Alphatec (ATEC) - 2022 Q4 - Annual Report

PART I This section outlines the company's business, risks, properties, and legal and regulatory disclosures Business Alphatec Holdings, Inc. is a medical technology company focused on spinal disorder treatment and market growth - Alphatec Holdings, Inc. is a medical technology company focused on designing, developing, and advancing technology for better surgical treatment of spinal disorders, with a mission to revolutionize spine surgery through clinical distinction[8] - Since 2018, the company has undergone a business transformation, replacing 100% of the executive team and 94% of its Board of Directors, and establishing an 'Organic Innovation Machine™' for in-house product development[9] Revenue from Products and Services (2021-2022) | Metric | Year Ended December 31, 2022 | Year Ended December 31, 2021 | Change ($) | Change (%) | | :----- | :--------------------------- | :--------------------------- | :--------- | :--------- | | Revenue from products and services | $350.9 million | $242.3 million | $108.6 million | 45% | Recent Developments The company recently secured a $150.0 million term loan and a $50.0 million revolving credit facility - On January 6, 2023, Alphatec entered into a $150.0 million term loan with Braidwell Transaction Holdings, LLC, with an initial funding of $100.0 million and an option for an additional $50.0 million within 18 months[13] - In September 2022, the company secured a revolving credit facility with MidCap Financial Trust, providing up to $50.0 million in borrowing capacity, potentially increasing to $75.0 million[14][15] Strategy Alphatec's strategy focuses on clinically distinct solutions, surgeon adoption, and elevated distribution - Alphatec's vision is to be the standard bearer in spine, achieved by creating clinically distinct solutions, compelling surgeon adoption, and elevating distribution[17][19] - In 2022, the company launched over 10 new technologies, expanding its portfolio to over 90 products, with more than half launched since July 2018[21][22] - The 'ATEC Experience' educational program attracted over 400 new and existing surgeons in 2022, driving growth in the surgeon user base[23][24][27] The Alphatec Solution Alphatec's solution involves a holistic approach integrating objective information and surgical technology, with new products driving 91% of 2022 revenue - Alphatec's procedural investment thesis involves a holistic approach, integrating objective information, ergonomic patient positioning, and surgical access technology to enhance clinical predictability and reproducibility[30] - New products launched since late 2017 accounted for 91% of total revenue in 2022, up from less than 10% in 2018[32] - The flagship Prone TransPsoas (PTP) approach, launched in 2020, enables simultaneous lateral and posterior spinal access in a prone position, leveraging SafeOp Advanced Neuromonitoring for real-time nerve information[34][35][36] Our Technology The company's technology portfolio includes positioners, access systems, imaging, AI platforms, specialized implants, and biologics - Key technologies include approach-specific Positioners (e.g., PTP Patient Positioning System™), differentiated Access Systems (e.g., Sigma-ALIF Access System), EOS Imaging for 3D surgical planning, and the Alpha InformatiX (AIX) platform (SafeOp Neural InformatiX System and VEA™ alignment mobile application)[37][38][39][41] - The company offers specialized spinal implants and fixation systems, including Invictus™ for comprehensive spinal fixation (occiput to ilium) and Calibrate™ PSX expandable interbody system, with NanoTec™ surface modifications[42][43] - Biologics offerings include allograft options (3D ProFuse® Osteoconductive Bioscaffold, AlphaGRAFT® DBM, AlphaGRAFT® CBM) and synthetic grafts (BioCORE® Moldable Bioactive Graft, Amnioshield® Amniotic Tissue Barrier) to facilitate spinal fusion[44] Products and Technologies Under Development Alphatec plans to launch 8-10 new products in 2023 to expand its portfolio and enhance clinical outcomes - Alphatec plans to launch 8-10 new products in 2023, expanding its portfolio to enhance clinical outcomes across multiple pathologies[46] Research and Development The R&D team focuses on developing technology platforms and products for spine pathologies, leveraging surgeon collaborations - The R&D team focuses on developing technology platforms and products for degenerative and deformity spine pathologies, leveraging integrated teams and surgeon collaborations to accelerate product concept to market commercialization[47] Sales and Marketing Products are marketed through independent sales agents and direct sales representatives, supported by industry conferences and training - Products are marketed through a sales force of independent sales agents and direct sales representatives, with compensation based on performance measures[48][49] Surgeon Training and Education Alphatec invests significantly in surgeon training and education programs to build market demand and drive customer loyalty - Alphatec invests significantly in surgeon training and education programs, utilizing a peer-to-peer approach to build market demand, drive customer conversion and loyalty, and extend the application of procedural solutions[50][51][53] Manufacture and Supply The company relies on third-party suppliers for manufacturing implants and instruments, with biologics subject to FDA and state regulations - The company relies on third-party suppliers for manufacturing implants and instruments, reducing capital investment and operational expense[54][55] - Biologics products, processed from human tissue, are subject to FDA and state regulations (e.g., California, New York, Florida) and Good Tissue Practice standards[56] Competition The spinal implant industry is highly competitive, with key factors including outcomes, quality, sales, and technical leadership - The spinal implant industry is highly competitive, with key factors including improved outcomes, product quality, effective sales, technical leadership, surgeon services, pricing, and speed to market[57] - Significant competitors include Medtronic (Sofamor Danek), Johnson & Johnson (DePuy Spine), Stryker, NuVasive, Zimmer Biomet, and Globus Medical, many of whom have greater financial resources and established networks[59] Intellectual Property Alphatec protects its intellectual property through patents, trademarks, copyrights, and trade secrets, holding numerous U.S. and