ALPHATEC: Management report and analysis of the financial situation and operating results (form 10-K)
The following discussion of our financial condition and results of operations should be read in conjunction with the financial statements and the notes to those statements appearing elsewhere in this Annual Report on Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this report include the identification of certain trends and other statements that may predict or anticipate future business or financial results that are subject to important factors that could cause our actual results to differ materially from those indicated. See "Item 1A Risk Factors" included elsewhere in this Annual Report on Form 10-K.
Overview
We are a medical technology company focused on the design, development, and advancement of technology for better surgical treatment of spinal disorders. We are dedicated to revolutionizing the approach to spine surgery through clinical distinction. We have a broad product portfolio designed to address the majority of the U.S. market for spinal disorders. We are focused on developing new approaches that integrate seamlessly with the SafeOp Neural InformatiX System to safely and reproducibly treat spine's various pathologies and achieve the goals of spine surgery. Our ultimate vision is to be the standard bearer in Spine. We intend to drive growth by capitalizing on our collective spine experience and investing in the research and development to continually differentiate our solutions and improve spine surgery. We believe our future success will be fueled by introducing market-shifting innovation to the spine market, and that we are well-positioned to capitalize on current spine market dynamics. We market and sell our products in theU.S. through a network of independent distributors and direct sales representatives. An objective of our leadership team is to deliver increasingly consistent, predictable growth. To accomplish this, we have partnered more closely with new and existing distributors to create a more dedicated and loyal sales channel for the future. We have added, and intend to continue to add, new high-quality exclusive and dedicated distributors to expand future growth. We believe this will allow us to reach an untapped market of surgeons, hospitals, and national accounts across theU.S. , as well as better penetrate existing accounts and territories. We have continued to make progress in the transition of our sales channel since early 2017, driving the percent of sales contributed by our strategic distribution channel from approximately 88% for the year endedDecember 31, 2019 to 92% for the year endedDecember 31, 2020 . Going forward, we intend to continue to relentlessly drive toward a fully exclusive network of independent and direct sales agents. Consolidation in the industry has facilitated this process, as large, seasoned agents seek opportunities to partner with spine-focused companies that have broad, growing product portfolios.
Recent developments
EOS acquisition project
OnDecember 16, 2020 , we entered into a Tender Offer Agreement (the "Tender Offer Agreement") with EOS imaging S.A., a société anonyme organized and existing under the laws ofFrance ("EOS"), pursuant to which we will 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"), and outstanding convertible bonds (collectively, the "OCEANEs") of EOS. The Offer will consist of a cash tender offer price of €2.45 (or approximately$2.99 ) per EOS Share and €7.01 (or approximately$8.55 ) perOCEANE , (the "Offer Consideration"), for a total purchase price of up to approximately$116.9 million . The Offer will need to be filed with and cleared by the Autorité des marches financiers (the "AMF"). These Tender Commitments will terminate if (i) the Tender Offer Agreement is terminated, (ii) the Offer is withdrawn by the Company pursuant to applicable French laws and regulations, or (iii) the Offer is not declared successful by the AMF as a result of certain conditions failing to be satisfied or waived. OnMarch 5, 2021 , we filed a draft offer with the AMF related to our Tender Offer Agreement with EOS to purchase all of the EOS Shares and OCEANEs. The Tender Offer Agreement is subject to clearance by theFrench Ministry of the Economy and Finance and AMF. We expect the transaction to close in the second quarter of 2021. 42
-------------------------------------------------------------------------------- In connection with the Offer, onDecember 16, 2020 , we entered into a securities purchase agreement (the "Purchase Agreement") with certain institutional and accredited investors, includingSquadron Capital, LLC (collectively, the "Purchasers"), providing for the sale by the Company of 12,421,242 shares of our common stock (the "Private Placement Shares") at a purchase price of$11.11 per share (the "Private Placement Purchase Price"), in a private placement (the "Private Placement"). The aggregate gross proceeds for the Private Placement will be approximately$138.0 million . We intend to use the net proceeds from the Private Placement to fund the Offer Consideration and for general corporate and working capital purposes. Pursuant to the terms of the Purchase Agreement, from the Private Placement Closing until the completion of the Offer, we are prohibited from issuing, or entering into any agreement to issue, or announcing the issuance or proposed issuance of, any shares of our common stock or common stock equivalents, subject to certain permitted exceptions. If the Tender Offer Agreement is terminated or the Offer is not completed on or beforeJuly 31, 2021 , we will repurchase the Private Placement Shares from the Purchasers, once issued, for an amount per share equal to the Private Placement Purchase Price plus interest on the Private Placement Purchase Price at a rate of nine percent per year computed from the date of the Private Placement Closing to the date of the repurchase.
