Alphatec (ATEC) - 2021 Q1 - Quarterly Report

PART I – FINANCIAL INFORMATION This section provides the unaudited condensed consolidated financial statements and MD&A for Q1 2021 Financial Statements Unaudited condensed consolidated financial statements for Q1 2021, covering balance sheets, operations, cash flows, and key event notes Condensed Consolidated Balance Sheets Total assets rose to $404.5 million by March 31, 2021, driven by a $191.1 million cash increase from a private placement | Metric | March 31, 2021 (in thousands) | Dec 31, 2020 (in thousands) | | :--- | :--- | :--- | | Assets | | | | Cash | $191,137 | $107,765 | | Inventories, net | $57,376 | $46,001 | | Total Assets | $404,503 | $261,223 | | Liabilities & Equity | | | | Total Current Liabilities | $70,149 | $58,312 | | Long-term debt, less current portion | $38,580 | $38,034 | | Contingently redeemable common stock | $131,838 | $0 | | Total Stockholders' Equity | $108,292 | $129,880 | Condensed Consolidated Statements of Operations Q1 2021 total revenue grew 47% to $44.1 million, gross profit up 51%, but net loss widened to $22.9 million due to higher expenses | Metric | Q1 2021 (in thousands) | Q1 2020 (in thousands) | YoY Change | | :--- | :--- | :--- | :--- | | Revenue from U.S. products | $43,716 | $29,070 | +50.4% | | Total revenue | $44,121 | $30,115 | +46.5% | | Gross profit | $31,858 | $21,031 | +51.5% | | Operating loss | ($19,046) | ($17,808) | +7.0% | | Net loss | ($22,903) | ($20,722) | +10.5% | | Net loss per share | ($0.26) | ($0.33) | N/A | Condensed Consolidated Statements of Cash Flows Q1 2021 cash flows: $18.6 million used in operations, $26.0 million in investing, $130.8 million from financing, resulting in $191.1 million cash balance | Cash Flow Activity | Q1 2021 (in thousands) | Q1 2020 (in thousands) | | :--- | :--- | :--- | | Net cash used in operating activities | ($18,604) | ($17,048) | | Net cash used in investing activities | ($25,994) | ($2,629) | | Net cash provided by (used in) financing activities | $130,776 | ($39) | | Net increase (decrease) in cash | $83,372 | ($19,647) | | Cash at end of period | $191,137 | $27,466 | - Financing activities were dominated by $131.8 million in proceeds from a public offering (private placement)[27] - Investing activities included $15.2 million for purchases of property and equipment and $9.1 million in cash paid for the investment in EOS[27] Notes to Condensed Consolidated Financial Statements Notes detail the $116.9 million EOS acquisition, $138.0 million private placement, $45.0 million Term Loan, $4.3 million PPP Loan, and NuVasive litigation - The company initiated a tender offer to acquire EOS imaging S.A. for up to $116.9 million, with the transaction expected to close in Q2 2021[32][141] - A private placement of 12,421,242 shares at $11.11 per share closed on March 1, 2021, raising gross proceeds of $138.0 million. These shares are contingently redeemable if the EOS acquisition does not close by July 31, 2021, and are therefore classified outside of stockholders' equity[112] - As of March 31, 2021, the company had $45.0 million in principal outstanding under its Term Loan with Squadron Medical and a $4.3 million PPP Loan for which a forgiveness application was under review[66][72][73] - The company is engaged in ongoing patent litigation with NuVasive, Inc. Management believes the claims lack merit and has not recorded an accrual for a contingent liability, as a loss is not considered probable or reasonably estimable[85][92] | Metric | Q1 2021 (in thousands) | Q1 2020 (in thousands) | | :--- | :--- | :--- | | Total Revenue | $44,121 | $30,115 | | Gross Profit | $31,858 | $21,031 | | Operating Loss | ($19,046) | ($17,808) | | Net Loss | ($22,903) | ($20,722) | | Metric | March 31, 2021 (in thousands) | Dec 31, 2020 (in thousands) | | :--- | :--- | :--- | | Total Assets | $404,503 | $261,223 | | Total Liabilities | $140,770 | $107,739 | | Total Stockholders' Equity | $108,292 | $129,880 | | Cash Flow Activity | Q1 2021 (in thousands) | Q1 2020 (in thousands) | | :--- | :--- | :--- | | Net cash used in operating activities | ($18,604) | ($17,048) | | Net cash used in investing activities | ($25,994) | ($2,629) | | Net cash provided by financing activities | $130,776 | ($39) | Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) MD&A highlights Q1 2021 47% revenue growth to $44.1 million from U.S. product sales and new product adoption, covering EOS acquisition, COVID-19 impact, and liquidity - The company's growth strategy focuses on product innovation and transitioning to a more dedicated and loyal sales channel[137][138][139] - The strategic distribution channel's contribution to U.S. revenue increased to 95% in Q1 2021 from 89% in Q1 2020, demonstrating progress in sales network transformation[140][157] - Management believes its existing cash of $191.1 million (including $103.3 million in escrow for the EOS acquisition) and available borrowings are adequate to fund operations, capital needs, and strategic initiatives[166][167][168] Overview Alphatec focuses on spine surgery