price of $3.30, and issued an additional 115,621 shares of common stock during the second quarter of 2018 and the remaining 174,302 during the third quarter of 2018.
17
In March 2018, the Company also issued $3 million in convertible notes that were convertible i
nto a total of 987,578 shares of common stock, which included total expected interest to be incurred, and issued warrants to purchase 2.2 million shares of common stock at an exercise price of $3.50 per share. The convertible notes matured on March 9, 201
9 and were settled in cash. Upon maturity, the Company recognized the value associated with the beneficial conversion feature calculated at issuance of $0.2 million within interest expense on the Company’s condensed consolidated statement of operations for
the three months ended March 31, 2019. Shares of common stock were issued upon achievement of post-closing milestones as described further below. The warrants remain outstanding as of March 31, 2019.
The first of the two milestones was achieved during the year ended December 31, 2018 and resulted in the issuance of 443,421 shares of common stock as payment. During the three months ended March 31, 2019, the second milestone pertaining to regulatory approval was achieved and the Company issued 886,843 shares of common stock as payment. Prior to achievement, the contingent consideration was recorded as a liability and measured at fair value using a probability-weighted income approach, utilizing significant unobservable inputs including the probability of achieving each of the potential milestones and an estimated discount rate related to the risks of the expected cash flows attributable to the milestones. The fair value of the contingent consideration, and the associated liability relating to the contingent consideration at each reporting date, was re-assessed with the changes in fair value reflected in earnings. For the three months ended March 31, 2019, the fair value for the contingent consideration increased by $0.3 million due to the proximity of the achievement of the milestone. The amount was recorded within research and development expense on the condensed consolidated statement of operations and a corresponding increase in the liability on the Company’s condensed consolidated balance sheet. The full liability was relieved upon achievement of the remaining milestone during the period.
9. Net Loss Per Share
Basic earnings per share (“EPS”) 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, without consideration for common stock equivalents. Diluted EPS is computed by dividing the net income available to common stockholders by the weighted average number of common shares outstanding for the period and the weighted average number of dilutive common stock equivalents outstanding for the period determined using the treasury-stock method. For purposes of this calculation, common stock subject to repurchase by the Company, convertible preferred stock, options, convertible notes and warrants are considered to be common stock equivalents and are only included in the calculation of diluted earnings per share when their effect is dilutive.
The following table presents the computation of basic and diluted net loss per share for continuing and discontinued operations (in thousands, except per share amounts):
|
|
Three Months Ended
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Loss from continuing operations
|
|
$
|
(12,916
|
)
|
|
$
|
(1,854
|
)
|
Loss from discontinued operations
|
|
|
(52
|
)
|
|
|
(62
|
)
|
Net loss
|
|
$
|
(12,968
|
)
|
|
$
|
(1,916
|
)
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
45,310
|
|
|
|
21,212
|
|
Weighted average unvested common shares subject
to repurchase
|
|
|
(290
|
)
|
|
|
—
|
|
Weighted average common shares outstanding—basic and diluted
|
|
|
45,020
|
|
|
|
21,212
|
|
Net loss per share, basic and diluted:
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(0.29
|
)
|
|
$
|
(0.09
|
)
|
Discontinued operations
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
Net loss per share, basic and diluted
|
|
$
|
(0.29
|
)
|
|
$
|
(0.09
|
)
|
18
The anti-dilutive securities not included in diluted
net
loss per share were as follows (in thousands):
|
|
Three Months Ended
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Options to purchase common stock
|
|
|
4,670
|
|
|
|
3,180
|
|
Unvested restricted share awards
|
|
|
3,761
|
|
|
|
2,034
|
|
Series A Convertible Preferred Stock
|
|
|
164
|
|
|
|
2,022
|
|
Series B Convertible Preferred Stock
|
|
|
—
|
|
|
|
14,349
|
|
Convertible Notes
|
|
|
—
|
|
|
|
988
|
|
Warrants to purchase common stock
|
|
|
22,302
|
|
|
|
23,182
|
|
Total
|
|
|
30,897
|
|
|
|
45,755
|
|
10. Stock Benefit Plans and Equity Transactions
Stock Benefit Plans
On October 25, 2018, the Company’s Board of Directors adopted an amendment to the Company’s 2016 Equity Incentive Award Plan (the “Amendment”). The Amendment increases the maximum aggregate number of shares with respect to one or more stock rights that may be granted to any one person during any fiscal year from 500,000 to 1,250,000.
