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 United States of America and internationally via a network of independent sales agents and direct sales representatives.
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 (“U.S. 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, 2021, which are included in the Company’s Annual Report on Form 10-K that was filed with the SEC. Operating results for the nine months ended September 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022, or any other future periods.
9
Table of Contents
2. Summary of Significant Accounting Policies
The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include the useful lives of property and equipment, goodwill, intangible assets, allowances for doubtful accounts, the valuation of share-based liabilities, deferred tax assets, inventory, stock-based compensation, revenues, income tax uncertainties, and other contingencies.
Fair Value Measurements
The carrying amount of financial instruments consisting of cash and cash equivalents, 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.
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.
Excess and Obsolete Inventory
Most of the Company’s inventory is comprised of finished goods, which is primarily produced by third-party suppliers. Specialized implants, fixation products, biologics, and disposables are determined by utilizing a standard cost method that includes capitalized variances which approximates the weighted average cost. Imaging equipment and related parts are valued at weighted average cost. Inventories are stated at the lower of cost or net realizable value. The Company reviews the components of its inventory on a periodic basis for excess and obsolescence and adjusts inventory to its net realizable value as necessary.
The Company records a lower of cost or net realizable value (“LCNRV”) inventory reserve for estimated excess and obsolete inventory based upon its expected use of inventory on hand. The Company’s inventory, which consists primarily of specialized implants, fixation products, biologics, and disposables is at risk of obsolescence due to the need to maintain substantial levels of inventory. In order to market its products effectively and meet the demands of interoperative product placement, the Company maintains and provides surgeons and hospitals with a variety of inventory products and sizes. For each surgery, fewer than all components will be consumed. The need to maintain and provide a wide variety of inventory causes inventory to be held that is not likely to be used.
The Company’s estimates and assumptions for excess and obsolete inventory are reviewed and updated on a quarterly basis. The estimates and assumptions are determined primarily based on current usage of inventory and the age of inventory quantities on hand. Additionally, the Company considers recent experience to develop assumptions about future demand for its products, while considering market conditions, product life cycles and new product launches. Increases in the LCNRV reserve for excess and obsolete inventory result in a corresponding charge to cost of sales.
10
Table of Contents
Revenue Recognition
In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Revenue from Contracts with Customers (“Topic 606”), the Company recognizes revenue from sales of products and services when the customer obtains control of the promised goods or services, in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. The principles in Topic 606 are applied using 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 sales agents, and with the acquisition of EOS, includes imaging equipment and related services. 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 and other imaging related services, is recognized in the period the service is performed, and makes up less than 10% of the Company’s total revenue. Revenue is measured based on the amount of consideration expected to be received in exchange for the transfer of the goods or services specified in the contract with each customer. In certain cases, the Company does offer the ability for customers to lease its imaging equipment primarily on a non-sales type basis, but such arrangements are immaterial to total revenue in the periods presented. The Company generally does not allow returns of products that have been delivered. Costs incurred by the Company associated with sales contracts with customers are deferred over the performance obligation period and recognized in the same period as the related revenue, except for contracts that complete within one year or less, in which case the associated costs are expensed as incurred. Payment terms for sales to customers may vary but are commensurate with the general business practices in the country of sale.
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. Estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of the Company’s anticipated performance and all information that is reasonably available, including historical, current, and forecasted information and whether, in the Company’s judgement, it is probable that a significant future reversal of cumulative revenue under the contract will not occur.
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 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.
Recent Accounting Pronouncements
In August 2021, the FASB issued Accounting Standards Update ("ASU") No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. The guidance requires application of Topic 606, Revenue from Contracts with Customers to recognize and measure contract assets and contract liabilities acquired in a business combination. ASU No. 2021-08 adds an exception to the general recognition and measurement principle in Topic 805 where assets acquired and liabilities assumed in a business combination, including contract assets and contract liabilities arising from contracts with customers, are measured at fair value on the acquisition date. Under the new guidance, the acquirer will recognize acquired contract assets and contract liabilities as if the acquirer had originated the contract. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022, with early adoption permitted. The Company does not intend to early adopt the standard and is in the process of assessing the impact, if any, on its condensed consolidated financial statements and related disclosures.
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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 a 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 €0.01 per share (collectively, the “EOS Shares”), for a cash offer of €2.45 per EOS Share, and outstanding convertible bonds of EOS (“OCEANEs”) for a cash offer of €7.01 per OCEANE, which included accrued but unpaid interest. On May 13, 2021 (the “Change in Control Date”), the Company substantially completed the Offer, pursuant to which the Company purchased 59% of the issued and outstanding EOS Shares and 53% of the OCEANEs for $66.5 million in cash pursuant to the Offer. In addition, prior to the Change in Control Date, the Company had also acquired 30% of the issued and outstanding EOS Shares and 4% of the OCEANEs on the open market for $25.0 million in cash. After the Change in Control Date, the Company held a controlling financial interest in EOS representing 89% of issued and outstanding EOS Shares and 57% of OCEANEs, equal to approximately 80% of the capital and voting rights of EOS on a fully diluted basis. The Offer was reopened on May 17, 2021 to purchase the remaining EOS Shares for $8.5 million, ultimately resulting in the acquisition of 100% of EOS Shares and 57% of the OCEANEs as of June 2, 2021. The total cash paid to acquire 100% of the EOS Shares and 57% of the OCEANEs was $100.0 million.
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 biplanar 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 to better inform and better achieve spinal alignment objectives in surgery.