foreign registrations - Alphatec protects its intellectual property through patents, trademarks, copyrights, trade secrets, and non-disclosure agreements[61] - As of December 31, 2022, the company owned 196 issued U.S. patents, 39 pending U.S. patent applications, and 234 issued or pending foreign patents, along with 26 registered U.S. trademarks and 19 registered foreign trademarks[62] Government Regulation Medical devices are extensively regulated by the FDA and international authorities, requiring strict compliance with design, manufacturing, and healthcare fraud laws - Medical devices are extensively regulated by the FDA and international authorities under the FDCA and PHSA, covering product design, manufacturing, labeling, premarket clearance/approval, advertising, and post-market surveillance[63][65] - Devices are classified into Class I, II, or III based on risk, requiring 510(k) clearance or Premarket Approval (PMA)[66][67][68] - The company's HCT/Ps (human cells, tissues, and cellular and tissue-based products) are regulated under Section 361 of the PHSA, requiring facility registration, donor screening, and Good Tissue Practice[80] - Alphatec is subject to federal and state healthcare fraud and abuse laws (Anti-Kickback Statute, False Claims Act, HIPAA), physician payment transparency laws (ACA 'sunshine' provisions), and data privacy/security laws (HIPAA, HITECH, state laws)[82][84][87][89][90][91][92] Third-Party Reimbursement Sales volumes and prices depend on adequate third-party reimbursement from private and governmental payors, with legislative changes impacting payments - Sales volumes and prices depend on adequate third-party reimbursement from private insurers and governmental payors (Medicare, Medicaid)[95] - Legislative changes like the Budget Control Act of 2011 have led to Medicare payment reductions, and escalating healthcare costs continue to pressure price reductions[96][97] Human Capital Alphatec employs 705 individuals worldwide, focusing on attracting and retaining diverse talent through competitive compensation and development - As of December 31, 2022, Alphatec had 705 employees worldwide (518 in the U.S., 187 internationally), with 347 at its Carlsbad, CA headquarters covering various functional areas[98] - The company employs strategies to attract, retain, and engage diverse talent, offering competitive compensation, benefits, equity ownership, career development, and training[99][101] Corporate and Available Information Alphatec Holdings, Inc. was incorporated in Delaware in 2005, with its principal office in Carlsbad, and SEC filings available online - Alphatec Holdings, Inc. was incorporated in Delaware in March 2005, with its principal executive office in Carlsbad, California[104] Risk Factors The company faces significant risks from competition, supply chain, regulatory compliance, financial vulnerabilities, and stock price volatility - The company operates in a highly competitive market with larger, well-established medical device companies, which possess greater resources, broader product offerings, and more established relationships[108] - Alphatec relies on a limited number of third-party manufacturers and suppliers for key raw materials (e.g., PEEK from Invibio) and biologics, posing risks of supply disruption and increased costs[116][117] - The company has a history of net losses and expects to continue incurring them in the near future, requiring additional funding which may not be available on acceptable terms[143][147][149] - The medical device industry is characterized by extensive patent and intellectual property litigation, and the company could face costly claims, diversion of management's attention, and potential damages or market exclusion[158][159] Risks Related to Our Business and Industry Business growth depends on market assumptions and key personnel, while international operations, healthcare consolidation, and security breaches pose additional risks - Business growth and profitability depend on accurate assumptions about the spine disorder market; incorrect assumptions or shifts to alternative treatments could adversely affect demand[107] - A significant percentage of revenue (42% in 2022, 47% in 2021) is derived from polyaxial pedicle screw systems, which rely on third-party licenses, making the business vulnerable to issues with these systems or licenses[111] - Commercial success requires convincing spine surgeons of product superiority and providing proper training; failure to do so could lead to declining sales, unsatisfactory patient outcomes, and lawsuits[114] - International operations are subject to risks like currency fluctuations, political conditions, governmental pricing, trade restrictions, and compliance with foreign laws (e.g., U.S. Foreign Corrupt Practices Act)[121] - Consolidation in the healthcare industry could increase pricing pressures and exclude suppliers from markets, negatively impacting Alphatec's business[123] - The company is dependent on its senior management, sales, marketing, and engineering teams, and key surgeon advisors; loss of these personnel could harm the business[134] - Security breaches, data loss, and other disruptions could compromise sensitive information, leading to liability and reputational damage[135] - Operations are concentrated in areas prone to natural disasters (wildfires, earthquakes), which could cause substantial delays, damage, or additional expenses[136] Risks Related to Our Financial Results, Credit and Certain Financial Obligations and Need for Financing Alphatec's financial results are vulnerable to reliance on subsidiaries, growth management, pricing, economic conditions, and unpredictable quarterly fluctuations - Alphatec Holdings is a holding company and relies on dividends and payments from subsidiaries to meet cash obligations, which are subject to subsidiary funding requirements and debt terms[139] - Failure to effectively manage anticipated growth could strain managerial, operational, and financial resources, potentially affecting product quality, relationships, and reputation[140] - Decreased prices for goods and services, if not offset by product mix changes or expense reductions, would adversely affect results of operations[141] - Adverse economic conditions, including high inflation and workforce shortages, could increase operating costs and reduce demand for products[151][152] - Quarterly financial results are difficult to predict and may fluctuate significantly due to