At
Registered follow-up public offer
OnOctober 16, 2020 , we closed the 2020 Offering where we issued and sold a total of 13,142,855 shares of our common stock at a price to the public of$8.75 per share. The net proceeds from the 2020 Offering were approximately$107.7 million , including net proceeds from the overallotment shares and deducting underwriting discounts and commissions and estimated offering expenses payable by us. The COVID-19 Pandemic The COVID-19 pandemic had a moderate impact on our business in 2020. Since the onset of the pandemic in early 2020, we have carefully monitored its impact on our operations. We have taken steps to minimize the risk to our employees. A significant number of our employees have been working remotely, except for certain staff that require access to our manufacturing and laboratory research facilities, in accordance with applicable government health and safety protocols and guidance issued in response to the COVID-19 pandemic. To date, our remote working arrangements have not affected our ability to maintain critical business operations, and we have not experienced any material disruptions or shortages of the supply of our products. Since the beginning of the COVID-19 pandemic, we have seen volatility in sales trends as elective surgeries that use our products have been affected by COVID-19, particularly in the early phases of the pandemic. Demand has since recovered to varying degrees by product as local conditions have improved in some geographies that opened after an initial improvement in COVID-19 infection rates, allowing surgeons to resume surgeries. During the second half of the year, procedural volumes returned to pre-pandemic levels. Recently, higher rates of infection have been observed in some geographies, includingthe United States andEurope , which have further restricted elective surgeries, although not to the extent experienced in the early phases of the pandemic. We expect to see continued volatility through at least the duration of the pandemic as governments respond to current local conditions. The depth and extent to which the COVID-19 pandemic will continue to impact individual markets continues to vary. We expect procedural volumes to remain somewhat difficult to estimate as COVID-19 infections continue to spread and the roll-out of a vaccine remains uncertain. We continue to believe that existing funds, cash generated from operations and existing sources of and access to financing are adequate to satisfy our needs for working capital, capital expenditures and debt service requirements as well as to engage in other business initiatives that we plan to strategically pursue. 43
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Components of income and expenditure
Here is a description of the main components of our income and expenses:
Revenue. We derive our revenue primarily from the sale of spinal surgery implants used in the treatment of spine disorders. Spinal implant products include pedicle screws and complementary implants, interbody devices, plates, and tissue-based materials. Our revenue is generated by our direct sales force and independent distributors. Our products are requested directly by surgeons and shipped and billed to hospitals and surgical centers. Currently, most of our business is conducted with customers within markets in which we have experience and with payment terms that are customary to our business. We may defer revenue until the time of collection if circumstances related to payment terms, regional market risk or customer history indicate that collectability is not certain. Cost of revenue. Cost of revenue consists of direct product costs, royalties, milestones and the amortization of purchased intangibles. Our product costs consist primarily of direct labor, overhead, and raw materials and components. The product costs of certain of our biologics products include the cost of procuring and processing human tissue. We incur royalties related to the technologies that we license from others and the products that are developed in part by surgeons with whom we collaborate in the product development process. Amortization of purchased intangibles consists of amortization of developed product technology. Research and development expenses. Research and development expense consists of costs associated with the design, development, testing, and enhancement of our products and technologies. Research and development expense also includes salaries and related employee benefits, research-related overhead expenses, fees paid to external service providers in both cash and equity, and costs associated with ourScientific Advisory Board and Executive Surgeon Panels. Sales, general and administrative expenses. Sales, general and administrative expense consists primarily of salaries and related employee benefits, sales commissions and support costs, depreciation of our surgical instruments, regulatory affairs, quality assurance costs, professional service fees, travel, medical education, trade show and marketing costs, insurance and legal expenses.
Litigation costs. Litigation expenses are costs incurred for our pending litigation, primarily with NuVasive, Inc.
Transaction-related expenses. Transaction-related expenses are certain costs incurred throughout the year related to the prior tender offer agreement entered into with EOS onFebruary 28, 2020 , which was subsequently terminated by the Company in response to the then-expected market effects of the COVID-19 pandemic onApril 24, 2020 , as well as costs incurred related to the renewed tender offer agreement entered into with EOS onDecember 16, 2020 . These expenses primarily include third-party advisory and legal fees.
Restructuring costs. Restructuring charges include severance, employee benefits and related taxes related to our historical cost rationalization efforts.
Loss on debt extinguishment. Loss on debt extinguishment is comprised of all amounts previously recorded as debt issuance costs related to theMidCap Funding IV, LLC ("MidCap") facility that was repaid in full as well as amounts associated with Squadron Medical partial debt extinguishment.