innovation and sales channel expansion, with the EOS acquisition expected in Q2 2021 and recovering demand post-COVID-19 volatility - The company's primary focus is on designing, developing, and advancing technology for the surgical treatment of spinal disorders[137] - A public tender offer was commenced to acquire EOS imaging S.A. for a total purchase price of up to $116.9 million, funded in part by a private placement that raised net proceeds of $131.8 million[141][143] - The COVID-19 pandemic caused volatility in sales trends due to the impact on elective surgeries, but demand has since recovered to varying degrees[144] Results of Operations Q1 2021 total revenue grew 47% to $44.1 million, U.S. product revenue up 50% from new products, gross margin improved to 72.2%, operating expenses rose 31% | Metric | Q1 2021 (in thousands) | Q1 2020 (in thousands) | YoY Change | | :--- | :--- | :--- | :--- | | Total Revenue | $44,121 | $30,115 | +47% | | U.S. Product Revenue | $43,716 | $29,070 | +50% | | Gross Profit | $31,858 | $21,031 | +51% | | Gross Margin | 72.2% | 69.8% | +2.4 p.p. | - Revenue from new products increased to approximately 77% of U.S. product revenue, up from 56% in the prior-year period[157] - Sales, general and administrative (SG&A) expenses increased by $12.8 million (47%) due to higher compensation-related costs and variable selling expenses tied to revenue growth[162] Liquidity and Capital Resources Cash increased to $191.1 million by March 31, 2021, due to a $131.8 million private placement, providing sufficient liquidity with $45.0 million Term Loan outstanding - Cash increased to $191.1 million at March 31, 2021, from $107.8 million at Dec 31, 2020, mainly due to a $131.8 million private placement[167] - The company has an $85.0 million Term Loan with Squadron Medical, with $45.0 million outstanding and $40.0 million available in additional borrowings[168][169] - The company received a $4.3 million PPP loan in April 2020 and submitted an application for forgiveness in November 2020, which was still under review[170][171] | Obligation Type | Total (in thousands) | | :--- | :--- | | Squadron Medical Term Loan | $45,000 | | Facility lease obligations | $35,034 | | Litigation settlement obligations, gross | $11,733 | | Total Contractual Obligations | $134,746 | Quantitative and Qualitative Disclosures About Market Risk Interest rate risk on $49.3 million floating-rate debt could reduce pre-tax income by $0.5 million annually with a 100-basis point increase, commodity risk is immaterial - The company is exposed to interest rate risk on $49.3 million of outstanding floating-rate debt. A 100-basis point (1%) increase in interest rates would decrease pre-tax income and cash flow by approximately $0.5 million annually[188] - Commodity price risk from raw materials such as titanium and stainless steel is not considered to have a material impact on results of operations[190] Controls and Procedures Management concluded disclosure controls were effective as of March 31, 2021, with no material changes to internal control over financial reporting - Management concluded that the company's disclosure controls and procedures were effective as of March 31, 2021[191] - No material changes were made to the internal control over financial reporting during the first quarter of 2021[192] PART II – OTHER INFORMATION This section covers legal proceedings, risk factors, unregistered equity sales, other information, and exhibits Legal Proceedings Refers to Note 6 for details on ongoing NuVasive, Inc. litigation, with no material accruals as loss is not probable or estimable - The company refers to Note 6 for details regarding the NuVasive, Inc. litigation[195] - The company has not accrued an estimated loss contingency for litigation, as it is not considered probable that a liability has been incurred and the amount cannot be reasonably estimated[194] Risk Factors No material changes to risk factors from 2020 Annual Report, except for LIBOR discontinuation risk which could increase funding interest rates - There have been no material changes to risk factors from the 2020 Annual Report on Form 10-K, except for the risk related to LIBOR discontinuation[196] - The discontinuation of LIBOR after 2021 could result in interest rate increases on the company's funding arrangements, which could adversely affect cash flows and operating results[196] Unregistered Sales of Equity Securities and Use of Proceeds Report indicates 'None' for this item, meaning no unregistered equity sales or use of proceeds beyond prior disclosures - The company reported 'None' for this item[197] Other Information Report indicates 'None' for this item, meaning no other material information required disclosure was not already covered - The company reported 'None' for this item[197] Exhibits Exhibits filed with the 10-Q report include an employment agreement, CEO/CFO certifications, and iXBRL financial data files - Exhibits filed include an employment agreement, CEO and CFO certifications pursuant to the Sarbanes-Oxley Act, and iXBRL data files[198][199][200][201]