Alphatec (ATEC) - 2020 Q2 - Quarterly Report

PART I – FINANCIAL INFORMATION This section presents Alphatec Holdings, Inc.'s unaudited condensed consolidated financial statements and comprehensive notes for the specified periods Item 1. Financial Statements This section presents Alphatec Holdings, Inc.'s unaudited condensed consolidated financial statements and related notes for the periods ended June 30, 2020, and December 31, 2019 Condensed Consolidated Balance Sheets This section presents the company's financial position, detailing assets, liabilities, and stockholders' equity at specific dates Condensed Consolidated Balance Sheets (In thousands): | Metric | June 30, 2020 (Unaudited) | December 31, 2019 | | :----------------------------------- | :------------------------ | :------------------ | | Assets | | | | Total current assets | $95,964 | $108,318 | | Total assets | $161,135 | $169,948 | | Liabilities and Stockholders' Equity | | | | Total current liabilities | $42,795 | $36,390 | | Long-term debt, less current portion | $66,073 | $53,448 | | Total stockholders' equity | $18,822 | $43,631 | | Total liabilities and stockholders' equity | $161,135 | $169,948 | - Total current assets decreased by $12.354 million (11.4%) from December 31, 2019, to June 30, 2020, primarily due to a decrease in cash and prepaid expenses[6] - Total stockholders' equity decreased by $24.809 million (56.8%) from December 31, 2019, to June 30, 2020, largely due to accumulated deficit[6] Condensed Consolidated Statements of Operations This section details the company's financial performance, including revenue, gross profit, operating loss, and net loss over specific periods Condensed Consolidated Statements of Operations (In thousands, except per share amounts): | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :----------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Total revenue | $29,629 | $27,319 | $59,744 | $51,874 | | Gross profit | $20,842 | $18,886 | $41,873 | $35,454 | | Operating loss | $(11,158) | $(10,414) | $(28,966) | $(21,180) | | Net loss | $(15,805) | $(12,436) | $(36,527) | $(25,404) | | Net loss per share, basic and diluted | $(0.25) | $(0.27) | $(0.58) | $(0.55) | - Total revenue increased by 8.4% for the three months ended June 30, 2020, and by 15.0% for the six months ended June 30, 2020, compared to the respective prior-year periods[9] - Net loss increased significantly, from $(12.436) million to $(15.805) million for the three-month period, and from $(25.404) million to $(36.527) million for the six-month period, primarily due to higher operating expenses and other expenses, including a loss on debt extinguishment[9] Condensed Consolidated Statements of Comprehensive Loss This section presents the company's comprehensive loss, reflecting net loss and other comprehensive income or loss components Condensed Consolidated Statements of Comprehensive Loss (In thousands): | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :----------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net loss | $(15,805) | $(12,436) | $(36,527) | $(25,404) | | Foreign currency translation adjustments related to continuing operations | $6 | $18 | $75 | $93 | | Comprehensive loss | $(15,799) | $(12,418) | $(36,452) | $(25,311) | - Comprehensive loss increased for both the three-month and six-month periods ended June 30, 2020, reflecting the higher net loss[10] Condensed Consolidated Statements of Stockholders' Equity This section details changes in the company's stockholders' equity, including net loss, stock-based compensation, and common stock issuances - Total stockholders' equity decreased from $43.631 million at January 1, 2020, to $18.822 million at June 30, 2020, primarily due to a net loss of $(36.527) million and a cumulative effect of change in accounting principle of $(81) thousand, partially offset by stock-based compensation and common stock issuances[13][15] - Additional paid-in capital increased by $11.724 million during the six months ended June 30, 2020, driven by stock-based compensation, warrant exercises, and issuance of common stock warrants[13][14][15] Condensed Consolidated Statements of Cash Flows This section outlines the company's cash inflows and outflows from operating, investing, and financing activities over specific periods Condensed Consolidated Statements of Cash Flows (In thousands): | Metric | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :----------------------------------- | :----------------------------- | :----------------------------- | | Net cash used in operating activities | $(30,145) | $(14,642) | | Net cash used in investing activities | $(6,978) | $(3,717) | | Net cash provided by financing activities | $21,098 | $7,776 | | Net decrease in cash | $(15,950) | $(10,484) | | Cash at end of period | $31,163 | $18,570 | - Net cash used in operating activities more than