Total stock-based compensation for the three months ended March 31, 2019 and 2018 is as follows (in thousands):
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Cost of revenues
|
|
$
|
28
|
|
|
$
|
22
|
|
Research and development
|
|
|
462
|
|
|
|
(116
|
)
|
Sales, general and administrative
|
|
|
1,122
|
|
|
|
713
|
|
Total
|
|
$
|
1,612
|
|
|
$
|
619
|
|
The negative stock-based compensation expense recorded within the Company’s research and development expense in 2018 is a result of the revaluation of the Company’s Elite Medical Holdings and Pac 3 Surgical Collaboration liability, which was subsequently terminated during the first quarter of 2018.
Shares Reserved for Future Issuance
As of March 31, 2019, the Company had reserved shares of its common stock for future issuance as follows (in thousands):
|
|
March 31, 2019
|
|
Stock options outstanding
|
|
|
4,670
|
|
Unvested restricted stock award
|
|
|
3,761
|
|
Employee stock purchase plan
|
|
|
223
|
|
Series A convertible preferred stock
|
|
|
164
|
|
Warrants outstanding
|
|
|
22,302
|
|
Distributor and Development Services plans
|
|
|
3,985
|
|
Authorized for future grant under the Company equity plans
|
|
|
461
|
|
Total
|
|
|
35,566
|
|
Series A Convertible Preferred Stock
In March 2017, the Company completed a private placement (the “2017 Private Placement”) with certain institutional and accredited investors, including certain directors, executive officers and employees of the Company (collectively, the “Purchasers”), providing for the sale by the Company of 1,809,628 shares of the Company’s common stock at a purchase price of $2.00 per share and 15,245 shares of newly designated Series A Convertible Preferred Stock at a purchase price of $1,000 per share (which shares were
convertible into approximately 7,622,372 shares of common stock). Except as otherwise required by law, the holders of Series A Convertible Preferred Stock have no right to vote on matters submitted to a vote of the Company’s stockholders.
19
During the three
month ended March 31, 2019 and 2018, 3,715 and 1,274 shares of Series A Convertible Preferred Stock were converted into 1,857,586 and 636,997 shares of common stock. As of March 31, 2019, there were 328 shares of Series A Convertible Preferred Stock outst
anding, which are convertible into 164,087 shares of common stock.
2017 Warrants
In connection with the 2017 Private Placement, the Company issued warrants to purchase up to 9,432,000 shares of the Company’s common stock at an exercise price of $2.00 per share (the “2017 Common Stock Warrants”). The Company also issued warrants to purchase common stock to the exclusive placement agents for the issuance (the “2017 Banker Warrants”). The 2017 Banker Warrants were for the purchase of up to an aggregate of 471,600 shares of the Company’s common stock with substantially the same terms as the 2017 Common Stock Warrants, except that they have an exercise price equal $2.50 per share. The 2017 Common Stock Warrants and the 2017 Banker Warrants (collectively, the “2017 Warrants”) expire on June 15, 2022. The 2017 Warrants may not be exercised by the holder to the extent that the holder, together with its affiliates, would beneficially own, after such exercise more than 4.99% of the shares of the Company’s common stock then outstanding (subject to the right of the holder to increase or decrease such beneficial ownership limitation upon notice to us, provided that such limitation cannot exceed 9.99%) and provided that any increase in the beneficial ownership limitation shall not be effective until 61 days after such notice is delivered.
In conjunction with the 2018 Private Placement described further below, during the three months ended March 31, 2018, a holder of 2.4 million 2017 Warrants exercised 1.7 million
2017
Warrants at the original exercise price of $2.00 per warrant in exchange for the issuance of additional warrants. As a result of the warrant exercise, the Company received gross proceeds of $3.4 million on March 8, 2018.
During the three
months ended March 31, 2018, excluding the $3.4 million described above, the Company received proceeds of approximately $0.9 million in connection with the exercise of approximately 0.4 million of 2017
Common Stock Warrants, respectively.
There were no 2017 Warrant exercises during the three months ended March 31, 2019. As of March 31, 2019, there were 3,757,000 2017 Common Stock Warrants outstanding.