During the nine months ended September 30, 2022, the Company recorded a purchase accounting adjustment primarily related to deferred tax assets, which resulted in a $1.6 million increase to goodwill. The Company has completed its estimate of the fair value of the purchase consideration, the assets acquired, and the liabilities assumed. Accordingly, the Company has allocated the purchase consideration as follows:
|
|
|
|
(in thousands) |
As of May 13, 2021 |
|
Cash paid for purchase of EOS Shares at Change in Control Date |
$ |
46,908 |
|
Cash paid for purchase of OCEANEs at Change in Control Date |
|
19,620 |
|
Total cash paid at Change in Control Date |
|
66,528 |
|
Fair value of investment in EOS Shares held prior to Change in Control Date |
|
23,549 |
|
Fair value of investment in OCEANEs held prior to Change in Control Date |
|
1,477 |
|
Total fair value of investment in EOS held prior to Change in Control Date |
|
25,026 |
|
Fair value of noncontrolling interest acquired after Change in Control Date |
|
8,454 |
|
|
$ |
100,008 |
|
|
|
|
Cash and cash equivalents |
$ |
16,778 |
|
Accounts receivable |
|
9,083 |
|
Inventory |
|
26,681 |
|
Other current assets |
|
4,422 |
|
Property, plant and equipment, net |
|
1,650 |
|
Deferred tax assets |
|
536 |
|
Right-of-use assets |
|
4,341 |
|
Goodwill |
|
29,469 |
|
Definite-lived intangible assets: |
|
|
Developed technology |
|
56,000 |
|
Customer relationships |
|
9,500 |
|
Trade names |
|
6,000 |
|
Other noncurrent assets |
|
395 |
|
Contract liabilities |
|
21,196 |
|
Long-term debt |
|
15,297 |
|
Other liabilities assumed |
|
28,354 |
|
Total identifiable net assets |
$ |
100,008 |
|
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Table of Contents
The purchase price, including cash paid at the Change in Control Date, the fair value of the investment held prior to the Change in Control Date, and the fair value of the noncontrolling interest acquired after the Change in Control Date, 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 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 ten years, seven years and ten years for technology-based, customer-related, and trade name related intangible assets, respectively. The estimated fair values of the intangible assets acquired were primarily determined using the income approach based on significant inputs that were not observable in the market.
Acquisition costs of $5.8 million were recognized during the nine months ended September 30, 2021 as transaction-related expenses on the condensed consolidated statements of operations as incurred. No such costs were recognized during the three months ended September 30, 2021. The Company's results of operations for the three months ended September 30, 2021 included the operating results of EOS of $11.1 million of revenue and a net loss of $6.2 million in the condensed consolidated statement of operations. The Company's results of operations for the nine months ended September 30, 2021 included the operating results of EOS of $17.2 million of revenue and a net loss of $13.6 million in the condensed consolidated statement of operations.
The following table presents the unaudited pro forma results for the three and nine months ended September 30, 2021, 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 and therefore many of the non-recurring business combination adjustments would have been included in the year ended December 31, 2020 by nature of such adjustments, instead of the periods presented. 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 comparable period for the three and nine months ended September 30, 2021 includes adjustments directly attributable to the business combination, including $1.8 million and $5.6 million in amortization charges for acquired intangible assets, respectively. The comparable period for the nine months ended September 30, 2021 also includes $7.4 million in acquisition related expenses. The unaudited pro forma results include IFRS to U.S. GAAP adjustments for EOS historical results and adjustments for accounting policy alignment, which were materially similar to the Company. Any differences in accounting policies were adjusted to reflect the accounting policies of the Company in the unaudited pro forma results presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30, |
|
|
Nine Months Ended
September 30, |
|
|
(in thousands, except per share amounts) |
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
|
Total revenue |
|
$ |
89,839 |
|
|
$ |
62,880 |
|
|
$ |
244,923 |
|
|
$ |
178,393 |
|
|
Net loss |
|
|
(36,999 |
) |
|
|
(43,031 |
) |
|
|
(117,163 |
) |
|
|
(101,739 |
) |
|
Net loss per share, basic and diluted |
|
$ |
(0.35 |
) |
|
$ |
(0.43 |
) |
|
$ |
(1.14 |
) |
|
$ |
(1.07 |
) |
|
4. Fair Value Measurements
Assets and liabilities measured at fair value on a recurring basis include the following as of September 30, 2022, and December 31, 2021 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2022 |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
Cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
$ |
87,405 |
|
|
|
— |
|
|
|
— |
|
|
$ |
87,405 |
|
Total cash equivalents |
$ |
87,405 |
|
|
|
— |
|
|
|
— |
|
|
$ |
87,405 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability classified equity award |
$ |
— |
|
|
|
— |
|
|
|
1,949 |
|
|
$ |
1,949 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2021 |
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Total |
|
Cash equivalents: |
|
|
|
|
|
|
|
|
|
|
|
Money market funds |
$ |
140,010 |
|
|
|
— |
|
|
|
— |
|
|
$ |
140,010 |
|
Total cash equivalents |
$ |
140,010 |
|
|
|
— |
|
|
|
— |
|
|
$ |
140,010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability classified equity award |
$ |
— |
|
|
|
— |
|
|
|
2,052 |
|
|
$ |
2,052 |
|
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Table of Contents
The Company did not have any transfers of assets and liabilities between the levels of the fair value measurement hierarchy during the periods presented.
The Company issued a liability classified equity award to one of its executive officers. The award vests in 2023 subject to continued service and a specific market condition. As the award will be settled in cash, it is classified as a liability within Level 3 of the fair value hierarchy as the Company is using a probability-weighted income approach, utilizing significant unobservable inputs including the probability of achieving the specific market condition with the valuation updated at each reporting period. The full fair value of the award was $2.3 million as of September 30, 2022 and is being recognized ratably as the underlying service period is provided.
The following table provides a reconciliation of liabilities measured at fair value using significant unobservable inputs (Level 3) for the nine months ended September 30, 2022 (in thousands):
|
|
|
|
|
|
|
Level 3
Liabilities |
|
Balance at December 31, 2021 |
|
$ |
2,052 |
|
Straight-line recognition of liability classified equity award |
|
|
196 |
|
Change in fair value measurement |
|
|
80 |
|
Balance at March 31, 2022 |
|
$ |
2,328 |
|
Straight-line recognition of liability classified equity award |
|
|
202 |
|
Change in fair value measurement |
|
|
(1,469 |
) |
Balance at June 30, 2022 |
|
$ |
1,061 |
|
Straight-line recognition of liability classified equity award |
|
|
85 |
|
Change in fair value measurement |
|
|
803 |
|
Balance at September 30, 2022 |
|
$ |
1,949 |
|
Fair Value of Long-term Debt
The fair value, based on a quoted market price (Level 1), of the Company’s outstanding Senior Convertible Notes due 2026 was approximately $257.9 million at September 30, 2022 and approximately $308.1 million at December 31, 2021. The fair value, based on a quoted market price (Level 1), of the Company’s outstanding OCEANEs was approximately $12.2 million at September 30, 2022 and approximately $14.1 million at December 31, 2021. See Note 9 for further information.