doubled, from $(14.642) million in 2019 to $(30.145) million in 2020, primarily due to increased net loss and changes in working capital[17] - Net cash provided by financing activities significantly increased to $21.098 million in 2020 from $7.776 million in 2019, driven by new debt arrangements and warrant exercises[17] Notes to Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures supporting the condensed consolidated financial statements 1. The Company and Basis of Presentation This section describes Alphatec Holdings, Inc.'s business, operational structure, and the basis for financial statement presentation - Alphatec Holdings, Inc. designs, develops, and markets technology for spinal disorders through its subsidiaries, Alphatec Spine, Inc. and SafeOp Surgical, Inc., primarily in the U.S. market[19] - The company's International Business was divested in 2016 and is reported as discontinued operations, with ongoing supply agreement revenue reported under continuing operations[21][49] - The company's working capital at June 30, 2020, was $53.2 million, including $31.2 million in cash, which, along with an additional $25 million available under its credit facility, is expected to fund operations for at least one year[24] - The COVID-19 pandemic poses significant risks to the company's future results and liquidity, including potential delays in payments, supply chain disruptions, and uncertain demand, particularly if surgical volumes continue to be impacted[25][27] 2. Summary of Significant Accounting Policies This section outlines the key accounting principles and methods used in preparing the company's financial statements - The company expensed costs related to the terminated tender offer for EOS Imaging, primarily third-party advisory, legal, and financing commitment fees, as transaction-related expenses[30] - The company adopted new accounting guidance effective January 1, 2020, for share-based payment awards to customers (ASU 2019-08) and goodwill impairment (ASU 2017-04), and cloud computing implementation costs (ASU 2018-15)[36][37][38] Reconciliation of Level 3 Liabilities (In thousands): | Period | Level 3 Liabilities | | :----------------------- | :------------------ | | Balance at January 1, 2020 | $266 | | Balance at March 31, 2020 | $135 | | Balance at June 30, 2020 | $276 | 3. Select Condensed Consolidated Balance Sheet Details This section provides detailed breakdowns of specific balance sheet accounts, including receivables, inventories, and property Accounts Receivable, net (In thousands): | Metric | June 30, 2020 | December 31, 2019 | | :-------------------------- | :------------ | :---------------- | | Accounts receivable | $20,080 | $16,436 | | Allowance for doubtful accounts | $(295) | $(286) | | Accounts receivable, net | $19,785 | $16,150 | Inventories, net (In thousands): | Metric | June 30, 2020 | December 31, 2019 | | :----------------------------------- | :------------ | :---------------- | | Raw materials | $5,424 | $5,822 | | Work-in-process | $1,403 | $1,578 | | Finished goods | $61,472 | $51,669 | | Less reserve for excess and obsolete finished goods | $(26,833) | $(24,215) | | Inventories, net | $41,466 | $34,854 | Property and Equipment, net (In thousands): | Metric | June 30, 2020 | December 31, 2019 | | :----------------------------------- | :------------ | :---------------- | | Total gross property and equipment | $77,632 | $71,688 | | Less accumulated depreciation and amortization | $(52,961) | $(51,966) | | Property and equipment, net | $24,671 | $19,722 | Intangible Assets, net (In thousands): | Metric | June 30, 2020 | December 31, 2019 | | :----------------------------------- | :------------ | :---------------- | | Total gross intangible assets | $54,593 | $54,593 | | Less accumulated amortization | $(29,869) | $(28,988) | | Intangible assets, net | $24,724 | $25,605 | Accrued Expenses (In thousands): | Metric | June 30, 2020 | December 31, 2019 | | :----------------------------------- | :------------ | :---------------- | | Commissions and sales milestones | $5,383 | $5,299 | | Payroll and payroll related | $5,671 | $7,949 | | Litigation settlement obligation - short-term portion | $4,400 | $4,400 | | Professional fees | $1,865 | $3,945 | | Royalties | $2,408 | $1,981 | | Interest | $602 | $155 | | Other | $4,308 | $2,687 | | Total accrued expenses | $24,637 | $26,416 | Other Long-Term Liabilities (In thousands): | Metric | June 30, 2020 | December 31, 2019 | | :----------------------------------- | :------------ | :---------------- | | Litigation settlement obligation - long-term portion | $9,002 | $10,712 | | Line of credit exit fee | — | $600 | | Tax liabilities | $373 | $373 | | Other | $276 | $266 | | Other long-term liabilities | $9,651 | $11,951 | 4. Discontinued Operations This section details the financial impact and status of the company's divested