Total interest and other charges, net. Total interest and other charges, net includes interest income, interest expense, foreign exchange gains and losses and other non-operating gains and losses.
Income tax provision (benefit). Income tax provision (benefit) from continuing
operations primarily consists of release of the valuation allowance from the
SafeOp acquisition, partially offset by state taxes.
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Results of operations
The first table below presents the data in our income statements for the periods presented. Our historical results are not necessarily representative of the results of operations that can be expected in the future.
Increase
Year Ended December 31, (Decrease)
2020 2019 $ %
(in thousands)
Revenue:
Revenue from U.S. products $ 141,079 $ 108,242 $ 32,837 30 %
Revenue from international supply agreement 3,782 5,185 (1,403 ) (27 )%
Total revenue 144,861 113,427 31,434 28 %
Cost of revenue 42,360 35,833 6,527 18 %
Gross profit 102,501 77,594 24,907 32 %
Operating expenses:
Research and development 18,745 13,849 4,896 35 %
Sales, general and administrative 129,156 101,714 27,442 27 %
Litigation-related 8,552 8,549 3 - %
Amortization of acquired intangible assets 688 698 (10 ) (1 )%
Transaction-related 4,223 - 4,223 100 %
Restructuring - 60 (60 ) (100 )%
Total operating expenses 161,364 124,870 36,494 29 %
Operating loss (58,863 ) (47,276 ) (11,587 ) 25 %
Interest and other expense, net:
Interest expense, net (12,374 ) (9,865 ) (2,509 ) 25 %
Loss on debt extinguishment (7,612 ) - (7,612 ) 100 %
Total interest and other expense, net (19,986 ) (9,865 ) (10,121 ) 103 %
Loss from continuing operations before
taxes (78,849 ) (57,141 ) (21,708 ) 38 %
Income tax provision (benefit) 145 (239 ) 384 161 %
Loss from continuing operations (78,994 ) (56,902 ) (22,092 ) 39 %
Loss from discontinued operations, net of
applicable taxes - (100 ) 100 (100 )%
Net loss $ (78,994 ) $ (57,002 ) $ (21,992 ) 39 %
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Increase
Year Ended December 31, (Decrease)
2020 2019 $ %
Revenue by source: (in thousands)
Revenue from U.S. products $ 141,079 $ 108,242 $ 32,837 30 %
Revenue from international supply agreement 3,782 5,185 (1,403 ) (27 )%
Total revenue $ 144,861 $ 113,427 $ 31,434 28 %
Gross profit by source:
Gross profit from U.S. products $ 102,248 $ 77,235 $ 25,013 32 %
Gross profit from international supply
agreement 253 359 (106 ) (30 )%
Total gross profit $ 102,501 $ 77,594 $ 24,907 32 %
Gross profit margin by source:
Gross profit margin from U.S. products 73 % 71 % 2 %
Gross profit margin from international supply
agreement 7 % 7 % - %
Total gross profit margin 71 % 68 % 3 %
Year ended
Total income. The total turnover was
Income from
During the year endedDecember 31, 2020 we launched a total of 11 new products, bringing our total offerings to over 70 products across our various product categories, of which over 30 were new products launched betweenJuly 2018 andDecember 2020 . As a result of the expansion of our product portfolio we continue to see increases in year-over-year revenue contributions from our new product pipeline as product categories per case, average revenue per case, and revenue per surgeon continues to increase, consistent with our commitments to create clinical distinction through organic product development and compel surgeon adoption. For the year endedDecember 31, 2020 , revenue contributions from our new products represented approximately 67% ofU.S. revenue compared to 37% for the year endedDecember 31, 2019 , with average product categories sold per case increasing to 1.9 during the year endedDecember 31, 2020 compared to 1.7 during the year endedDecember 31, 2019 . As a result of the increases in our new product contributions and average product categories sold per case, average revenue per case increased by 13% for the year endedDecember 31, 2020 as compared to the year endedDecember 31, 2019 . Information related to revenue from each of our product categories is detailed further below (in thousands): Increase Year Ended December 31, (Decrease) 2020 2019 $ %U.S. revenues by product type: Fixation$ 81,735 58 %$ 67,175 62 %$ 14,560 22 % Interbody 42,381 30 % 31,940 30 % 10,441 33 % Biologics 7,270 5 % 5,624 5 % 1,646 29 % Access Systems 2,313 2 % 1,218 1 % 1,095 90 % Information 7,380 5 % 2,285 2 % 5,095 223 % Total U.S. revenues$ 141,079 100 %$ 108,242 100 %$ 32,837 30 %
In addition to increases in revenue contributions related to our product portfolio, contributions from our strategic distribution channel also increased during the year ended.