factors like product acceptance, demand, pricing, new product timing, sales organization effectiveness, regulatory changes, and reimbursement levels[153] Risks Related to Our Intellectual Property, Regulatory Penalties and Litigation Inadequate intellectual property protection, product liability claims, biologics risks, and improper material handling pose significant legal and financial risks - Inadequate protection of patents and other intellectual property rights could lead to market share loss, as competitors may design around patents or challenge their validity[156][157] - Product liability claims, inherent in medical device manufacturing for spine surgery, could result in damages exceeding insurance coverage, increased rates, or inability to secure future coverage[162] - Biologics products carry a potential risk of communicable disease, exposing the company to additional product liability claims[164] - Improper handling, storage, or disposal of biological, hazardous, and radioactive materials could lead to costly claims, fines, or penalties[166] Risks Related to Our Common Stock The company's stock price is highly volatile, with concentrated ownership and anti-takeover provisions potentially affecting control, and NOLs may be limited - The company's stock price is highly volatile and can fluctuate significantly due to factors such as product orders, quarterly results, new product announcements, regulatory changes, litigation, and sales by large stockholders[168] - Concentrated stock ownership (approx. 30% by executive officers, directors, and principal stockholders) allows them to exert control over significant corporate decisions, potentially delaying or preventing a change of control[172] - Anti-takeover provisions in organizational documents and change of control clauses in agreements may discourage or prevent acquisitions, even if beneficial to stockholders[173][174][175] - The ability to use net operating loss carryforwards (NOLs) and other tax attributes may be limited due to ownership changes (Section 382 and 383 of the Internal Revenue Code), potentially increasing future tax liability[177] Unresolved Staff Comments There are no unresolved staff comments to report - No unresolved staff comments were reported[180] Properties Alphatec's principal properties include leased corporate headquarters, a distribution facility, and international offices Principal Leased Properties | Location | Use | Approximate Square Footage | | :------- | :------------------- | :------------------------- | | Carlsbad, California | Corporate headquarters | 121,541 | | Memphis, Tennessee | Distribution facility | 75,643 | | Paris, France | Office facilities | 15,156 | Legal Proceedings For a description of material legal proceedings, refer to Note 7 of the Notes to Consolidated Financial Statements - Material legal proceedings are described in Note 7 of the Notes to Consolidated Financial Statements[182] Mine Safety Disclosures This item is not applicable to Alphatec Holdings, Inc - Mine Safety Disclosures are not applicable[182] PART II This section details the company's common equity market, financial performance analysis, market risks, and internal controls Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Alphatec's common stock trades on NASDAQ, with no cash dividends paid, and earnings retained for business expansion - Alphatec's common stock is traded on The NASDAQ Global Select Market under the symbol 'ATEC'[185] - As of February 23, 2023, there were approximately 365 holders of record for 111,109,933 outstanding shares of common stock[186] - The company has never declared or paid cash dividends and plans to retain all available funds for business operations and expansion[187] - During Q4 2022, Alphatec issued 2,000 unregistered restricted shares of common stock to an independent sales agent for distribution and related services[187][190] Reserved This item is reserved and contains no content Management's Discussion and Analysis of Financial Condition and Results of Operations This section analyzes Alphatec's financial condition and operations, highlighting revenue growth, expenses, liquidity, and critical accounting policies - Alphatec is a medical technology company focused on spinal disorder treatment, aiming to revolutionize spine surgery through clinical distinction and leveraging its experience for market-leading growth[197][198] - The company's financial condition and results of operations for 2022 compared to 2021 are discussed, with a focus on revenue growth driven by increased product volume, surgeon user base expansion, and new technology adoption[196][209] - Key accounting policies requiring significant estimates and assumptions include revenue recognition, allowances for accounts receivable, inventories, intangible assets, stock-based compensation, and income taxes[238][240] Recent Developments Alphatec recently secured a $150.0 million Braidwell Term Loan and a $50.0 million Revolving Credit Facility to bolster liquidity - On January 6, 2023, Alphatec secured a $150.0 million Braidwell Term Loan, with $100.0 million funded initially, maturing in January 2028 at Term SOFR plus 5.75%[199] - In September 2022, the company entered into a Revolving Credit Facility with MidCap, providing up to $50.0 million (expandable to $75.0 million) based on a borrowing base, maturing in September 2027 or 90 days before 2026 Notes maturity, at Term SOFR plus 3.5%[200][202] Revenue and Expense Components Revenue is primarily from spinal implants and imaging equipment, with cost of sales, R&D, SG&A, and other expenses detailed as key operational components - Revenue is primarily from spinal surgery implants and medical imaging equipment sales to hospitals and surgical centers, recognized upon transfer of control (shipment, delivery, or surgical use)[204] - Cost of sales includes direct product costs, royalties, service labor, and parts[205][206] - Other expense categories include litigation-related expenses, amortization of acquired intangible assets, transaction-related expenses (e.g., EOS acquisition), restructuring expenses, and net interest and other non-operating gains/losses[206][208] Results of Operations The company reported a 44% increase in total revenue in 2022, alongside increases in cost of sales and operating expenses, with decreased net interest expense Total Revenue (2021-2022) (in thousands) | Metric | Year Ended 2022 | December 31, 2021 | Change ($) | Change (%) | | :----------------------- | :-------------- | :---------------- | :------- | :--- | | Revenue from products and services | $350,852 | $242,258 | $108,594 | 45 % | | Revenue from international supply agreement | 15 | 954 | (939) | (98)% | | Total revenue | $350,867 | $243,212 | $107,655 | 44 % | - Revenue from products and services increased by $108.6 million (45%) in 2022, primarily due to increased product volume, surgeon user base expansion, new product portfolio, and technology adoption[209] Cost of Sales (2021-2022) (in thousands) | Metric | Year Ended 2022 | December 31, 2021 | Change ($) | Change (%) | | :----------------------- | :-------------- | :---------------- | :------- | :--- | | Cost of sales | $117,808 | $85,450 | $32,358 | 38 % | - Cost of sales increased by $32.4 million (38%) in 2022, mainly due to product volume, partially offset by a decrease in inventory expense from the EOS acquisition purchase accounting[211] Operating Expenses (2021-2022) (in thousands) | Metric | Year Ended 2022 | December 31, 2021 | Change ($) | Change (%) | | :----------------------- | :-------------- | :---------------- | :------- | :--- | | Research and development | $44,033 | $32,015 | $12,018 | 38 % | | Sales, general and administrative | 300,013 | 229,271 | 70,742 | 31 % | | Litigation-related expenses | 23,943 | 11,123 | 12,820 | 115 % | | Amortization of acquired intangible assets | 10,115 | 5,348 | 4,767 | 89 % | | Transaction-related expenses | 120 | 6,365 | (6,245) | (98)% | | Restructuring expenses | 1,810 | 1,697 | 113 | 7 % | | Total operating expenses | $380,034 | $285,819 | $94,215 | 33 % | - R&D expenses rose by $12.0 million (38%) due to increased personnel for new product portfolio expansion[213][214] - Litigation-related expenses surged by $12.8 million (115%) due to increased legal fees and accruals[215] Total Interest and Other Expense, Net (2021-2022) (in thousands) | Metric | Year Ended 2022 | December 31, 2021 | Change ($) | Change (%) | | :----------------------- | :-------------- | :---------------- | :------- | :--- | | Interest expense, net | $(5,505) | $(7,108) | $1,603 | (23)% | | Loss on debt extinguishment, net | — | $(7,434) | $7,434 | (100)% | | Other income (expense), net | 471 | (1,563) | 2,034 | (130)% | | Total interest and other expense, net | $(5,034) | $(16,105) | $11,071 | (69)% | - Net interest expense decreased due to lower rates on 2026 Notes compared to the repaid Squadron Medical Term Loan[217][219] Liquidity and Capital Resources Alphatec's liquidity is supported by cash, a Revolving Credit Facility, and operations, deemed sufficient for 12 months, despite decreased cash - Principal liquidity sources are cash and cash equivalents, the Revolving Credit Facility, and cash from operations[221][225] - Cash and cash equivalents decreased from $187.2 million at December 31, 2021, to $84.7 million at December 31, 2022[225] Summary of Cash Flows Net cash used in operating and investing activities drove a $102.6 million decrease in cash in 2022, partially offset by financing activities Summary of Cash Flows (2020-2022) (in thousands) | Cash (used in) provided by: | Year Ended 2022 | December 31, 2021 | 2020 | | :-------------------------- | :-------------- | :---------------- | :--- | | Operating activities | $(75,143) | $(73,432) | $(46,412) | | Investing activities | $(58,280) | $(157,762) | $(23,859) | | Financing activities | $31,228 | $311,966 | $130,829 | | Effect of exchange rate changes on cash | $(357) | $(1,289) | $94 | | Net (decrease) increase in cash and cash equivalents | $(102,552) | $79,483 | $60,652 | - Net cash used in operating activities was $75.1 million in 2022, primarily due to business expansion costs and inventory purchases[227][228][229] Debt and Commitments Alphatec's debt includes a Revolving Credit Facility, Convertible Senior Notes, EOS convertible bonds, and other notes, alongside settlement and purchase commitments - As of December 31, 2022, Alphatec had $35.3 million outstanding under the Revolving Credit Facility and $316.3 million under the 0.75% Convertible Senior Notes due 2026 (2026 Notes)[230] - The company assumed $13.3 million (€12.5 million) in EOS convertible bonds (OCEANEs) maturing on May 31, 2023, and $5.1 million (€4.8 million) in other debts from the EOS acquisition, due in installments through 2027[231][234] - Remaining Orthotec settlement payments totaled $4.1 million as of December 31, 2022, to be paid in quarterly installments through October 2023[234] Contractual obligations and commercial commitments The company's contractual obligations and commercial commitments include senior convertible notes, revolving credit facility, leases, and purchase commitments Total Contractual Obligations and Commercial Commitments (as of December 31, 2022, in thousands) | (in thousands) | Total | Payments Due by Period Year or Less | More than 1 Year | | :------------- | :---- | :---------------------------------- | :--------------- | | Senior Convertible Notes | $316,250 | $— | $316,250 | | Revolving Credit Facility | 35,251 | — | 35,251 | | Facility lease obligations (1) | 38,247 | 4,937 | 33,310 | | Purchase commitments (2) | 27,449 | 5,826 | 21,623 | | OCEANEs | 13,333 | 13,333 | — | | Interest expense | 10,102 | 2,696 | 7,406 | | Orthotec litigation settlement obligation (3) | 4,064 | 4,064 | — | | Other (4) | 5,046 | 656 | 4,390 | | Development services plans | 3,854 | — | 3,854 | | Total | $453,596 | $31,512 | $422,084 | Off-Balance Sheet Arrangements As of December 31, 2022, Alphatec did not have any off-balance sheet arrangements - As of December 31, 2022, Alphatec did not have any off-balance sheet arrangements[237] Critical Accounting Policies and Estimates Critical accounting policies include revenue recognition, inventory, goodwill, intangible assets, and stock-based compensation, requiring significant judgment - Critical accounting policies include revenue recognition (Topic 606), excess and obsolete inventory valuation, goodwill valuation, intangible assets valuation, and stock-based compensation valuation, all requiring significant management estimates and judgments[238][241][246][249][250][252] Quantitative and Qualitative Disclosures About Market Risk Alphatec is exposed to interest rate risk, foreign currency exchange risk, and immaterial commodity price risk from raw materials - Alphatec is exposed to interest rate risks from cash, cash equivalents, and floating-rate borrowings (Revolving Credit Facility and Braidwell Term Loan), which bear interest at