5. Inventories
Inventories reported at the lower of cost or net realizable value consist of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
2022 |
|
|
December 31,
2021 |
|
Raw materials |
|
$ |
15,121 |
|
|
$ |
14,671 |
|
Work-in-process |
|
|
4,587 |
|
|
|
5,712 |
|
Finished goods |
|
|
82,451 |
|
|
|
71,320 |
|
Inventories |
|
$ |
102,159 |
|
|
$ |
91,703 |
|
14
Table of Contents
6. Property and Equipment, net
Property and equipment, net consist of the following (in thousands, except as indicated):
|
|
|
|
|
|
|
|
|
|
|
|
|
Useful lives
(in years) |
|
September 30,
2022 |
|
|
December 31,
2021 |
|
Surgical instruments |
|
4 |
|
$ |
151,743 |
|
|
$ |
130,432 |
|
Machinery and equipment |
|
7 |
|
|
8,091 |
|
|
|
11,092 |
|
Computer equipment |
|
3 |
|
|
4,505 |
|
|
|
5,694 |
|
Office furniture and equipment |
|
5 |
|
|
4,358 |
|
|
|
3,861 |
|
Leasehold improvements |
|
various |
|
|
2,863 |
|
|
|
1,754 |
|
Construction in progress |
|
n/a |
|
|
14,102 |
|
|
|
7,292 |
|
|
|
|
|
|
185,662 |
|
|
|
160,125 |
|
Less: accumulated depreciation
and amortization |
|
|
|
|
(86,754 |
) |
|
|
(72,724 |
) |
Property and equipment, net |
|
|
|
$ |
98,908 |
|
|
$ |
87,401 |
|
Total depreciation expense was $8.0 million and $22.6 million for the three and nine months ended September 30, 2022, respectively, and $5.3 million and $13.8 million for three and nine months ended September 30, 2021, respectively. Construction in progress is not depreciated until placed in service. Property and equipment includes assets under financing leases and the related amortization of assets under financing leases is included in depreciation expense. Construction in progress includes costs associated with internal-use software.
7. Goodwill and Intangible Assets
Goodwill
The change in the carrying amount of goodwill during the period ended September 30, 2022 include the following (in thousands):
|
|
|
|
|
December 31, 2021 |
|
$ |
39,689 |
|
Purchase price allocation adjustment |
|
|
1,628 |
|
Foreign currency fluctuation |
|
|
(3,724 |
) |
September 30, 2022 |
|
$ |
37,593 |
|
15
Table of Contents
Intangible assets, net
Intangible assets, net consist of the following (in thousands, except as indicated):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining Avg.
Useful lives |
|
Gross |
|
|
Accumulated |
|
|
Intangible |
|
September 30, 2022: |
|
(in years) |
|
Amount |
|
|
Amortization |
|
|
Assets, net |
|
Developed product technology |
|
7 |
|
$ |
69,724 |
|
|
$ |
(10,380 |
) |
|
$ |
59,344 |
|
Trademarks and trade names |
|
8 |
|
|
4,974 |
|
|
|
(792 |
) |
|
|
4,182 |
|
Customer relationships |
|
4 |
|
|
13,532 |
|
|
|
(6,344 |
) |
|
|
7,188 |
|
Distribution network |
|
2 |
|
|
2,413 |
|
|
|
(1,991 |
) |
|
|
422 |
|
Total amortized intangible assets |
|
|
|
|
90,643 |
|
|
|
(19,507 |
) |
|
|
71,136 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Software in development |
|
n/a |
|
|
3,340 |
|
|
|
|
|
|
3,340 |
|
In-process research and development |
|
n/a |
|
|
5,262 |
|
|
|
|
|
|
5,262 |
|
Total intangible assets |
|
|
|
$ |
99,245 |
|
|
$ |
(19,507 |
) |
|
$ |
79,738 |
|
|
|
|
|
. |
|
|
|
|
|
|
|
|
|
Remaining Avg.
Useful lives |
|
Gross |
|
|
Accumulated |
|
|
Intangible |
|
December 31, 2021: |
|
(in years) |
|
Amount |
|
|
Amortization |
|
|
Assets, net |
|
Developed product technology |
|
12 |
|
$ |
74,543 |
|
|
$ |
(5,768 |
) |
|
$ |
68,775 |
|
Trademarks and trade names |
|
10 |
|
|
5,732 |
|
|
|
(477 |
) |
|
|
5,255 |
|
Customer relationships |
|
5 |
|
|
14,732 |
|
|
|
(5,264 |
) |
|
|
9,468 |
|
Distribution network |
|
3 |
|
|
2,413 |
|
|
|
(1,840 |
) |
|
|
573 |
|
Total amortized intangible assets |
|
|
|
|
97,420 |
|
|
|
(13,349 |
) |
|
|
84,071 |
|
|
|
|
|
|
|
|
|
|
|
|
|
In-process research and development |
|
n/a |
|
|
1,203 |
|
|
|
|
|
|
1,203 |
|
Total intangible assets |
|
|
|
$ |
98,623 |
|
|
$ |
(13,349 |
) |
|
$ |
85,274 |
|
Total amortization expense attributed to intangible assets was $2.8 million and $7.2 million for the three and nine months ended September 30, 2022, respectively, and $2.3 million and $4.2 million for the three and nine months ended September 30, 2021, respectively. Software in development will be amortized when the projects are complete and the assets are ready for their intended use. In-process research and development assets begin amortizing when the relevant products reach full commercial launch.