46 -------------------------------------------------------------------------------- partnerships with new surgeons and distributor partners, driving growth in our sales network and distribution channel, and geographic footprint. During the year endedDecember 31, 2020 , the number of surgeon partners utilizing our products increased by over 10%, and our strategic distribution partnerships increased by over 27%, as compared to the year endedDecember 31, 2019 . As a result, contributions toU.S. revenue from our strategic distribution channel increased to 92% during the year endedDecember 31, 2020 compared to 88% for the year endedDecember 31, 2019 . Information related to revenue contributions from both our strategic and legacy distribution partnerships is detailed further below (in thousands): Increase Year Ended December 31, (Decrease) 2020 2019 $ % U.S. revenue by distributor type: Strategic$ 129,917 92 %$ 95,051 88 %$ 34,866 37 % Legacy and terminated 11,162 8 % 13,191
12 % (2,029 ) (15.4 )% Total U.S. revenue$ 141,079 100 %$ 108,242 100 %$ 32,837 30 % Revenue from international supply agreement for the year endedDecember 31, 2020 , which is attributed to sales to Globus under which we supply to Globus certain of its implants and instruments at agreed-upon prices for a minimum term of three years, decreased by$1.4 million compared to the year endedDecember 31, 2019 . As part of the supply agreement, Globus had the option to extend the term for up to two additional twelve-month periods subject to Globus meeting specified purchase requirements. During the second quarter of 2020, Globus notified us that it would exercise the option to extend the agreement for the second additional twelve-month period throughAugust 2021 , at which time we expect that the supply agreement will expire and revenue from Globus will discontinue.
Cost of income. Cost of turnover for the year ended
Cost of revenue fromU.S. products for the year endedDecember 31, 2020 increased to$38.8 million compared to$31.0 million for the year endedDecember 31, 2019 , which is consistent with our year-over-year revenue growth. Additionally, our non-cash excess and obsolescence expense, which is primarily related to the phase out of older legacy products decreased to$7.0 million for the year endedDecember 31, 2020 from$8.6 million for the year endedDecember 31, 2019 , a decrease of$1.6 million , or 19%. Cost of revenue from the international supply agreement for the year endedDecember 31, 2020 decreased to$3.5 million compared to$4.8 million for the year endedDecember 31, 2019 . The decrease is primarily due to a reduction in sales volume and related costs under the supply agreement with Globus.
Gross profit. Gross profit was
Gross profit margin fromU.S. product revenue increased by approximately 2% for the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 . The change in gross profit margin fromU.S. product revenue was primarily attributed to the reduction in non-cash excess and obsolescence expense, partially offset by an increase in amortization expense related to our SafeOp Neural InformatiX system and product mix.
There was no change in the gross profit margin of the international sourcing agreement for the year ended.
Research and development expenses. Research and development expenses increased by$4.9 million , or 35%, primarily related to the hiring of new personnel and new project costs, partially offset by decreases in other various research and development initiatives. We expect research and development expenses to increase in future periods as we continue to hire additional engineering and development talent and invest in our product pipeline. 47 -------------------------------------------------------------------------------- Sales, general and administrative expenses. Sales, general and administrative expenses increased$27.4 million , or 27% during the year endedDecember 31, 2020 as compared to the year endedDecember 31, 2019 . The increase was primarily related to commissions, sales compensation, stock-based compensation, and variable selling expenses associated with the increase inU.S. product revenue, and in addition to our continued investment in building our strategic distribution channel. Additionally, we have increased our investment in our sales and marketing functions by increasing headcount to support the growth of our business. We expect our sales, general and administrative expenses to continue to increase as we continue to invest in our business infrastructure to fuel our organic growth, in addition to increases in our variable selling expenses related to our projected increase inU.S. product revenue. As we continue to make investments in our business infrastructure and achieve our projected future revenue growth, we expect to attain greater operational efficiencies and in turn, increased operating leverage on the fixed costs associated with our sales, general and administrative expenses, which are currently 92% ofU.S. product revenue.
Litigation costs. Litigation expenses increased by a negligible amount and were primarily related to our pending litigation with NuVasive, Inc. and fluctuations in the timing of related legal activities.