International Business - The International Business, sold in 2016, is reported as discontinued operations. Revenue from the ongoing supply agreement with Globus Medical Ireland, Ltd. is reported under continuing operations[21][49] Revenue from International Supply Agreement (In thousands): | Period | 2020 | 2019 | | :------------------------------- | :--- | :--- | | Three Months Ended June 30 | $795 | $1,226 | | Six Months Ended June 30 | $1,840 | $2,826 | - Globus exercised its option to extend the supply agreement for a second additional twelve-month period through August 2021, but revenue from this agreement is expected to continue decreasing as Globus registers its own products[49][135] 5. Debt This section provides details on the company's debt arrangements, including repayments, new loans, and future payment obligations - The company fully repaid its MidCap facility on May 29, 2020, resulting in a loss on debt extinguishment[51] - The Squadron Term Loan was expanded by an additional $35 million in May 2020, removing financial covenant requirements and extending the maturity date to June 2025. Total principal outstanding is $75.0 million with an additional $25 million available[52][155] - The company received a $4.3 million Paycheck Protection Program (PPP) Loan in April 2020, maturing in April 2022 with a 1.0% interest rate. Forgiveness is possible based on qualifying expenditures, but not assured[56][57][59][156][158] Principal Payments Remaining on Debt as of June 30, 2020 (In thousands): | Year Ending December 31, | Amount | | :----------------------- | :----- | | Remainder of 2020 | $370 | | 2021 | $2,104 | | 2022 | $3,166 | | 2023 | $14,976 | | 2024 | $12,000 | | 2025 and thereafter | $50,000 | | Total | $82,616 | 6. Commitments and Contingencies This section outlines the company's contractual obligations, lease agreements, and ongoing legal proceedings - The company entered into a new lease agreement for a headquarters location in Carlsbad, California, commencing November 15, 2020, and terminating November 30, 2030[63][169] Future Minimum Annual Lease Payments as of June 30, 2020 (In thousands): | Year Ending December 31, | Undiscounted Lease Payments | | :----------------------- | :-------------------------- | | Remainder of 2020 | $744 | | 2021 | $918 | | 2022 | $40 | | Total undiscounted lease payments | $1,702 | - The company is involved in ongoing litigation with NuVasive, Inc. regarding patent infringement claims. While the company believes the allegations lack merit and intends to vigorously defend, the outcome is unpredictable, and no accrual for contingent liability has been recorded[70][72][78] - The company has guaranteed minimum royalty obligations of approximately $4.8 million through 2024 and beyond, based on intellectual property agreements[82] 7. Orthotec Settlement This section details the status and remaining obligations related to the Orthotec litigation settlement - As of June 30, 2020, the company has made $42.8 million in installment payments for the Orthotec settlement, with a remaining outstanding balance of $15.0 million (including interest)[84][160] Reconciliation of Total Net Settlement Obligation (In thousands): | Metric | June 30, 2020 | December 31, 2019 | | :----------------------------------- | :------------ | :---------------- | | Litigation settlement obligation - short-term portion | $4,400 | $4,400 | | Litigation settlement obligation - long-term portion | $9,002 | $10,712 | | Total settlement obligation, gross | $15,033 | $17,233 | | Related party receivable - included in stockholders' equity | $(5,000) | $(5,000) | | Total settlement obligation, net | $10,033 | $12,233 | 8. Net Loss Per Share This section presents the computation of basic and diluted net loss per share and details anti-dilutive securities Computation of Basic and Diluted Net Loss Per Share (In thousands, except per share amounts): | Metric | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :----------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Net loss, basic and diluted | $(15,805) | $(12,436) | $(36,527) | $(25,404) | | Weighted average common shares outstanding—basic and diluted | 63,713 | 46,880 | 63,140 | 45,957 | | Net loss per share, basic and diluted | $(0.25) | $(0.27) | $(0.58) | $(0.55) | Anti-Dilutive Securities Not Included in Diluted Net Loss Per Share (In thousands): | Security Type | As of June 30, 2020 | As of June 30, 2019 | | :----------------------------------- | :------------------ | :------------------ | | Options to purchase common stock | 4,167 | 4,670 | | Unvested restricted share awards | 8,345 | 3,761 | | Series A Convertible Preferred Stock | 67 | 164 | | Warrants to purchase common stock | 25,401 | 22,302 | | Total | 37,980 | 30,897 | 9. Stock Benefit Plans and Equity Transactions This section covers changes in stock benefit plans, equity issuances, and