Future amortization expense related to intangible assets is as follows (in thousands):
|
|
|
|
|
Remainder of 2022 |
|
$ |
2,734 |
|
2023 |
|
|
10,936 |
|
2024 |
|
|
10,833 |
|
2025 |
|
|
10,248 |
|
2026 |
|
|
10,248 |
|
Thereafter |
|
|
26,137 |
|
|
|
$ |
71,136 |
|
16
Table of Contents
8. Contract Liabilities
Contract liabilities consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
2022 |
|
|
December 31,
2021 |
|
Contract liabilities |
|
$ |
15,068 |
|
|
$ |
18,151 |
|
Less: Non-current portion of contract liabilities |
|
|
(2,775 |
) |
|
|
(2,896 |
) |
Current portion of contract liabilities |
|
$ |
12,293 |
|
|
$ |
15,255 |
|
The non-current contract liabilities balance is included in other long-term liabilities on the condensed consolidated balance sheets. Contract liabilities relates to contracts with customers for which partial or complete payment of the transaction price has been received from the customer and the related obligations must be completed before revenue can be recognized. These amounts primarily relate to undelivered equipment, services, or maintenance agreements. The Company recognized $6.4 million and $16.5 million of revenue from its contract liabilities during the three and nine months ended September 30, 2022, respectively, and $4.8 million and $8.2 million of revenue from its contract liabilities during the three and nine months ended September 30, 2021, respectively. The opening and closing balances of the Company’s contract liabilities are as follows (in thousands):
|
|
|
|
|
Balance at December 31, 2021 |
|
$ |
18,151 |
|
Payments received |
|
|
13,410 |
|
Revenue recognized |
|
|
(16,493 |
) |
Balance at September 30, 2022 |
|
$ |
15,068 |
|
9. Debt
Revolving Credit Facility
In September 2022, the Company entered into a revolving credit facility (the “Revolving Credit Facility”) with entities affiliated with MidCap Financial Trust (“MidCap”). The Revolving Credit Facility provides up to $50.0 million in borrowing capacity to the Company based on a borrowing base. The borrowing base is calculated based on certain accounts receivable and inventory assets. The Company may request a $25.0 million increase in the Revolving Credit Facility for a total commitment of up to $75.0 million. The Revolving Credit Facility matures on the earlier of September 29, 2027, or 90 days prior to the final maturity date of the Company’s 2026 Notes. As of September 30, 2022, the outstanding balance under the Revolving Credit Facility was $35.0 million. In October 2022, the Company repaid $27.5 million of the outstanding balance.
In conjunction with obtaining the Revolving Credit Facility, the Company incurred $1.3 million in debt issuance costs. These costs were capitalized to other assets on the condensed consolidated balance sheets and are being amortized over the life of the Revolving Credit Facility. As of September 30, 2022, debt issuance costs, net of accumulated amortization, associated with the Revolving Credit Facility were $1.3 million.
The outstanding loans bear interest at the sum of the Term Secured Overnight Financing Rate ("SOFR"), a rate per annum equal to the secured overnight financing rate for such SOFR business day, plus 3.5% per annum. Interest on borrowings is due monthly. The interest rate as of September 30, 2022 was 6.5%. The loan agreements include an unused line fee, which is calculated as 0.5% per annum of either the unused Revolving Credit Facility or a minimum balance. Upon the Revolving Credit Facility’s maturity, any outstanding principal balance, unpaid accrued interest, and all other obligations under the Revolving Credit Facility will be due and payable.
The Revolving Credit Facility contains a lockbox arrangement clause requiring the Company to maintain a lockbox bank account. If the revolving loan availability is less than 30% of the revolving loan limit for five consecutive business days, or the Company is in default, MidCap will apply funds collected from the Company's lockbox account to reduce the outstanding balance of the Revolving Credit Facility (“Lockbox Deductions”). As of September 30, 2022, the Company's loan availability level has not activated Lockbox Deductions, nor is it expected to for the next 12 months; therefore, the Company has determined that the outstanding balance under the Revolving Credit Facility is long-term debt on the condensed consolidated balance sheets.
The outstanding loans are secured by substantially all of the Company’s assets, excluding intellectual property. The loan agreements and other ancillary documents contain customary representations and warranties and affirmative and negative covenants. Under the loan agreements, the Company is required to maintain a minimum level of liquidity. The loan agreements also include certain events of default, and upon the occurrence of such events of default, all outstanding loans under the Revolving Credit Facility may be accelerated and/or the lenders’ commitments terminated. The Company is in compliance with all required financial covenants as of September 30, 2022.
17
Table of Contents
0.75% Senior Convertible Notes due 2026
In August 2021, the Company issued $316.3 million aggregate principal amount of unsecured Senior Convertible Notes (the "2026 Notes") with a stated interest rate of 0.75% and a maturity date of August 1, 2026. Interest on the 2026 Notes is payable semi-annually in arrears on February 1 and August 1 of each year, beginning on February 1, 2022. The net proceeds from the sale of the 2026 Notes were approximately $306.2 million after deducting the initial purchasers’ offering expenses and before cash use for the privately negotiated capped call transactions (the “Capped Call Transactions”), as described below, the repurchase of stock, and the repayment of the outstanding term loan with Squadron Medical Finance Solutions, LLC (“Squadron Medical”) and outstanding obligation under the Inventory Financing Agreement, as described below. The 2026 Notes do not contain any financial covenants.
The 2026 Notes are convertible into shares of the Company’s common stock based upon an initial conversion rate of 54.5316 shares of the Company’s common stock per $1,000 principal amount of 2026 Notes (equivalent to an initial conversion price of approximately $18.34 per share). The conversion rate will be subject to adjustment upon the occurrence of certain specified events, including certain distributions and dividends to all or substantially all of the holders of the Company’s common stock. Based on the terms of the 2026 Notes, when a conversion notice is received, the Company has the option to pay or deliver cash, shares of the Company’s common stock, or a combination thereof.
Holders of the Convertible Notes have the right to convert their notes in certain circumstances and during specified periods. Prior to the close of business on the business day immediately preceding February 2, 2026, holders may convert all or a portion of their 2026 Notes only under the following circumstances: (1) during any calendar quarter (and only during such calendar quarter) commencing after the calendar quarter ending on September 30, 2021, if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (2) during the 5 consecutive business days immediately after any 10 consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of 2026 Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such trading day; or (3) upon the occurrence of specified corporate events. From and after February 2, 2026, holders of the 2026 Notes may convert their notes at any time at their election until the close of business on the second scheduled trading day immediately before the maturity date. As of September 30, 2022, none of the conditions permitting the holders of the 2026 Notes to convert have been met. The 2026 Notes are classified as long-term debt on the condensed consolidated balances sheet as of September 30, 2022.
The 2026 Notes are redeemable, in whole or in part, at the Company’s option at any time, and from time to time, on or after August 6, 2024 and on or before the 40th scheduled trading day immediately before the maturity date, at a cash redemption price equal to the principal amount of the 2026 Notes to be redeemed, plus accrued and unpaid interest, if any, but only if the last reported sale price per share of the Company’s common stock exceeds 130% of the conversion price for a specified period of time. In addition, calling any note for redemption will constitute a “make-whole fundamental change” with respect to that note, in which case the conversion rate applicable to the conversion of that note will be increased in certain circumstances if such note is converted after it is called for redemption.