Term SOFR plus a spread[259] - Increasing international business exposes the company to foreign currency exchange risks, primarily with the euro, which could adversely affect financial results[260] - Commodity price risk from raw materials (titanium, stainless steel) is not material, as these prices comprise a small portion of cost of sales[261] Financial Statements and Supplementary Data The consolidated financial statements and supplementary data are presented in Item 15 of this Annual Report on Form 10-K - The consolidated financial statements and supplementary data are located in Item 15[262] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure There are no changes in or disagreements with accountants on accounting and financial disclosure to report - No changes in or disagreements with accountants on accounting and financial disclosure were reported[262] Controls and Procedures Alphatec maintains effective disclosure controls and internal control over financial reporting, deemed effective as of December 31, 2022 - Alphatec maintains disclosure controls and procedures, which management concluded were effective as of December 31, 2022, providing reasonable assurance of timely and accurate reporting[263][265] - Management's assessment, based on the COSO (2013) framework, concluded that the company's internal control over financial reporting was effective as of December 31, 2022[266][267] - No material changes to internal control over financial reporting occurred during the most recent fiscal quarter, despite the ongoing implementation of a new ERP system[268] Other Information There is no other information to report under this item - No other information was reported[269] Disclosure Regarding Foreign Jurisdictions that Prevent Inspections This item is not applicable to Alphatec Holdings, Inc - Disclosure regarding foreign jurisdictions that prevent inspections is not applicable[269] PART III This section provides information on directors, executive compensation, security ownership, related party transactions, and principal accounting fees Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the company's 2023 Annual Meeting of Stockholders Proxy Statement - Information for this item is incorporated by reference from the 2023 Annual Meeting of Stockholders Proxy Statement[271] Executive Compensation Information regarding executive compensation is incorporated by reference from the company's 2023 Annual Meeting of Stockholders Proxy Statement - Information for this item is incorporated by reference from the 2023 Annual Meeting of Stockholders Proxy Statement[272] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership of certain beneficial owners and management and related stockholder matters is incorporated by reference from the company's 2023 Annual Meeting of Stockholders Proxy Statement - Information for this item is incorporated by reference from the 2023 Annual Meeting of Stockholders Proxy Statement[273] Certain Relationships and Related Transactions, and Director Independence Information regarding certain relationships and related transactions, and director independence is incorporated by reference from the company's 2023 Annual Meeting of Stockholders Proxy Statement - Information for this item is incorporated by reference from the 2023 Annual Meeting of Stockholders Proxy Statement[274] Principal Accounting Fees and Services Information regarding principal accounting fees and services is incorporated by reference from the company's 2023 Annual Meeting of Stockholders Proxy Statement - Information for this item is incorporated by reference from the 2023 Annual Meeting of Stockholders Proxy Statement[275] PART IV This section outlines the exhibits and financial statement schedules included in the Annual Report on Form 10-K Exhibits, Financial Statement Schedules This section lists all exhibits and financial statement schedules filed as part of the Annual Report, including corporate documents and agreements - This item lists the consolidated financial statements and supplementary data, along with a comprehensive list of exhibits filed as part of the Annual Report on Form 10-K[277][278] - Exhibits include corporate organizational documents (e.g., Certificate of Incorporation, Bylaws), various agreements (e.g., Securities Purchase Agreement, Lease Agreement, Supply Agreement), employment and severance agreements, equity compensation plans, and certifications (e.g., Section 302, Section 906)[279][280][281][282][283][284] Financial Statements and Notes This section presents Alphatec's audited consolidated financial statements and notes for 2020-2022, covering balance sheets, operations, cash flows, and critical accounting policies - The consolidated financial statements for the years ended December 31, 2022, 2021, and 2020 are presented in accordance with U.S. GAAP[305][315] - Deloitte & Touche LLP issued an unqualified opinion on the financial statements and the effectiveness of internal control over financial reporting as of December 31, 2022[305][306][320][321] - Key notes cover significant accounting policies, the EOS imaging acquisition, fair value measurements, detailed balance sheet components, debt obligations (including 2026 Notes, OCEANEs, and credit facilities), and stock-based compensation[348][396][406][416][433][435][499] Reports of Independent Registered Public Accounting Firm Deloitte & Touche LLP issued an unqualified opinion on Alphatec's financial statements and internal controls, with inventory valuation as a critical audit matter - Deloitte & Touche LLP issued an unqualified opinion on the consolidated financial statements for 2022 and 2021, and on the effectiveness of internal control over financial reporting as of December 31, 2022[305][306][320][321] - The valuation of inventories, particularly the estimation of excess and obsolete inventories and the related LCNRV reserve, was identified as a critical audit matter due to management's significant manual process and judgments regarding future product use[309][311] - Mayer Hoffman McCann P.C. provided an unqualified opinion on the consolidated financial statements for the year ended December 31, 2020[315] Consolidated Balance Sheets Total assets decreased to $513.4 million in 2022, liabilities increased, and stockholders' equity shifted to a deficit of $(36.7) million Consolidated Balance Sheet Highlights (in thousands) | Metric | December 31, 2022 | December 31, 2021 | | :----- | :---------------- | :---------------- | | Cash