Alphatec (US:ATEC)2019-03-29 20:54Revenue Performance - Total revenues for the year ended December 31, 2018 were $91.7 million, a decrease of $10.0 million, or 9.8%, compared to $101.7 million for the year ended December 31, 2017[243] - Revenue from U.S. products was $83.7 million for the year ended December 31, 2018, down $3.2 million, or 3.7%, from $86.9 million in 2017, primarily due to exiting the stocking distributor model[244] - Revenue from the strategic distribution channel increased to $67.1 million, representing 80% of U.S. revenues, up from 59% in 2017, while legacy and terminated distribution revenue decreased by 53%[245] - Revenue from the international supply agreement was $8.0 million for 2018, a decrease of $6.8 million from $14.8 million in 2017, with expectations of continued decline[244] Cost and Profitability - Total cost of revenues decreased to $28.5 million for the year ended December 31, 2018, down $5.0 million, or 14.9%, from $33.5 million in 2017[246] - Gross profit for the year ended December 31, 2018 was $63.2 million, a decrease of $5.0 million, or 7.3%, compared to $68.2 million in 2017[250] - Gross profit margin from U.S. product revenue was 75.0% for 2018, down from 76.6% in 2017, attributed to increased excess and obsolescence expenses[250] Expenses - Research and development expenses increased to $10.0 million for the year ended December 31, 2018, compared to $4.9 million in 2017, reflecting increased investment in product development[240] - Research and development expenses increased by $5.1 million, or 104.1%, for the year ended December 31, 2018, primarily due to the integration of SafeOp technology and product development costs for Kodiak and IdentiTi systems[252] - Sales, general and administrative expenses rose by $2.5 million, or 3.6%, for the year ended December 31, 2018, mainly due to costs associated with the SafeOp acquisition and marketing efforts for new products[253] - Litigation-related expenses amounted to $5.7 million for the year ended December 31, 2018, significantly higher than $0.3 million in 2017, with expectations for a decrease in future periods[254] Financial Losses - Operating loss for the year ended December 31, 2018 was $(22.4) million, compared to $(9.0) million in 2017, indicating a significant increase in operational challenges[240] - Net loss attributable to common shareholders was $(42.5) million for the year ended December 31, 2018, compared to $(2.3) million in 2017, highlighting a substantial decline in financial performance[240] Cash Flow and Liquidity - Operating activities used net cash of $25.6 million for the year ended December 31, 2018, with significant adjustments for non-cash items and working capital[280] - Cash used in investing activities totaled $21.7 million for the year ended December 31, 2018, primarily for the acquisition of SafeOp and purchases of surgical instruments and equipment[282] - As of December 31, 2018, the company had cash of $29.1 million and accounts receivable of $15.1 million, indicating a solid liquidity position[265] - Financing activities generated net cash of $53.9 million for the year ended December 31, 2018, primarily from a private placement and warrant exercises totaling $51.9 million[283] Debt and Obligations - The company closed a $35.0 million Term Loan with Squadron on November 6, 2018, with net proceeds used to retire existing debt and for general corporate purposes[268] - Total contractual obligations and commercial commitments amounted to $107.8 million as of December 31, 2018, with significant obligations including $35 million for the Squadron Term Loan and $23.5 million in interest expenses[284] - The company has incurred $36.2 million in Orthotec settlement payments, with an outstanding balance of $21.6 million remaining[279] Internal Controls and Reporting - A material weakness in internal control over financial reporting was identified as of December 31, 2018, which was remediated in the first quarter of 2019[310] - The company’s management is responsible for establishing adequate internal control over financial reporting to ensure reliability in financial statements[311] - Management assessed the effectiveness of internal control over financial reporting as of December 31, 2018, identifying deficiencies related to significant non-routine transactions[313] - An error was identified in previously issued financial statements for the quarters ended June 30, 2018, and September 30, 2018, related to the accounting for a beneficial conversion feature of Series B Convertible Preferred Stock[314] - A material weakness was concluded due to a lack of sufficient oversight and review for the application of U.S. GAAP in complex equity transactions[314] - Remediation actions included hiring additional personnel for increased oversight and redesigning internal controls for timely quarterly reviews[315] - There have been no changes to internal control over financial reporting during the most recent fiscal quarter that materially affected its effectiveness[316] Accounting Policies - The company recognized revenue in accordance with ASC Topic 606, which did not materially impact its consolidated financial statements[290] - The company assesses impairment of intangible assets annually, with significant management judgment required in estimating fair value[291] - Stock-based compensation is recognized based on fair value and is affected by estimates of future volatility and expected term of stock options[295] - The company’s outstanding floating rate indebtedness totaled $46 million, with a potential pre-tax income decrease of approximately $0.5 million for a 100 basis point increase in interest rates[305]