Amortization of acquired intangible assets. Amortization of acquired intangible assets was
Transaction-related expenses. Transaction-related expenses of$4.2 million are costs incurred throughout the year related to the prior tender offer agreement entered into with EOS onFebruary 28, 2020 , which was subsequently terminated by the Company in response to the then-expected market effects of the COVID-19 pandemic onApril 24, 2020 , as well as costs incurred related to the renewed tender offer agreement entered into with EOS onDecember 16, 2020 . These expenses primarily include third-party advisory and legal fees. Total interest and other expense, net. Total interest and other expense, net increased$10.1 million , or 103%, primarily due to interest expense on new debt arrangements, additional draws on existing agreements, a loss on debt extinguishment related to the payoff of the MidCap facility in the second quarter of 2020, and amounts associated with the partial extinguishment of our term loan with Squadron Medical in the fourth quarter of 2020. Income tax provision. Income tax provision from continuing operations increased$0.4 million , or 161%, primarily related to a release of the 2018 income tax benefit recognized as part of the acquisition of SafeOp.
Liquidity and capital resources
Our principal sources of liquidity are our existing cash and additional borrowings available under our Term Loan. Our liquidity and capital structure are evaluated regularly within the context of our annual operating and strategic planning process. We consider the liquidity necessary to fund our operations, which include working capital needs, investments in research and development, investments in inventory and instrument sets to support our customers, as well as other operating costs. Our future capital requirements will depend on many factors including our rate of revenue growth, the timing and extent of spending to support development efforts, the expansion of sales, marketing and administrative activities, and the timing of introductions of new products and enhancements to existing products. As current borrowing sources become due, we may be required to access the capital markets for additional funding. If we are required to access the debt market, we should be able to secure reasonable borrowing rates. Cash was$107.8 million and$47.1 million atDecember 31, 2020 andDecember 31, 2019 , respectively, and available borrowings under our Term Loan were$40.0 million and$20.0 million atDecember 31, 2020 andDecember 31, 2019 , respectively. The increase in cash during the year endedDecember 31, 2020 of$60.7 million was primarily due to the public offering that closed inOctober 2020 , which raised$107.7 million in net proceeds. The$20.0 million increase in available borrowings under the Term Loan during the year endedDecember 31, 2020 is mainly due to the debt amendment we entered into inDecember 2020 ; whereby, we exchanged$30.0 million of outstanding principal for our common stock and expanded the Term Loan by$15.0 million . We believe that our cash on hand, and the amount available to us under our Term Loan will be sufficient to fund our operations for at 48
-------------------------------------------------------------------------------- least the next twelve months subsequent to the date the consolidated financial statements are issued. We believe that our existing funds, cash generated from our operations and our existing sources of and access to financing are adequate to satisfy our needs for working capital, capital expenditure and debt service requirements, and other business initiatives we plan to strategically pursue.
Squadron medical credit agreement, paycheck protection loan and other debts and commitments
We have an$85.0 million Term Loan with Squadron Medical which matures onJune 30, 2026 . The Term Loan bears interest at London Interbank Offered Rate ("LIBOR") plus 8.0% per annum (subject to a 9.0% floor and 12.0% ceiling). Interest-only payments are due monthly untilDecember 2023 and joined by$1.0 million monthly principal payments beginningDecember 2023 . Any remaining principal amounts of the Term Loan will be due onJune 30, 2026 . In addition to paying interest on outstanding principal on the Term Loan, we will pay a commitment fee at a rate of 1.0% per annum to Squadron Medical in respect of the unutilized Term Loan. As collateral for the Term Loan, Squadron Medical has a first lien security interest in substantially all of our assets, except for accounts receivable. Our obligation outstanding under the Term Loan as ofDecember 31, 2020 was$45.0 million . OnApril 23, 2020 , we received the proceeds from a loan in the amount of approximately$4.3 million (the "PPP Loan") fromSilicon Valley Bank , as lender, pursuant to the Paycheck Protection Program ("PPP") of the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"). The PPP Loan matures onApril 21, 2022 and bears interest at a rate of 1.0% per annum. CommencingAugust 21, 2021 , we are required to pay the lender equal monthly payments of principal and interest as required to fully amortize byApril 21, 2022 the principal amount outstanding on the PPP Loan as of the date prescribed by guidance issued by theU.S. Small Business Administration ("SBA"). The PPP Loan is evidenced by a promissory note datedApril 21, 2020 , which contains customary events of default relating to, among other things, payment defaults and breaches of representations and warranties. We may prepay the PPP Loan at any time prior to maturity with no prepayment penalties. All or a portion of the PPP Loan may be forgiven by the SBA upon application. We submitted our application for forgiveness of the loan inNovember 2020 . Under the CARES Act, loan forgiveness is available for the sum of documented payroll costs, covered rent payments, covered mortgage interest and covered utilities during the twenty-four-week period, beginning on the date of loan approval. For purposes of the CARES Act, payroll costs exclude compensation of an individual employee in excess of$100,000 , prorated annually. Not more than 25% of the forgiven amount may be for non-payroll costs. Forgiveness is reduced if full-time headcount declines, or if salaries and wages for employees with salaries of$100,000 or less annually are reduced by more than 25%. In the event the PPP Loan, or any portion thereof, is forgiven pursuant to the PPP, the amount forgiven is applied to outstanding principal. We used all of the proceeds from the PPP Loan to retain employees and maintain payroll. Although we have applied for loan forgiveness as afforded by the PPP, we cannot provide assurance that such loan forgiveness will be granted in whole or in part. We entered into an Inventory Financing Agreement whereby we may draw up to$6.0 million for the purchase of inventory to accrue interest at a rate of LIBOR plus 8.0% per annum, subject a 10.0% floor and 13.0% ceiling. All principal will become due and payable upon maturity onNovember 6, 2023 and all interest will be paid monthly. Should we elect to prepay the Squadron Medical Term Loan, all amounts due under the Inventory Financing Agreement will become mandatorily due. Our obligation outstanding under the Inventory Financing Agreement as ofDecember 31, 2020 was$3.8 million .