During the three months ended March 31, 2018, 304,182 of the 2017 Banker Warrants were exercised for total cash proceeds upon exercise of $0.8 million during the period. There were no 2017 Banker Warrant exercises for the three months ended March 31, 2019. A total of 167,418 of the 2017 Banker Warrants remained outstanding as of March 31, 2019.
All the 2017 Warrants were deemed to qualify for equity classification under authoritative accounting guidance.
Series B Convertible Preferred Stock
On March 8, 2018, the Company completed
the 2018 Private Placement
to certain institutional and accredited investors, including certain directors and executive officers of the Company,
providing for the sale by the Company
at a purchase price of $1,000 per share, 45,200 of newly designated Series B Convertible Preferred Stock, which shares of preferred stock were automatically converted into 14,349,236 shares of the Company’s common stock upon approval by the Company’s stockholders at the 2018 annual meeting of stockholders held in May 2018, and warrants to purchase up to 12,196,851 shares of common stock at an exercise price of $3.50 per share (the “2018 Common Stock Warrants”). The 2018 Common Stock Warrants became exercisable following stockholder approval at the 2018 annual meeting of stockholders, are subject to certain ownership limitations in certain cases, and expire five years after the date of such stockholder approval. The gross proceeds from the 2018 Private Placement were approximately $45.2 million.
Pursuant to the terms of the purchase agreement entered into in connection with the 2018 Private Placement, from the date of the stockholder approval of the 2018 Private Placement, or May 17, 2018, through the first anniversary of the effective date of the resale registration statement related to the 2018 Private Placement, or May 11, 2019, if the Company issues any shares of common stock or common stock equivalents, subject to certain permitted exceptions, at a price below the conversion price on the date stockholder approval was obtained (a “Dilutive Issuance”), the Company is required to issue an additional number of shares of common stock to the purchasers in the 2018 Private Placement in amount equal the number of shares of common stock such purchasers would have received if the Dilutive Issuance occurred prior to the date the Company’s stockholders approved the 2018 Private Placement.
20
2018 Warrants
The 2018 Common Stock Warrants (the “2018 Warrants”) have a five year life and are exercisable for cash or by cashless exercise. Some of the 2018 Warrants may not be exercised by the holder to the extent that the holder, together with its affiliates, would beneficially own, after such exercise more than 4.99% of the shares of the Company’s common stock then outstanding (subject to the right of the holder to increase or decrease such beneficial ownership limitation upon notice to us, provided that such limitation cannot exceed 9.99%) and provided that any increase in the beneficial ownership limitation shall not be effective until 61 days after such notice is delivered.
In addition to the
12,196,851 warrants issued in the 2018 Private Placement, the Company issued 1,800,000 warrants to an existing holder with identical terms to the 2018 Warrants, including the exercise price of $3.50.
All the 2018 Warrants were deemed to qualify for equity classification under authoritative accounting guidance.
A summary of all outstanding warrants is as follows:
|
|
Number of
Warrants
|
|
|
Strike Price
|
|
2017 Common Stock Warrants
|
|
|
3,757,000
|
|
|
$
|
2.00
|
|
2017 Banker Warrants
|
|
|
167,418
|
|
|
$
|
2.50
|
|
2018 Common Stock Warrants
|
|
|
13,996,851
|
|
|
$
|
3.50
|
|
Merger Warrants
|
|
|
2,200,000
|
|
|
$
|
3.50
|
|
Executive
|
|
|
1,327,434
|
|
|
$
|
5.00
|
|
Squadron Capital
|
|
|
845,000
|
|
|
$
|
3.15
|
|
Other
|
|
|
7,812
|
|
|
$
|
19.20
|
|
Total
|
|
|
22,301,515
|
|
|
|
|
|
2017 Distributor Inducement Plan
In December 2017, the Board of Directors approved and adopted the 2017 Distributor Inducement Plan which authorizes the Company to issue to distributors restricted shares of common stock of the Company and/or warrants to purchase the Company’s common stock. The warrants are issuable with an exercise price equal to the fair market value of the common stock on the date of issuance. Each warrant and common stock issuance is subject to a time-based or net sales-based vesting provision. The Board of Directors authorized the grant of up to 1,000,000 shares of common stock under the 2017 Distributor Inducement Plan. As of March 31, 2019, 0.3 million warrants and 17,000 shares of common stock were earned under the 2017 Distributor Inducement Plan. Total expense for the plan was $0.1 million for both the three months ended March 31, 2019 and 2018.