If a fundamental change occurs prior to the maturity date, holders may require the Company to repurchase all or a portion of their 2026 Notes for cash at a price equal to 100% of the principal amount of the 2026 Notes plus accrued and unpaid interest. No principal payments are otherwise due on the 2026 Notes prior to maturity.
The Company recorded the full principal amount of the 2026 Notes as a long-term liability net of deferred issuance costs. The annual effective interest rate for the 2026 Notes is 1.4%. The Company recognized interest expense on the 2026 Notes of $1.1 million and $3.3 million for the three and nine months ended September 30, 2022, respectively, which includes $0.5 million and $1.5 million for the amortization of debt issuance costs, respectively. The Company recognized interest expense of $0.6 million for the three and nine months ended September 30, 2021 which includes $0.3 million for the amortization of debt issuance costs. The Company uses the if-converted method for assumed conversion of the 2026 Notes to compute the weighted-average shares of common stock outstanding for diluted earnings per share, if applicable.
18
Table of Contents
The outstanding principal amount and carrying value of the 2026 Notes consist of the following (in thousands):
|
|
|
|
|
|
|
September 30,
2022 |
|
Principal |
|
$ |
316,250 |
|
Unamortized debt issuance costs |
|
|
(7,789 |
) |
Net carrying value |
|
$ |
308,461 |
|
Capped Call Transactions
In connection with the offering of the 2026 Notes, the Company entered into the Capped Call Transactions with certain financial institutions. The Capped Call Transactions are expected generally to reduce the potential dilution and/or offset the cash payments the Company is required to make in excess of the principal amount of the 2026 Notes upon conversion of the 2026 Notes in the event that the market price per share of the Company’s common stock is greater than the strike price of the Capped Call Transactions with such reduction and/or offset subject to a cap. The Capped Call Transactions have an initial cap price of $27.68 per share of the Company’s common stock, which represents a premium of 100% over the last reported sale price of the Company’s common stock on August 5, 2021, and is subject to certain adjustments under the terms of the Capped Call Transactions. Collectively, the Capped Call Transactions cover, initially, the number of shares of the Company’s common stock underlying the 2026 Notes, subject to anti-dilution adjustments substantially similar to those applicable to the 2026 Notes. The cost of the Capped Call Transactions was approximately $39.9 million.
The Capped Call Transactions are separate transactions and are not part of the terms of the 2026 Notes and will not affect any holder’s rights under the notes. Holders of the 2026 Notes will not have any rights with respect to the Capped Call Transactions.
The Capped Call Transactions meet all of the applicable criteria for equity classification and, as a result, the related $39.9 million cost was recorded as a reduction to additional paid-in capital on the Company’s condensed consolidated statements of shareholders’ (deficit) equity.
OCEANE Convertible Bonds
On May 31, 2018, EOS issued 4,344,651 OCEANE convertible bonds, denominated in Euros, due May 2023 for aggregate gross proceeds of $34.3 million (€29.5 million). The OCEANEs are unsecured obligations of EOS, rank equally with all other unsecured and unsubordinated obligations of EOS, and pay interest at a rate equal to 6% per year, payable semiannually in arrears on May 31 and November 30 of each year, beginning November 30, 2018. Unless either earlier converted or repurchased, the OCEANEs will mature on May 31, 2023. Interest expense was $0.2 million and $0.6 million for the three and nine months ended September 30, 2022, respectively. Interest expense was $0.3 million for the three months ended September 30, 2021 and $0.4 million from the date of the acquisition to September 30, 2021.
As discussed in Note 3, in connection with the Offer to acquire EOS, the Company purchased 2,486,135 OCEANE convertible bonds, and as such, 1,858,516 OCEANE convertible bonds with a principal amount of $15.3 million (€12.6 million) remained outstanding at the time of acquisition.
19
Table of Contents
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 one share per OCEANE, and the initial conversion rate is subject to customary anti-dilution adjustments. The OCEANEs are convertible at any time until the seventh business day prior to maturity or seventh business day prior to an earlier redemption of the OCEANE. If the number of shares calculated is not a whole number, the holder may request allocation of either the whole number of shares immediately below the number and receive an amount in cash equal to the remaining fractional share value, or the whole number of shares immediately above the number and pay an amount in cash equal to the remaining fractional share value. Holders of the OCEANEs have the option to convert all or any portion of such OCEANEs, regardless of any conditions, at any time until the close of seventh business day immediately preceding the maturity date.
EOS has a right to redeem all of the OCEANEs at its option any time after June 20, 2021 at a cash redemption price equal to the par value of the OCEANEs plus accrued and unpaid interest if the product of the volume-weighted-average price of the shares and the conversion ratio as specified in the agreement in effect on each trading day exceeds 150% of the par value of each OCEANE on each of at least twenty consecutive trading days during any forty consecutive trading days, if EOS redeems the OCEANEs when the number of OCEANEs outstanding is 15% or less of the number of OCEANEs originally issued, or the occurrence of a tender or exchange offer. As a result of the Company’s acquisition of EOS, the OCEANEs are now convertible into new shares of EOS, as a wholly-owned subsidiary of the Company. OCEANE holders can redeem the notes upon the occurrence of an event of default or upon the occurrence of a change of control. In July 2021, in connection with the change of control, holders of 25,971 OCEANEs chose to redeem their bonds for approximately $0.2 million (€0.2 million).
The carrying value of the outstanding OCEANEs was $12.2 million (€12.5 million) as of September 30, 2022.
Other Debt Agreements
In January and April 2021, prior to the acquisition, EOS obtained two loan agreements, denominated in Euros, under French government sponsored COVID-19 relief initiatives (pret garanti par l’etat or “PGE” loans). Each loan contains a 12-month term and 90% of the principal balance of each loan is state guaranteed. The cost of the state guaranty is 0.25% of the loan amounts. The loans carry an interest-free rate from the commercial banks (€3.3 million) and a 1.75% interest from the lender (€1.5 million). The loan capital and loan guaranty costs are payable in full at the end of the 12-month term or the loan may be extended up to 5 additional years. If the Company chooses to extend the debt, the election must be made by the Company between months 8 and 11 of the 12-month term. The extension will carry an interest rate at the banks’ refinancing cost, to be applied from year 2 to year 6 and an increased state guaranty cost (50 to 200 bps, as per a scale with company size and extension year).