From
We entered into a distribution agreement with a third-party provider inJanuary 2020 in which we are obligated to certain minimum purchase requirements related to inventory and equipment leases. As ofDecember 31, 2020 , the minimum purchase commitment required by us under the agreement was$3.2 million to be paid over a three-year period. Our various debt agreements include several event of default provisions, such as payment default, insolvency conditions and a material adverse effect clause, which could cause interest to be charged at a rate which is up to five 49 -------------------------------------------------------------------------------- percentage points above the rate effective immediately before the event of default or result in our lenders' rights to declare all outstanding obligations immediately due and payable We were in compliance with the covenants under the credit agreements atDecember 31, 2020 .
Operating activities
We used net cash of$46.4 million from operating activities for the year endedDecember 31, 2020 . During this period, net cash used in operating activities consisted of our net loss adjusted for$48.5 million of non-cash adjustments including amortization, depreciation, stock-based compensation, provision for excess and obsolete inventory, interest expense related to amortization of debt discount and issuance costs, debt extinguishment charges, loss on disposal of instruments, and$16.0 million use of cash related to working capital and other assets. Investing Activities
We used species of
Fundraising activities
Financing activities provided net cash of$130.8 million for the year endedDecember 31, 2020 , primarily related to$107.7 million of proceeds from the 2020 Offering,$3.3 million from the exercise of stock options or warrants,$42.4 million in borrowings under lines of credit, and$34.0 million in proceeds from the issuance of term debt, partially offset by$56.6 million in repayments under existing lines of credit.
Contractual obligations and commercial commitments
Total contractual obligations and commercial commitments at
are summarized in the following table (in thousands):
Payment
Payable per year
Total 2021 2022 2023 2024 2025 Thereafter Paycheck Protection Program$ 4,271 $ 2,344 $ 1,927 $ - $ - $ - $ - Inventory financing 3,821 - - 3,821 - - - Squadron Medical Term Loan 45,000 - - 1,000 12,000 12,000 20,000 Interest expense 20,782 5,091 4,499 4,463 3,522 2,416 791 Note payable for software agreements, insurance premiums and PP&E 1,887 1,823 23 24 17 - - Capital lease obligations 74 37 37 - - - - Facility lease obligations (1) 30,943 1,552 2,977 3,025 3,116 3,209 17,064 Other purchase commitments and operating lease obligations 3,392 3,392 - - - - - Litigation settlement obligations, gross (2) 12,833 4,000 4,400 4,400 33 - - Guaranteed minimum royalty obligations & milestones (3) 6,574 918 918 948 918 2,329 543 License agreement milestones (4) 1,240 40 440 240 240 40 240 Total$ 130,817 $ 19,197 $ 15,221 $ 17,921 $ 19,846 $ 19,994 $ 38,638
(1) Includes our new lease for the head office building which began in February
2021.
(2) Represents gross payments due to
and Release Agreement, dated as ofAugust 13, 2014 , by and among the Company and its direct subsidiaries, includingAlphatec Spine, Inc. ,
Alphatec Holdings International CV, Scient’x SAS and Surgiview
SAS;
Berkowitz III; and
2014, the Company and HealthpointCapital entered into an agreement to
joint payment of the settlement by which HealthpointCapital is obligated to
To pay
the fourth quarter of 2020 and continuing through 2021. See Note 11 of
our Notes to Consolidated Financial Statements included this Annual
Report on Form 10-K for further information.