and cash equivalents | $84,696 | $187,248 | | Total current assets | $255,634 | $331,157 | | Total assets | $513,376 | $572,053 | | Total current liabilities | $138,870 | $101,095 | | Long-term debt | $349,511 | $326,489 | | Total liabilities | $426,516 | $401,028 | | Total stockholders' (deficit) equity | $(36,713) | $79,422 | Consolidated Statements of Operations Alphatec reported a 44% increase in total revenue to $350.9 million in 2022, but incurred a net loss of $152.1 million due to increased expenses Consolidated Statements of Operations Highlights (in thousands, except per share amounts) | Metric | Year Ended December 31, 2022 | Year Ended December 31, 2021 | Year Ended December 31, 2020 | | :----- | :--------------------------- | :--------------------------- | :--------------------------- | | Total revenue | $350,867 | $243,212 | $144,861 | | Gross profit | $233,059 | $157,762 | $102,501 | | Total operating expenses | $380,034 | $285,819 | $161,364 | | Operating loss | $(146,975) | $(128,057) | $(58,863) | | Total interest and other expense, net | $(5,034) | $(16,105) | $(19,986) | | Net loss | $(152,149) | $(144,326) | $(78,994) | | Net loss per share, basic and diluted | $(1.47) | $(1.50) | $(1.18) | | Weighted average shares outstanding, basic and diluted | 103,373 | 96,197 | 67,020 | Consolidated Statements of Comprehensive Loss Alphatec reported a comprehensive loss of $156.8 million in 2022, an increase from 2021, due to net loss and foreign currency translation adjustments Consolidated Statements of Comprehensive Loss (in thousands) | Metric | Year Ended 2022 | December 31, 2021 | 2020 | | :----- | :-------------- | :---------------- | :--- | | Net loss | $(152,149) | $(144,326) | $(78,994) | | Foreign currency translation adjustments | $(4,696) | $(7,198) | $116 | | Comprehensive loss | $(156,845) | $(151,524) | $(78,878) | Consolidated Statements of Stockholders' Equity Stockholders' equity shifted from positive to a $(36.7) million deficit in 2022, driven by net loss and foreign currency adjustments Consolidated Statements of Stockholders' (Deficit) Equity Highlights (in thousands) | Metric | December 31, 2022 | December 31, 2021 | | :----- | :---------------- | :---------------- | | Common Shares | 106,640 | 99,537 | | Par Value | $11 | $10 | | Additional paid-in capital | $933,537 | $892,828 | | Treasury stock | $(25,097) | $(25,097) | | Accumulated other comprehensive deficit | $(10,690) | $(5,994) | | Accumulated deficit | $(934,474) | $(782,325) | | Total stockholders' (deficit) equity | $(36,713) | $79,422 | - The accumulated deficit increased from $(782.3) million in 2021 to $(934.5) million in 2022, reflecting the net loss for the period[337] - Stock-based compensation contributed $37.6 million to additional paid-in capital in 2022[337] Consolidated Statements of Cash Flows Cash and cash equivalents decreased by $102.6 million in 2022, primarily due to cash used in operating and investing activities Consolidated Statements of Cash Flows (in thousands) | Cash (used in) provided by: | 2022 | Year Ended 2021 | December 31, 2020 | | :-------------------------- | :--- | :-------------- | :---------------- | | Operating activities | $(75,143) | $(73,432) | $(46,412) | | Investing activities | $(58,280) | $(157,762) | $(23,859) | | Financing activities | $31,228 | $311,966 | $130,829 | | Effect of exchange rate changes on cash | $(357) | $(1,289) | $94 | | Net (decrease) increase in cash and cash equivalents | $(102,552) | $79,483 | $60,652 | | Cash and cash equivalents at beginning of year | $187,248 | $107,765 | $47,113 | | Cash and cash equivalents at end of year | $84,696 | $187,248 | $107,765 | - Operating activities used $75.1 million in cash in 2022, mainly due to business expansion costs and inventory purchases[227][228][229][345] Notes to Consolidated Financial Statements The notes detail Alphatec's organization, accounting policies, EOS acquisition, fair value, balance sheet items, debt, commitments, equity, and income taxes 1. Organization and Significant Accounting Policies Alphatec is a medical technology company whose financial statements are prepared under U.S. GAAP, involving significant estimates for revenue, inventory, and stock-based compensation - Alphatec Holdings, Inc. is a medical technology company focused on spinal disorder treatment through its subsidiaries Alphatec Spine, SafeOp Surgical, and EOS imaging, marketing products in the U.S. and internationally[348] - Financial statements are prepared under U.S. GAAP, consolidated, and involve significant management estimates for items like useful lives of assets, allowances, deferred taxes, inventory, and stock-based compensation[349][351] - Revenue is recognized when control of products or services transfers to customers, with variable consideration estimated based on anticipated performance[374][376][377][378] - Inventory is stated at the lower of cost or net realizable value, with reserves for excess and obsolescence based on usage, age, and future demand[357][358][359] - Goodwill and intangible assets are valued and assessed for impairment annually or more frequently if circumstances warrant[364][365][367][368][369] - Stock-based compensation expense for equity-classified awards (RSUs, PRSUs) is measured at grant date fair value and amortized over the service period, with forfeiture estimates[383][384][385][386] Net Loss Per Share (in thousands, except per share data) | Metric | Year Ended December 31, 2022 | Year Ended December 31, 2021 | Year Ended December 31, 2020 | | :----- | :--------------------------- | :--------------------------- | :--------------------------- | | Net loss | $(152,149) | $(144,326) | $(78,994) | | Weighted average common shares outstanding | 103,373 | 96,197 | 67,020 | | Net loss per share, basic and diluted | $(1.47) | $(1.50) | $(1.18) | - Potentially dilutive shares (options, RSUs, warrants, convertible notes) were excluded from diluted EPS calculation due to their anti-dilutive effect given the net loss position[390][393] 2. Business Combination Alphatec acquired EOS imaging S.A. for $100.0 million in 2021, resulting in $29.5 million in goodwill and acquired intangible assets - On May 13, 2021, Alphatec substantially completed the acquisition of EOS imaging S.A. for a total cash consideration of $100.0 million, gaining 100% of EOS Shares and 57% of OCEANEs[397] - EOS, now a wholly owned subsidiary, is a global medical device company specializing in low-dose 2D/3D full-body