In February 2022, the Company extended the maturity for each loan agreement to 2027. Each loan has a 12-month period from the applicable extension date where interest only payments will occur (the “Interest Only Period”). Following the Interest Only Period, monthly and quarterly installments of principal and interest under each loan agreement will be due until the original principal amounts and applicable interest is fully repaid in 2027. The outstanding obligation under each loan as of September 30, 2022 was $3.2 million and $1.4 million (€3.3 million and €1.5 million) at weighted average interest rates of 0.98% and 1.25%, respectively, and weighted average costs of the state guaranty of 0.69% and 1.00%, respectively.
Total Indebtedness
Principal payments remaining on the Company's debt are as follows as of September 30, 2022 (in thousands):
|
|
|
|
|
Remainder of 2022 |
|
$ |
906 |
|
2023 |
|
|
13,220 |
|
2024 |
|
|
1,422 |
|
2025 |
|
|
1,155 |
|
2026 |
|
|
317,406 |
|
Thereafter |
|
|
35,554 |
|
Total |
|
|
369,663 |
|
Less: debt discount |
|
|
(7,789 |
) |
Total |
|
|
361,874 |
|
Less: current portion of long-term debt |
|
|
(13,550 |
) |
Long-term debt |
|
$ |
348,324 |
|
20
Table of Contents
10. 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 recognizes right-of-use assets (“ROU assets”) and lease liabilities for office buildings and certain equipment with lease terms of 1 year to 10 years, some of which include options to extend and/or terminate the leases. Any short-term leases defined as twelve months or less or month-to-month leases were excluded and continue to be expensed each month. Total costs associated with these short-term leases is immaterial to all periods presented.
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 nine months ended September 30, 2022 were immaterial. The Company had an immaterial amount of financing leases as of September 30, 2022, which is included in property and equipment, net, accrued expenses and other current liabilities, and other long-term liabilities, on the condensed consolidated balance sheets.
Operating Lease
The Company occupies approximately 121,541 square feet of office, engineering, and research and development space in Carlsbad, California. On December 4, 2019, the Company entered into a 10-year operating lease that commenced on February 1, 2021 and will terminate on January 31, 2031, subject to two sixty-month options to renew which are not reasonably certain to be exercised. The Company recognized a $21.1 million ROU asset and $21.5 million lease liability on the condensed consolidated balance sheet upon taking control of the premises on the lease commencement date. Base rent under the 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. On May 11, 2022, the Company entered into a lease amendment for the build out of additional space within the building which resulted in a lease modification increasing the ROU asset and lease liability.
On April 9, 2021, the Company entered into a 7-year operating lease agreement for a distribution center which consists of approximately 75,643 square feet of office and warehouse space in Memphis, Tennessee. The term of the 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. The Company recognized a $1.7 million ROU asset and $1.6 million lease liability upon taking control of the premises on the lease commencement date. Base rent under the building lease will be commensurate with the Company’s proportionate share of occupancy of the building and will increase annually by 3.0% throughout the remainder of the lease.
With the acquisition of EOS, the Company assumed its ROU assets and lease liabilities in the amount of $4.3 million. EOS occupies its main office in Paris, France. The EOS office in Paris, France is a 10-year operating lease that commenced in 2019 and will terminate in September 2028. Base rent under the lease is approximately $0.6 million per year.
Future minimum annual lease payments for all operating leases of the Company are as follows as of September 30, 2022 (in thousands):
|
|
|
|
|
Remainder of 2022 |
|
$ |
1,101 |
|
2023 |
|
|
4,773 |
|
2024 |
|
|
4,900 |
|
2025 |
|
|
4,944 |
|
2026 |
|
|
5,013 |
|
Thereafter |
|
|
18,093 |
|
Total undiscounted lease payments |
|
|
38,824 |
|
Less: imputed interest |
|
|
(7,343 |
) |
Operating lease liabilities |
|
|
31,481 |
|
Less: current portion of operating lease liabilities |
|
|
(4,529 |
) |
Operating lease liabilities, less current portion |
|
$ |
26,952 |
|
The Company’s weighted average remaining lease term and weighted average discount rate as of September 30, 2022 and December 31, 2021 are as follows:
|
|
|
|
|
|
|
|
|
|
|
September 30,
2022 |
|
|
December 31,
2021 |
|
Weighted-average remaining lease term (years) |
|
|
7.8 |
|
|
|
8.6 |
|
Weighted-average discount rate |
|
|
5.5 |
% |
|
|
8.5 |
% |
21
Table of Contents
Information related to the Company’s operating leases is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
September 30, |
|
|
Nine Months Ended
September 30, |
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
Rent expense |
|
$ |
1,210 |
|
|
$ |
1,156 |
|
|
$ |
3,457 |
|
|
$ |
3,358 |
|
Cash paid for amounts included in measurement of lease liabilities |
|
$ |
1,032 |
|
|
$ |
393 |
|
|
$ |
3,183 |
|
|
$ |
1,268 |
|
Purchase Commitments
With the acquisition of EOS, the Company assumed its inventory purchase commitment agreement with a third-party supplier. The Company is obligated to certain minimum purchase commitment requirements through December 2026. As of September 30, 2022, the remaining minimum purchase commitment required by the Company under the agreement is $26.1 million.
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 condensed 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 condensed consolidated financial statements. An estimated loss contingency is accrued in the Company’s 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, 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, infringed, or contributed to the infringement of, U.S. Patent Nos. 7,819,801, 8,355,780, 8,361,156, 8,439,832, 8,753,270, 9,833,227 and U.S. Design Patent Nos. D652,519 and D750,252.
In May 2018, the Court dismissed the asserted design patents with prejudice. In September 2018, NuVasive filed an Amended Complaint, asserting infringement claims of U.S. Patent Nos. 9,924,859, 9,974,531 and 8,187,334.
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 2020, PTAB ruled that all challenged claims of the ‘156 Patent were valid, that several claims of the ‘334 Patent were invalid and that other challenged claims of the ‘334 Patent valid. In February 2022, the U.S. Court of Appeals for the Federal Circuit affirmed that ruling.