In December 2017, the Board of Directors also authorized grant of warrants to purchase 50,000 of the Company’s common stock, and 75,000 restricted stock units to a distributor of which 15,000 were earned and issued. These warrants and restricted stock units are subject to time based and net sales based vesting conditions.
2017 Development Services Plan
In December 2017, the Board approved and adopted the 2017 Development Services Plan which authorizes the Company to enter into Development Services Agreements with third-party individuals or entities whereby, upon the achievement of certain Company financial and commercial revenue milestones, future royalty payments for product and/or intellectual property development work may be paid in either cash or restricted shares of Company common stock at the option of the developer. Each common stock issuance would be subject to net sales-based vesting provisions and satisfaction of applicable laws and market regulations regarding the issuance of restricted shares to such developers. The Board of Directors authorized the grant of up to 3,000,000 shares of common stock under the Development Services Plan. As of March 31, 2019, 2.3 million shares of common stock have been designated under the 2017 Development Services Plan, but no common stock elections, grants or cash payouts have been made as of March 31, 2019.
11. Income Taxes
To calculate its interim tax provision, at the end of each interim period the Company estimates the annual effective tax rate and applies that to its ordinary quarterly earnings. In addition, the effect of changes in enacted tax laws or rates or tax status is recognized in the interim period in which the change occurs. 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
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compute the provision for inco
me taxes may change as new events occur, additional information is obtained or the tax environment changes.
Intraperiod tax allocation rules require the Company to allocate the provision for income taxes between continuing operations and other categories of earnings, such as discontinued operations. In periods in which the Company has a year-to-date pre-tax loss from continuing operations and pre-tax income in other categories of earnings, such as discontinued operations, the Company must allocate the tax provision to the other categories of earnings, and then record a related tax benefit in continuing operations.
The unrecognized tax benefits at March 31, 2019 and December 31, 2018 were $4.4 million for both periods, with no changes occurring during the three month period. With the facts and circumstances currently available to the Company, it is reasonably possible that the amount of reserves that could reverse over the next 12 months is approximately $0.1 million. The Company recognizes interest and penalties related to uncertain tax positions as a component of the income tax provision. The Company is not currently under examination by the Internal Revenue Service, foreign, or state or local tax authorities.
The income tax benefit from continuing operations for the three months ended March 31, 2019 consists primarily of a release of the valuation allowance due to an increase in net deferred tax liabilities recorded as a result of the acquisition of SafeOp. The Company’s effective tax rate of (0.24)% for the three months ended March 31, 2019 differs from the federal statutory rate of 21% primarily due to the change in the valuation allowance related to the SafeOp acquisition, as noted above.
12. 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 $1.0 million of the $1.1 million payment due and payable by the Company to Orthotec on July 1, 2016 and agreed to not exercise its contractual rights to seek an immediate repayment of such amount. Pursuant to this forbearance agreement, the Company repaid this amount in September 2016. The Company and HealthpointCapital also entered into an agreement for joint payment of settlement whereby HealthpointCapital has agreed to contribute $5 million to the $49 million Orthotec settlement amount.
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 March 31, 2019. The $5 million receivable from HealthpointCapital, LLC continues to be
classified within stockholders’ equity on the Company’s condensed consolidated balance sheet due to the related party nature with HealthpointCapital affiliates.
Certain of the Company’s board of directors and senior management participated in the March 2017 and 2018 Private Placements.
13. Restructuring
In connection with the sale of the International Business (described in Note 4), the Company terminated employment agreements with several executive officers, including the chief executive officer and the chief financial officer, and commenced an employee headcount reduction program. In conjunction with the restructuring program, the Company recorded restructuring expenses related to severance liabilities and post-employment benefits. A rollforward of the accrued restructuring liability is presented below (in thousands):
Balance at January 1, 2019
|
|
$
|
710
|
|
Accrued restructuring charges
|
|
|
60
|
|
Payments
|
|
|
(608
|
)
|
Balance at March 31, 2019
|
|
$
|
162
|
|
All activities and costs are expected to be completed during 2019.
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