stock-based compensation expenses - Shareholders approved an amendment to the 2016 Equity Incentive Award Plan, increasing available shares by 7,000,000. As of June 30, 2020, 4,596,708 shares remained available[90] - A voluntary salary-to-equity conversion program was implemented for certain employees, allowing compensation reduction in exchange for restricted stock units vesting on July 10, 2020[91] Total Stock-Based Compensation (In thousands): | Category | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :----------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Cost of revenues | $128 | $28 | $235 | $56 | | Research and development | $396 | $174 | $687 | $317 | | Sales, general and administrative | $4,051 | $2,149 | $7,221 | $3,590 | | Total | $4,575 | $2,351 | $8,143 | $3,963 | Shares Reserved for Future Issuance as of June 30, 2020 (In thousands): | Category | Shares | | :----------------------------------- | :----- | | Stock options outstanding | 4,167 | | Unvested restricted stock award | 8,345 | | Employee stock purchase plan | 394 | | Series A convertible preferred stock | 67 | | Warrants outstanding | 25,401 | | Authorized for future grant under the Distributor and Development Services plans | 6,949 | | Authorized for future grant under the Management Objective Strategic Incentive Plan | 370 | | Authorized for future grant under the Company equity plans | 5,487 | | Total | 51,180 | Summary of All Outstanding Warrants for Common Stock: | Warrant Type | Number of Warrants | Strike Price | Expiration | | :----------------------------------- | :----------------- | :----------- | :--------- | | 2017 PIPE Warrants | 3,255,554 | $2.02 | June 2022 | | 2018 PIPE Warrants | 11,663,147 | $3.50 | May 2023 | | SafeOp Surgical Merger Warrants | 2,199,682 | $3.50 | May 2023 | | 2018 Squadron Capital Warrants | 845,000 | $3.15 | May 2027 | | 2019 Squadron Capital Warrants | 4,838,710 | $2.17 | May 2027 | | 2020 Squadron Capital Warrants | 1,075,820 | $4.88 | May 2027 | | Executive Warrants | 1,327,434 | $5.00 | December 2022 | | Other | 195,312 | $3.85 | Various through May 2023 | | Total | 25,400,659 | | | 10. Income Taxes This section discusses the company's effective tax rate and unrecognized tax benefits - The company's effective tax rate was 0% for the three and six months ended June 30, 2020, primarily due to its net loss position[108][150] - Unrecognized tax benefits remained at $2.5 million for both June 30, 2020, and December 31, 2019, with no changes during the year-to-date period[107] 11. Related Party Transactions This section details transactions with related parties, including receivables and their classification - A $5 million receivable from HealthpointCapital, LLC, related to the Orthotec settlement, remains classified within stockholders' equity due to its related party nature[110] - An officer receivable of $0.6 million for a tax liability related to restricted common stock vesting is included on the consolidated balance sheet[111] 12. Subsequent Event This section reports on events occurring after the balance sheet date that may affect the financial statements - There were no subsequent events to report as of the date of the financial statements[112] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition, operational results, strategic focus, and the impact of recent developments Overview This section introduces Alphatec Holdings, Inc.'s core business, strategic objectives, and progress in sales channel transition - Alphatec Holdings, Inc. is a medical technology company focused on designing, developing, and advancing technology for spinal disorder treatment, aiming to revolutionize spine surgery through market-shifting innovation[114] - The company markets products in the U.S. via independent distributors and a direct sales force, with a strategic objective to achieve consistent, predictable growth by expanding its dedicated and loyal sales channel[115] - Sales contributed by the strategic distribution channel increased from approximately 88% (Q2 2019) to 91% (Q2 2020) and from 86% (H1 2019) to 90% (H1 2020), reflecting ongoing progress in sales channel transition[116] Recent Developments This section highlights key recent events, including the terminated EOS Imaging acquisition and the impact of the COVID-19 pandemic - The company terminated its Tender Offer Agreement with EOS Imaging S.A. on April 27, 2020, citing a 'Material Adverse Effect' due to the expected ongoing market effects of the COVID-19 pandemic on capital equipment priorities[117] - The debt refinancing commitment letter with Perceptive Credit Holdings III, LP, related to the EOS transaction, was also terminated[118] - The COVID-19 pandemic caused a significant decline in procedure volumes from late March through April 2020, though volumes returned to near pre-pandemic levels in June[119] - The pandemic's impact on capital