(3) Commitments representing cash and equity related royalty payments and are
subject to attaining certain sales and equity milestones.
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(4) Commitments representing cash payments subject to performance
certain sales milestones which we believe are reasonably likely to be
achieved.
Real Property Leases
In January 2016 , we entered into a lease agreement, or the Building Lease , for
office, engineering, and research and development space in Carlsbad, California
with the lease term through July 31, 2021 . Under the Building Lease our monthly
rent payable is approximately $105,000 per month during the first year and
increases by approximately $3,000 each year thereafter.
On December 4, 2019 , we entered into a new lease agreement, or New Building
Lease, for a new headquarters location which consists of 121,541 square feet of
office, engineering, and research and development space in Carlsbad,
California . The term of the New Building Lease commenced on February 1, 2021 and
is expected to terminate January 31, 2031 , subject to two sixty-month options to
renew. Base rent under the New Building Lease for the first twelve months of the
term will be $195,000 per month subject to full abatement during months two
through ten. Base rent for the second year of the term will be $244,115 per
month and thereafter will increase annually by 3.0%. At the beginning of each
exercised option period, base rent will be adjusted to the market rental value,
and thereafter will increase annually by 3.0% through the end of such option
period.
Off-balance sheet provisions
From
Critical accounting conventions and estimates
Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in theU.S. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. On an on-going basis, we evaluate our estimates and assumptions, including those related to revenue recognition, allowances for accounts receivable, inventories and intangible assets, stock-based compensation and income taxes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumption conditions.
We believe that the following accounting policies are essential to the judgments and estimates used in the preparation of our consolidated financial statements.
Revenue recognition
The Company recognizes revenue from products sales in accordance withFinancial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 606, Revenue from Contracts with Customers ("Topic 606"). This standard applies to all contracts with customers, except for contracts that are within the scope of other standards, such as leases, insurance, collaboration arrangements and financial instruments. Under Topic 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of Topic 606, the entity performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer. At contract inception, once the contract is determined to be within the scope of Topic 606, the Company assesses the goods or services promised within each contract and determines those that are performance obligations and assesses whether each promised good or service is distinct. The Company then recognizes as revenue the amount of the transaction price that is allocated to the respective performance obligation when (or as) the performance obligation is satisfied. 51
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Surplus and obsolete inventory
Our inventories are stated at the lower of cost or net realizable value, with cost primarily determined under the first-in, first-out method. A majority of our inventory is comprised of finished goods and we primarily utilize third-party suppliers to produce our products. We evaluate the carrying value of our inventory in relation to the estimated forecast of product demand, which also takes into consideration estimated product lifecycles. Our estimates and assumptions for excess and obsolete inventory are reviewed and updated on a quarterly basis. Increases in the reserve for excess and obsolete inventory results in a corresponding charge to cost of goods sold. Historically our reserves have been adequate to cover losses. The need to maintain substantial levels of inventory impacts the risk of inventory obsolescence. We maintain a number of different products in our inventory portfolio. In addition, we continue to introduce new products and product innovations which we believe will increase our revenue, enhance spine surgery, and compel surgeons to adopt our products. Though we believe this strategy provides us with a competitive advantage, it also increases the risk that our products will become excess or obsolete inventory prior to sale or prior to the end of their anticipated useful lives. As a result, the introduction of new or next-generation products may require us to take charges for excess and obsolete inventory which may have impact the value of our current inventory as well as our operating results.
Leases
EffectiveJanuary 1, 2019 , we adopted ASC No. 201602, Leases ("Topic 842") ("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. We determined the initial classification and measurement of our ROU, assets and lease liabilities at the lease commencement date, or the adoption date, if later, and thereafter if modified. We recognized a right-of-use asset for our operating leases with lease terms greater than 12 months. The lease term includes any renewal options and termination options that we are 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 we would pay to borrow on a collateralized basis an amount equal to the lease payments in a similar economic environment. We applied the new guidance to our existing facility lease at the time of adoption and recognized a right-of-use asset of$2.4 million and operating lease liability of$2.9 million , during the first period of adoption, and recorded a reversal of the previous deferred rent balance under the previous lease guidance of approximately$0.6 million . We entered into another facility lease for smaller office space during the third quarter of 2019 and also applied this guidance to create an additional ROU asset and operating lease liability. The two leases are presented together on the Company's consolidated balance sheet. 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 and comprehensive loss.
Valuation of intangible assets
We assess the impairment of our intangible assets annually in December or
whenever business conditions change and an earlier impairment indicator arises.