In August 2021, the Court found the ’156 Patent invalid and, in September 2021, NuVasive elected not to proceed with its remaining claims for the ’334 Patent, ’780 Patent, ’270 Patent, ’227 Patent and ’859 Patent. Trial on the remaining patents concluded on March 11, 2022. On March 15, 2022, the Court ordered the parties to participate in post-trial settlement conference. In June 2022, the parties reached a final resolution of all matters and executed a confidential settlement agreement. The Court dismissed the action with prejudice. The outcome of these proceedings did not have any material adverse effect on the Company’s consolidated results of operations, cash flows or financial position.
22
Table of Contents
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, in June 2018, NuVasive amended its complaint to add the Company as a defendant. In October 2018, the Delaware Court ordered that NuVasive advance 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 September 30, 2022, the Company has not recorded any liability on the condensed consolidated balance sheet related to this matter.
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 sales.
11. 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 paid in March 2014, and an additional lump sum payment of $15.75 million, which the Company 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 unpaid balance of the principal amount due accrues interest at the rate of 7% per year until the balance is 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.
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 agreed to contribute $5.0 million to the $49.0 million settlement amount. During the year ended December 31, 2021, HealthpointCapital completed its contribution to the settlement amount.
As of September 30, 2022, the Company has made installment payments in the aggregate of $52.3 million, with a remaining outstanding balance of $5.3 million (including imputed 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.
A reconciliation of the total net settlement obligation is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
2022 |
|
|
December 31,
2021 |
|
Litigation settlement obligation - short-term portion |
|
$ |
4,400 |
|
|
$ |
4,400 |
|
Litigation settlement obligation - long-term portion |
|
|
765 |
|
|
|
3,587 |
|
Total |
|
|
5,165 |
|
|
|
7,987 |
|
Future imputed interest |
|
|
166 |
|
|
|
478 |
|
Total settlement obligation, net |
|
$ |
5,331 |
|
|
$ |
8,465 |
|
23
Table of Contents
The short-term portion of the litigation settlement obligation is included in accrued expenses and other current liabilities on the condensed consolidated balance sheets and the long-term portion of the litigation settlement obligation is included in other long-term liabilities on the condensed consolidated balance sheets.
12. Stock-Benefit Plans and Equity Transactions
Stock-Based Compensation
The Company has stock-based compensation plans under which it grants stock options, RSUs, and PRSUs to officers, directors and third parties. Total stock-based compensation for the periods presented are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
Cost of sales |
|
$ |
735 |
|
|
$ |
310 |
|
|
$ |
1,440 |
|
|
$ |
489 |
|
Research and development |
|
|
1,653 |
|
|
|
1,440 |
|
|
|
3,987 |
|
|
|
2,602 |
|
Sales, general and administrative |
|
|
8,689 |
|
|
|
9,004 |
|
|
|
25,037 |
|
|
|
23,633 |
|
Total |
|
$ |
11,077 |
|
|
$ |
10,754 |
|
|
$ |
30,464 |
|
|
$ |
26,724 |
|
As of September 30, 2022, there is $47.8 million of unrecognized compensation expense for RSUs and PRSUs to be recognized over a weighted average period of 1.65 years.
Restricted Stock Units and Performance Based Restricted Stock Units Awards
The Company issued approximately 563,000 and 3,103,000 shares of common stock, before net share settlement, upon vesting of RSUs and PRSUs during the three and nine months ended September 30, 2022, respectively, and issued approximately 504,000 and 2,581,000 shares of common stock, before net share settlement, upon vesting of RSUs and PRSUs during the three and nine months ended September 30, 2021, respectively.
Employee Stock Purchase Plan
Employees are eligible to participate in the Employee Stock Purchase Plan ("ESPP") approved by its shareholders. During the three months ended September 30, 2022, there were no shares issued under the ESPP. During the nine months ended September 30, 2022, there were approximately 222,000 shares issued under the ESPP. During the three months ended September 30, 2021, there were no shares issued under the ESPP. During the nine months ended September 30, 2021, there were approximately 112,000 shares issued under the ESPP.
The Company estimates the fair value of shares issued to employees under the ESPP using the Black-Scholes option-pricing model. The assumptions used to estimate the fair value of stock options granted and stock purchase rights under the ESPP are as follows:
|
|
|
|
|
|
|
|
|
|
|
Three and Nine Months Ended |
|
|
|
September 30, |
|
|
|
2022 |
|
|
2021 |
|
Risk-free interest rate |
|
0.07% - 1.54% |
|
|
0.04% - 0.10 % |
|
Expected dividend yield |
|
|
— |
|
|
|
— |
|
Expected term (years) |
|
|
0.50 |
|
|
|
0.50 |
|
Volatility |
|
50.29% - 64.53% |
|
|
49.98% - 78.51% |
|
Warrants Outstanding
2017 PIPE Warrants
The 2017 common stock warrants (the “2017 PIPE Warrants”) had a five-year life and were exercisable by cash exercise only. During the nine months ended September 30, 2022, there were approximately 2,312,000 2017 PIPE Warrant exercises for total cash proceeds of $3.5 million. During the three and nine months ended September 30, 2021, there were approximately 275,000 and 795,000 2017 PIPE Warrant exercises, respectively, for total cash proceeds of $0.6 million and $1.6 million, respectively. As of September 30, 2022, the 2017 PIPE Warrants were expired, and no 2017 PIPE Warrants remained outstanding.
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Table of Contents
2018 PIPE Warrants
The 2018 common stock warrants (the “2018 PIPE Warrants”) have a five-year life and are exercisable by cash or cashless exercise. During the three months ended September 30, 2022, there were approximately 14,000 2018 PIPE Warrant cashless exercises. During the nine months ended September 30, 2022, there were approximately 140,000 2018 PIPE Warrant exercises for total cash proceeds of $0.4 million. During the three and nine months ended September 30, 2021, there were approximately 40,000 and 2,881,000 2018 PIPE Warrant exercises, respectively, for total cash proceeds of $0.1 million and $1.5 million, respectively. As of September 30, 2022, approximately 8,340,000 2018 PIPE Warrants remained outstanding.
SafeOp Surgical Merger Warrants
The SafeOp common stock warrants (the “SafeOp Warrants”), have a five-year life and are exercisable by cash or cashless exercise. During the three months ended September 30, 2022, there were no SafeOp Warrant exercises. During the nine months ended September 30, 2022, there were approximately 257,000 SafeOp Warrant cashless exercises. There were no SafeOp Warrant exercises during the three months ended September 30, 2021. During the nine months ended September 30, 2021, there were approximately 970,000 SafeOp Warrant exercises for total cash proceeds of $0.1 million. As of September 30, 2022, approximately 938,000 SafeOp Warrants remained outstanding.