markets and economies could lead to a recession, adversely affecting hospital spending and demand for products, and has led to the withdrawal of full-year 2020 financial guidance[122][192] Revenue and Expense Components This section describes the primary sources of revenue and the various categories of operating and non-operating expenses - Revenue is primarily derived from the sale of spinal surgery implants, generated by direct sales and independent distributors, with collectability assessed for revenue deferral[123] - Cost of revenue includes direct product costs, royalties, milestones, and amortization of purchased intangibles, with product costs encompassing labor, overhead, raw materials, and human tissue for biologics[123] - Operating expenses include research and development (R&D), sales, general and administrative (SG&A), litigation-related, amortization of acquired intangible assets, transaction-related, and restructuring expenses[124][125][126] - Other expenses, net, comprise interest income/expense, foreign currency gains/losses, and other non-operating items, while income tax benefit primarily relates to the release of valuation allowance from the SafeOp acquisition[127][128] Critical Accounting Policies and Estimates This section outlines the significant accounting policies and estimates that require management judgment in financial reporting - The company's financial statements rely on estimates and assumptions for revenue recognition, allowances for accounts receivable, inventories, intangible assets, stock-based compensation, and income taxes[128] - No material changes to critical accounting policies were made during the three months ended June 30, 2020, other than those disclosed in Note 2 regarding recent accounting pronouncements[129] Results of Operations This section provides a detailed analysis of the company's financial performance, including revenue, gross profit, and various expense categories Total Revenue (In thousands): | Period | 2020 | 2019 | Change ($) | Change (%) | | :------------------------------- | :--- | :--- | :--------- | :--------- | | Three Months Ended June 30 | $29,629 | $27,319 | $2,310 | 8.4% | | Six Months Ended June 30 | $59,744 | $51,874 | $7,870 | 15.2% | U.S. Revenue by Distributor Type (In thousands): | Distributor Type | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Strategic distribution | $26,324 (91%) | $22,854 (88%) | $52,316 (90%) | $42,226 (86%) | | Legacy and terminated distribution | $2,510 (9%) | $3,239 (12%) | $5,588 (10%) | $6,822 (14%) | | Total U.S. revenue | $28,834 (100%) | $26,093 (100%) | $57,904 (100%) | $49,048 (100%) | Gross Profit (In thousands): | Period | 2020 | 2019 | Change ($) | Change (%) | | :------------------------------- | :--- | :--- | :--------- | :--------- | | Three Months Ended June 30 | $20,842 | $18,886 | $1,956 | 10.4% | | Six Months Ended June 30 | $41,873 | $35,454 | $6,419 | 18.1% | Gross Profit Margin by Source: | Source | Three Months Ended June 30, 2020 | Three Months Ended June 30, 2019 | Six Months Ended June 30, 2020 | Six Months Ended June 30, 2019 | | :----------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Revenue from U.S. products | 72.3% | 72.2% | 72.2% | 71.8% | | Revenue from international supply agreement | 1.0% | 3.7% | 4.6% | 7.7% | | Total gross profit margin | 70.3% | 69.1% | 70.1% | 68.3% | - Research and development expense increased by 15.6% for the three months and 12.1% for the six months ended June 30, 2020, driven by personnel and new project costs[143] - Sales, general and administrative expense increased by 9.8% for the three months and 20.1% for the six months ended June 30, 2020, due to higher commissions, strategic distribution channel investment, marketing, headcount, and stock-based compensation[144] - Transaction-related expenses were $(0.2) million for the three months and $4.1 million for the six months ended June 30, 2020, primarily due to costs associated with the terminated EOS tender offer[147] - A loss on debt extinguishment was recorded in Q2 2020 due to the payoff of the MidCap facility[148] - Interest and other expenses, net, increased by $1.1 million and $1.9 million for the three and six months ended June 30, 2020, respectively, due to new debt arrangements and additional draws[149] Liquidity and Capital Resources This section assesses the company's ability to meet its short-term and long-term financial obligations and fund operations - The company's working capital was $53.2 million at June 30, 2020, including $31.2 million in cash, which, along with $25 million available from the Squadron credit facility, is expected to fund operations for at least one year[153] - The company has experienced negative operating cash flows historically and expects this to continue, especially if the COVID-19 pandemic impacts surgical volumes[154] - Net cash used in operating