This assessment requires us to make assumptions and judgments regarding the
carrying value of these assets. These assets are considered to be impaired if we
determine that their carrying value may not be recoverable based upon our
assessment of certain events or changes in circumstances, including the
following:
• a determination that the carrying value of such assets cannot be
recovered through undiscounted cash flows;
• loss of legal ownership or title to the assets;
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• significant changes in our strategic business objectives and our use
of the assets; or • the impact of significant negative industry or economic trends. If the assets are considered to be impaired, the impairment we recognize is the amount by which the carrying value of the assets exceeds the fair value of the assets. Significant management judgment is required in estimating the fair value of our intangible assets.
Common share purchase warrants
Warrants are accounted for in accordance with the applicable accounting guidance provided in ASC 815 - Derivatives and Hedging as either derivative liabilities or as equity instruments depending on the specific terms of the agreements. Liability-classified instruments are recorded at fair value at each reporting period with any change in fair value recognized as a component of change in fair value of derivative liabilities in the consolidated statements of operations. We estimate liability classified instruments using the Black Scholes model, which requires management to develop assumptions and inputs that have significant impact on such valuations. During each reporting period, we evaluate changes in facts and circumstances that could impact the classification of warrants from liability to equity, or vice versa. Stock-Based Compensation We account for stock-based compensation under provisions which require that share-based payment transactions with employees be recognized in the financial statements based on their fair value and recognized as compensation expense over the vesting period. The amount of expense recognized during the period is affected by subjective assumptions, including estimates of our future volatility, the expected term for our stock options, the number of options expected to ultimately vest, and the timing of vesting for our share-based awards. We use a Black-Scholes option-pricing model to estimate the fair value of our stock option awards. The calculation of the fair value of the awards using the Black-Scholes option-pricing model is affected by our stock price on the date of grant as well as assumptions regarding the following:
• Estimated volatility is a measure of the amount by which the price of our shares
is expected to fluctuate each year during the expected life of the
award. Our estimated volatility through December 31, 2020 was based on
our actual historical volatility. An increase in the estimated
volatility would lead to an increase in our stock-based compensation
costs.
• The planned duration represents the period during which the grants awarded are
expected to be outstanding. Our estimated expected term through
December 31, 2020 was calculated using a weighted-average term based on
historical exercise patterns and the term from option grant date to
exercise for the options granted within the specified date range. An
increase in the expected term would result in an increase to our
stock-based compensation expense.
• The risk-free interest rate is based on the yield curve of a zero coupon
maturity equal to the expected duration of the grant of stock options. a
increase in the risk-free interest rate would result in an increase of
our stock-based compensation expense.
• The deemed dividend yield is based on our expectation not to pay
dividends for the foreseeable future.
We use historical data to estimate the number of future stock option forfeitures. Share-based compensation recorded in our consolidated statements of operations is based on awards expected to ultimately vest and has been reduced for estimated forfeitures. Our estimated forfeiture rates may differ from our actual forfeitures which would affect the amount of expense recognized during the period.
We account for stock option grants to non-employees under provisions that require the fair value of these instruments to be recognized as an expense over the period in which the related services are rendered.
53 -------------------------------------------------------------------------------- Stock-based compensation expense of awards with performance conditions is recognized over the period from the date the performance condition is determined to be probable of occurring through the time the applicable condition is met. Determining the likelihood and timing of achieving performance conditions is a subjective judgment made by management which may affect the amount and timing of expense related to these share-based awards. Share-based compensation is adjusted to reflect the value of options which ultimately vest as such amounts become known in future periods. As a result of these subjective and forward-looking estimates, the actual value of our share-based awards could differ significantly from those amounts recorded in our financial statements. Stock-based awards with market conditions are valued using theMonte Carlo valuation technique which requires management to make significant estimates and assumptions that are not observable from the market. Stock based compensation for awards with both service and market conditions are recognized on a straight-line basis over the longer of the derived service period or the requisite service period. Income Taxes We account for income taxes in accordance with provisions which set forth an asset and liability approach that requires the recognition of deferred tax assets and deferred tax liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Valuation allowances are established when necessary to reduce deferred tax assets to the amount that is more likely than not expected to be realized. In making such a determination, a review of all available positive and negative evidence must be considered, including scheduled reversal of deferred tax liabilities, projected future taxable income, tax planning strategies, and recent financial performance.
We recognize interest and penalties related to uncertain tax positions as a component of the provision for income taxes.
Recent accounting positions
See “Notes to Financial Statements – Note 2 – Recent Accounting Position Papers” included elsewhere in this annual report on Form 10-K.
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