Squadron Medical Warrants
In connection with debt financing entered into with Squadron Medical in 2018, and amended in 2019 and 2020, the Company issued common stock warrants to Squadron Medical and a participant lender (the “Squadron Medical Warrants”). The Squadron Medical Warrants expire in May 2027 and are exercisable by cash exercise. No Squadron Medical Warrants have been exercised as of September 30, 2022.
Executive Warrants
The Company issued warrants to Mr. Patrick S. Miles, the Company’s Chairman and Chief Executive Officer (the “Executive Warrants”). The Executive Warrants have a five-year term and are exercisable by cash or cashless exercise. No Executive Warrants have been exercised as of September 30, 2022.
A summary of all outstanding warrants for common stock as of September 30, 2022, are as follows (in thousands, except for strike price data):
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Warrants |
|
|
Strike Price |
|
Expiration |
2018 PIPE Warrants |
|
|
8,340 |
|
|
$ |
3.50 |
|
May 2023 |
SafeOp Surgical Merger Warrants |
|
|
938 |
|
|
$ |
3.50 |
|
May 2023 |
2018 Squadron Medical Warrants |
|
|
845 |
|
|
$ |
3.15 |
|
May 2027 |
2019 Squadron Medical Warrants |
|
|
4,839 |
|
|
$ |
2.17 |
|
May 2027 |
2020 Squadron Medical Warrants |
|
|
1,076 |
|
|
$ |
4.88 |
|
May 2027 |
Executive Warrants |
|
|
1,327 |
|
|
$ |
5.00 |
|
December 2022 |
Other(1) |
|
|
121 |
|
|
$ |
6.28 |
|
Various through February 2026 |
Total |
|
|
17,486 |
|
|
|
|
|
(1)Weighted-average strike price.
All outstanding warrants were deemed to qualify for equity classification under authoritative accounting guidance.
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Table of Contents
13. Business Segment and Geographic Information
The Company operates in one segment based upon the Company’s organizational structure, the way in which the operations and investments are managed and evaluated by the chief operating decision maker (“CODM”) as well as the lack of available discrete financial information at a level lower than the consolidated level. The Company shares common, centralized support functions which report directly to the CODM and decision-making regarding the Company’s overall operating performance and allocation of Company resources is assessed on a consolidated basis.
Net revenue and property and equipment, net, by geographic region are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
|
Property and equipment, net |
|
|
|
Three Months Ended
September 30, |
|
|
Nine Months Ended
September 30, |
|
|
September 30, |
|
|
December 31, |
|
(in thousands) |
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
United States |
|
$ |
84,801 |
|
|
$ |
55,865 |
|
|
$ |
229,720 |
|
|
$ |
158,875 |
|
|
$ |
96,173 |
|
|
$ |
85,320 |
|
International |
|
|
5,038 |
|
|
|
7,015 |
|
|
|
15,203 |
|
|
|
10,375 |
|
|
|
2,735 |
|
|
|
2,081 |
|
Total |
|
$ |
89,839 |
|
|
$ |
62,880 |
|
|
$ |
244,923 |
|
|
$ |
169,250 |
|
|
$ |
98,908 |
|
|
$ |
87,401 |
|
14. Net Loss Per Share
Basic net loss per share is calculated by dividing the net loss available to common stockholders by the weighted-average number of common shares outstanding for the period. If applicable, 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
September 30, |
|
|
Nine Months Ended
September 30, |
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
Numerator: |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(36,999 |
) |
|
$ |
(43,031 |
) |
|
$ |
(117,163 |
) |
|
$ |
(104,139 |
) |
Denominator: |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding |
|
|
104,804 |
|
|
|
99,571 |
|
|
|
102,561 |
|
|
|
95,204 |
|
Net loss per share, basic and diluted: |
|
$ |
(0.35 |
) |
|
$ |
(0.43 |
) |
|
$ |
(1.14 |
) |
|
$ |
(1.09 |
) |
The following potentially dilutive shares of common stock were excluded from the calculation of diluted net loss per share because their effect would have been anti-dilutive for the periods presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
As of
September 30, |
|
|
|
2022 |
|
|
2021 |
|
Series A convertible preferred stock |
|
|
— |
|
|
|
29 |
|
Options to purchase common stock and employee stock purchase plan |
|
|
3,142 |
|
|
|
3,524 |
|
Unvested restricted stock unit awards |
|
|
8,744 |
|
|
|
8,733 |
|
Warrants to purchase common stock |
|
|
17,486 |
|
|
|
20,214 |
|
Senior convertible notes |
|
|
17,246 |
|
|
|
17,246 |
|
Total |
|
|
46,618 |
|
|
|
49,746 |
|
15. 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. 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 estimated annual taxable income or loss for the year and projections of the proportion of income earned and taxed in foreign jurisdictions. 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.
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Table of Contents
The Company’s effective tax rate from continuing operations was (0.35%) and (0.40%) for the three and nine months ended September 30, 2022, respectively, and (0.21%) and (0.16%) for the three and nine months ended September 30, 2021, respectively. The Company’s effective tax rate differs from the federal statutory rate of 21% in each period primarily due to the Company’s net loss position and valuation allowance.
16. Related Party Transactions
In November 2018, the Company entered into the Term Loan and Inventory Financing Agreement with certain affiliates of Squadron Capital, LLC (“Squadron”), including an inventory supplier (the “Squadron Supplier Affiliate”). The Term Loan and the Inventory Financing Agreement were terminated and all obligations thereunder were repaid on August 10, 2021. For the three and nine months ended September 30, 2022, the Company purchased inventory in the amounts of $2.7 million and $7.7 million, respectively, from the Squadron Supplier Affiliate. For the three and nine months ended September 30, 2021, the Company purchased inventory in the amounts of $2.4 million and $6.3 million, respectively, from the Squadron Supplier Affiliate. As of September 30, 2022, and December 31, 2021, the Company had $2.2 million and $0.8 million, respectively, due to the Squadron Supplier Affiliate, for inventory purchases. Squadron was a lead investor in the private placement of the Company's common stock that was closed on March 1, 2021. David Pelizzon, President and Director of Squadron, currently serves on the Company’s Board of Directors.
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