activities was $30.1 million for the six months ended June 30, 2020, primarily due to net loss and working capital changes[163] - Net cash used in investing activities was $7.0 million, mainly for surgical instrument purchases to support new product launches[164] - Net cash provided by financing activities was $21.1 million, driven by proceeds from stock/warrant exercises and new/existing lines of credit, partially offset by debt repayments[164] Off-Balance Sheet Arrangements This section confirms the absence of any off-balance sheet arrangements that could materially impact the company's financial position - The company does not have any off-balance sheet arrangements[165] Contractual obligations and commercial commitments This section details the company's future payment obligations arising from various contractual agreements and commercial commitments Total Contractual Obligations and Commercial Commitments as of June 30, 2020 (In thousands): | Obligation Type | Total | 2020 (remainder) | 2021 | 2022 | 2023 | 2024 | Thereafter | | :----------------------------------- | :---- | :--------------- | :--- | :--- | :--- | :--- | :--------- | | Paycheck Protection Plan Loan | $4,270 | — | $2,104 | $2,166 | — | — | — | | Inventory financing | $2,978 | — | — | — | $2,978 | — | — | | Squadron Term Loan | $75,000 | — | — | $1,000 | $12,000 | $12,000 | $50,000 | | Interest expense | $35,421 | $4,536 | $7,973 | $7,911 | $7,220 | $5,743 | $2,038 | | Facility lease obligations | $31,792 | $848 | $1,552 | $2,977 | $3,025 | $3,116 | $20,274 | | Litigation settlement obligations, gross | $15,033 | $2,200 | $4,000 | $4,400 | $4,400 | $33 | — | | Guaranteed minimum royalty obligations | $4,763 | $335 | $918 | $918 | $918 | $918 | $756 | | Total | $175,637 | $8,815 | $19,369 | $20,934 | $31,191 | $22,060 | $73,268 | Real Property Leases This section describes the company's current and new real property lease agreements, including terms and commencement dates - The company's current building lease in Carlsbad, California, extends through July 31, 2021[168] - A new headquarters lease agreement for 121,541 square feet in Carlsbad, California, is anticipated to commence November 15, 2020, and terminate November 30, 2030, with base rent increasing annually[169] Recent Accounting Pronouncements This section discusses the impact of recently adopted and issued accounting pronouncements on the company's financial reporting - No new material accounting pronouncements or changes were made during the three months ended June 30, 2020, beyond those related to leases and other updates described in Note 2[171] Forward Looking Statements This section cautions readers about forward-looking statements, highlighting inherent risks and uncertainties that may cause actual results to differ - This report contains forward-looking statements regarding anticipated operating losses, future revenue, expenses, capital requirements, liquidity, and the ability to meet financial covenants and regulatory requirements[172] - Forward-looking statements are subject to risks and uncertainties, including those related to the COVID-19 pandemic, intellectual property, litigation, and the ability to achieve profitability, and actual results may vary materially[172][173][175] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section discusses the company's exposure to market risks, specifically interest rate risk and commodity price risk, and their potential impact on financial performance Interest Rate Risk This section analyzes the company's exposure to fluctuations in interest rates, particularly on its variable rate debt - The company is exposed to interest rate risk due to variable rate debt instruments, totaling $79.3 million as of June 30, 2020, primarily under the Squadron Term Loan[177][178] - A 100 basis point increase in the interest rate would decrease pre-tax income and cash flow by approximately $0.8 million annually, assuming constant outstanding floating rate indebtedness[178] Commodity Price Risk This section assesses the company's vulnerability to changes in raw material prices and their impact on operations - The company's purchases of raw materials like titanium and stainless steel expose it to commodity price fluctuations, but these have not materially impacted results of operations due to their small portion of cost of revenue[179] Item 4. Controls and Procedures This section details the evaluation of the company's disclosure controls and procedures, addresses previously reported material weaknesses in internal control over financial reporting, and outlines remediation efforts Evaluation of Disclosure Controls and Procedures This section reports on the effectiveness of the company's disclosure controls and procedures as assessed by management - As of June 30, 2020, the company's Chief Executive Officer and Chief Financial Officer concluded that disclosure controls and procedures were effective at a reasonable level of assurance[180] Previously Reported Material Weaknesses in Internal Control over Financial Reporting This section addresses the identified material weaknesses in internal control over financial reporting and the company's remediation actions - A material weakness related to insufficient review over sales order and inventory transfers was identified at December 31, 2019, posing a risk of material misstatement in financial statements[181][183] - Remediation efforts implemented in Q1 2020 include improving documentation controls and ensuring appropriate training for control owners, though full remediation requires sustained effective operation and testing[183] Changes in Internal Control over Financial Reporting This section reports on any changes in internal control over financial reporting during the period, including COVID-19 impacts - No material changes to internal control over financial reporting occurred during the three months ended June 30, 2020, other than the remediation efforts for the previously reported material weakness[185] - Despite most employees working remotely due to COVID-19, the company has not experienced any material impact on its internal control over financial reporting[185] PART II – OTHER INFORMATION This section provides additional information not covered in the financial statements, including legal proceedings, risk factors, and exhibits Item 1. Legal Proceedings This section outlines the company's involvement in various legal proceedings, emphasizing the inherent unpredictability of litigation and the company's policy for assessing and accruing potential losses - The company is involved in various legal proceedings, including ongoing litigation with NuVasive, Inc., which is inherently unpredictable[187][188] - An estimated loss contingency is accrued if it is probable that a liability has been incurred and the amount can be reasonably estimated; otherwise, no accrual is made[187] Item 1A. Risk Factors This section updates the risk factors, primarily focusing on the significant and adverse impacts of the COVID-19 pandemic on operations, supply chains, demand, and financial markets, and the uncertainties surrounding the forgiveness of the Paycheck Protection Program loan COVID-19 This section details the significant and adverse impacts of the COVID-19 pandemic on the company's operations and financial outlook - The COVID-19 pandemic has adversely impacted operations, supply chains, distribution channels, and expenses, leading to significant and unpredictable reductions in demand due to deferred elective medical procedures[189] - Business disruptions include restrictions on sales, temporary closures of facilities, reduced customer access, and a shift to remote work environments, increasing susceptibility to fraud and system interruptions[190] - The uncertain scope and duration of the pandemic prevent the company from estimating its full impact on operations and financial results, leading to the withdrawal of full-year 2020 financial guidance[192] Our loans under the Paycheck Protection Program may not be forgiven or may subject us to challenges and investigations regarding our qualification for the loan. This section discusses the risks associated with the Paycheck Protection Program loan, including potential non-forgiveness and scrutiny - The company received a $4.3 million PPP Loan, which may be forgiven based on qualifying expenditures, but there is no assurance of full or partial forgiveness due to evolving SBA guidance[193][194] - Uncertainty exists regarding the PPP Loan application process, borrower certifications, and forgiveness requirements, potentially subjecting the company to challenges or investigations[194] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section states that there were no unregistered sales of equity securities or use of proceeds to report - There were no unregistered sales of equity securities or use of proceeds to report for the period[195] Item 5. Other Information This section indicates that there is no other information to report - There is no other information to report for the period[195] Item 6. Exhibits This section lists the exhibits filed with the Quarterly Report on Form 10-Q, including various forms of warrants, agreements, and certifications - The report includes exhibits such as forms of common stock purchase warrants, amendments to warrants, registration rights agreements, credit and guaranty agreements, and certifications[197][198] SIGNATURES This section contains the required signatures for the Quarterly Report on Form 10-Q, confirming its submission by authorized officers - The report is duly signed by Patrick S. Miles, Chairman and Chief Executive Officer, and Jeffrey G. Black, Executive Vice President and Chief Financial Officer, on August 6, 2020[201]