imaging and surgical planning for orthopedic surgery, which Alphatec plans to integrate into its spine surgery approach[398] - The acquisition resulted in $29.5 million in goodwill, primarily from expected revenue and cost synergies[401] - Acquisition costs of $5.8 million were recognized as transaction-related expenses in 2021[402] 3. Fair Value Measurements Fair value measurements are categorized into a three-tier hierarchy, applied to cash equivalents, foreign currency contracts, equity awards, and debt instruments - Fair value measurements are categorized into a three-tier hierarchy: Level 1 (quoted prices in active markets), Level 2 (observable inputs other than Level 1), and Level 3 (unobservable inputs)[372][373] Cash Equivalents Fair Value (in thousands) | Metric | December 31, 2022 (Level 1) | December 31, 2021 (Level 1) | | :----- | :-------------------------- | :-------------------------- | | Money market funds | $62,956 | $140,010 | - Foreign currency forward contracts were used to mitigate exchange risk related to the EOS acquisition, with a nominal loss recognized from changes in fair value and settlement in 2021[408][410] - A liability-classified equity award to an executive officer was amended in November 2022 to be paid in common stock, reclassifying it to equity[411][412] - The fair value of the 2026 Notes was $288.8 million (Level 1) at December 31, 2022, and OCEANEs was $13.3 million (Level 1)[413] 4. Balance Sheet Details This section details inventories, property and equipment, goodwill, intangible assets, accrued expenses, and other long-term liabilities Inventories (in thousands) | Component | December 31, 2022 | December 31, 2021 | | :-------- | :---------------- | :---------------- | | Raw materials | $13,928 | $14,671 | | Work-in-process | $3,032 | $5,712 | | Finished goods | $84,561 | $71,320 | | Total Inventories | $101,521 | $91,703 | Property and Equipment, Net (in thousands) | Component | Useful Life (in years) | December 31, 2022 | December 31, 2021 | | :-------- | :--------------------- | :---------------- | :---------------- | | Surgical instruments | 4 | $158,906 | $130,432 | | Machinery and equipment | 7 | $9,502 | $11,092 | | Computer equipment | 3 | $4,753 | $5,694 | | Office furniture and equipment | 5 | $4,760 | $3,861 | | Leasehold improvements | various | $2,965 | $1,754 | | Construction in progress | n/a | $15,360 | $7,292 | | Less: accumulated depreciation | | $(94,294) | $(72,724) | | Property and equipment, net | | $101,952 | $87,401 | - Goodwill increased by $1.6 million due to a purchase accounting adjustment related to deferred tax assets, offset by foreign currency fluctuations, resulting in a balance of $39.8 million at December 31, 2022[420][421] Intangible Assets, Net (in thousands) | Component | Remaining Weighted Avg. Useful Life (in years) | Gross Amount (2022) | Accumulated Amortization (2022) | Intangible Assets, net (2022) | | :-------- | :--------------------------------------------- | :------------------ | :------------------------------ | :---------------------------- | | Developed technology | 7 | $75,896 | $(13,420) | $62,476 | | Customer relationships | 8 | $5,421 | $(987) | $4,434 | | Trade names | 4 | $14,240 | $(6,906) | $7,334 | | Other | 2 | $2,413 | $(2,041) | $372 | | In-process research and development | n/a | $2,503 | — | $2,503 | | Software in development | n/a | $5,662 | — | $5,662 | | Total Intangible Assets, net | | $106,135 | $(23,354) | $82,781 | - Total amortization expense for intangible assets was $10.2 million in 2022, up from $6.4 million in 2021, with future amortization expected to be $12.4 million in 2023[425][426] Accrued Expenses and Other Current Liabilities (in thousands) | Component | December 31, 2022 | December 31, 2021 | | :-------- | :---------------- | :---------------- | | Payroll and payroll related | $19,764 | $18,449 | | Commissions and sales milestones | $17,444 | $12,420 | | Accrued legal expenses | $8,345 | $4,290 | | Royalties | $4,758 | $3,466 | | Orthotec litigation settlement obligation | $3,968 | $4,400 | | Inventory in-transit | $3,548 | $2,089 | | Debt issuance costs | $2,690 | $— | | Administration fees | $1,912 | $1,698 | | Other taxes payable | $1,955 | $3,004 | | Professional fees | $1,238 | $394 | | Interest | $1,122 | $1,045 | | Other | $5,638 | $4,294 | | Total accrued expenses and other current liabilities | $72,382 | $55,549 | Other Long-Term Liabilities (in thousands) | Component | December 31, 2022 | December 31, 2021 | | :-------- | :---------------- | :---------------- | | Royalties | $5,739 | $5,833 | | Orthotec litigation settlement obligation | $— | $3,587 | | Income tax-related liabilities | $980 | $1,522 | | Contract liabilities | $3,047 | $2,897 | | Other | $1,777 | $3,222 | | Total other long-term liabilities | $11,543 | $17,061 | 5. Contract Liabilities Current and non-current contract liabilities totaled $15.0 million at December 31, 2022, with $21.6 million of revenue recognized from these obligations - Current and non-current contract liabilities totaled $12.0 million and $3.0 million, respectively, at December 31, 2022[433] - Alphatec recognized $21.6 million of revenue from contract liabilities in 2022, with $12.9 million from the beginning balance[433] Contract Liabilities Reconciliation (in thousands) | Metric | Amount | | :----- | :----- | | Balance at December 31, 2021 | $18,151 | | Payments received | $19,494 | | Revenue recognized | $(21,581) | | Foreign currency fluctuation | $(1,061) | | Balance at December 31, 2022 | $15,003 | 6. Debt Alphatec's debt includes a Revolving Credit Facility, Convertible Senior Notes, EOS OCEANEs, and other notes, with principal payments scheduled - The Revolving Credit Facility with MidCap provides up to $50.0 million (expandable to $75.0 million), with $35.3 million outstanding at December 31, 2022[435][437] - Alphatec issued $316.3 million in unsecured 0.75% Convertible Senior Notes due 2026, convertible into common stock under certain conditions[441][442] - The company entered into Capped Call Transactions costing $39.9 million to reduce potential dilution from the 2026 Notes, recorded as a reduction to additional paid-in capital[449][450] - EOS issued 4,344,651 OCEANEs (convertible bonds) due May 2023, bearing 6% interest[451][453][456] - Other debt includes $5.0 million in French government-sponsored COVID-19 relief loans (PGE loans) from the EOS acquisition, extended to mature in 2027[457][458] Debt Composition (in thousands) | Component | December 31, 2022 | December 31, 2021 | | :-------- | :---------------- | :---------------- | | 2026 Notes | $316,250 | $316,250 | | OCEANEs | $13,333 | $14,113 | | Other notes payable | $1,869 | $386 | | EOS PGE Loans | $5,046 | $5,341 | | Revolving Credit Facility | $35,251 | $— | | Total | $371,749 | $336,090 | | Less: debt discount | $(7,290) | $(9,259) | | Total long-term debt, net of current portion | $349,511 | $326,489 | Principal Payments on Debt (as of December 31, 2022, in thousands) | Year | Amount | | :--- | :----- | | 2023 | $14,957 | | 2024 | $1,731 | | 2025 | $1,693 | | 2026 | $317,513 | | 2027 | $35,855 | | Total | $371,749 | - The $4.3 million Paycheck Protection Program (PPP) loan received in 2020 was forgiven in July 2021, resulting in a gain on debt extinguishment[462] - The Squadron Medical Term Loan was terminated and repaid in August 2021, resulting in a $11.7 million loss on debt extinguishment[466] 7. Commitments and Contingencies The company has various commitments including facility leases and inventory purchase obligations, and is involved in legal proceedings and IP agreements - Alphatec leases office and storage facilities and equipment, with initial terms ranging from 1 to 10 years[471][472] Operating Lease Information (in thousands) | Metric | Year Ended December 31, 2022 | Year Ended December 31, 2021 | Year Ended December 31, 2020 | | :----- | :--------------------------- | :--------------------------- | :--------------------------- | | Rent expense | $4,643 | $4,482 | $1,300 | | Cash paid for amounts included in measurement of lease liabilities | $4,409 | $1,795 | $1,400 | | Weighted average remaining lease term (years) | 7.7 | 8.6 | | | Weighted average discount rate | 5.5% | 8.5% | | - The company has minimum inventory purchase commitments of $27.4 million with a third-party supplier through December 2026[473] - Alphatec is involved in various legal proceedings, including past intellectual property litigation with NuVasive, Inc., which was settled in June 2022[478][479][480] - The company has intellectual property agreements requiring royalty payments based on product sales, included in cost of sales[483] 8. Orthotec Settlement Alphatec's 2014 settlement with Orthotec, LLC, has a remaining outstanding balance of $4.1 million, due in quarterly installments through October 2023 - In September 2014, Alphatec entered into a Settlement and Release Agreement with Orthotec, LLC, agreeing to pay $49.0 million[484][486] Orthotec Litigation Settlement Obligation (in thousands) | Metric | December 31, 2022 | December 31, 2021 | | :----- | :---------------- | :---------------- | | Litigation settlement obligation - short-term portion | $3,968 | $4,400 | | Litigation settlement obligation - long-term portion | $— | $3,587 | | Total | $3,968 | $7,987 | | Future imputed interest | $96 | $478 | | Total litigation settlement obligation | $4,064 | $8,465 | 9. Equity Alphatec's equity includes authorized common stock, past sales and repurchases, redeemable preferred stock, and various outstanding warrants - Alphatec's common stock authorized is 200,000,000 shares[487] - In August 2021, the Board authorized a $25.0 million common stock repurchase, leading to the repurchase of 1,806,358 shares[490] - Redeemable preferred stock has a carrying value of $23.6 million, redeemable at $9.00 per share upon liquidation or certain corporate events, and is not convertible into common stock[491] Outstanding Warrants (as of December 31, 2022, in thousands) | Warrant Type | Number of Warrants | Strike Price | Expiration | | :----------- | :----------------- | :----------- | :--------- | | 2018 PIPE Warrants | 6,311 | $3.50 | May 2023 | | SafeOp Surgical Merger Warrants | 938 | $3.50 | May 2023 | | 2018 Squadron Medical Warrants | 845 | $3.15 | May 2027 | | 2019 Squadron Medical Warrants | 4,839 | $2.17 | May 2027 | | 2020 Squadron Medical Warrants | 1,076 | $4.88 | May 2027 | | Executive Warrants | 1,327 | $5.00 | December 2024 | | Other* | 155 | $6.97 | Various through February 2026 | | Total | 15,491 | | | - The 2017 PIPE Warrants expired in 2022[492][496] 10. Stock Benefit Plans and Stock-Based Compensation Alphatec operates several equity incentive plans, incurring $40.6 million in stock-based compensation costs in 2022, with significant unrecognized expense - Alphatec operates several equity incentive plans: the 2016 Equity Incentive Plan (791,000 shares available), 2016 Employment Inducement Award Plan (477,000 shares available), 2019 Management Objective Strategic Incentive Plan (213,000 restricted shares and 12,500 warrants granted), and 2017 Distributor Inducement Plan (305,000 warrants and 414,000 restricted shares granted)[499][500][502][503] Stock-Based Compensation Costs (in thousands) | Component | Year Ended December 31, 2022 | Year Ended December 31, 2021 | Year Ended December 31, 2020 | | :-------- | :--------------------------- | :--------------------------- | :--------------------------- | | Cost of sales | $2,597 | $737 | $512 | | Research and development | $5,016 | $4,056 | $2,114 | | Sales, general and administrative | $32,943 | $31,657 | $15,033 | | Total | $40,556 | $36,450 | $17,659 | - As of December 31, 2022, there was $0.3 million of unrecognized compensation expense for stock options (weighted average period of 1.75 years) and $41.4 million for restricted stock awards/units (weighted average period of 1.43 years)[511][515] - The Employee Stock Purchase Plan (ESPP) allows eligible employees to purchase common stock at a discount[516][517] Common Stock Reserved for Future Issuance (in thousands) | Component | December 31, 2022 | | :-------- | :---------------- | | Stock options outstanding | 2,916 | | Unvested restricted stock units | 8,533 | | Employee stock purchase plan | 119 | | Senior convertible notes | 17,246 | | Warrants outstanding | 15,491 | | Authorized for future grant under the Distributor and Development Services plans | 281 | | Authorized for future grant under the Management Objective Strategic Incentive Plan | 274 | | Authorized for future grant under the Company Equity plans | 1,269 | | Total | 46,129 | 11. Income Taxes Alphatec reported a net loss before taxes in 2022, with significant NOL carryforwards, a valuation allowance against deferred tax assets, and unrecognized tax benefits Pretax Income (Loss) by Jurisdiction (in thousands) | Jurisdiction | Year Ended December 31, 2022 | Year Ended December 31, 2021 | Year Ended December 31, 2020 | | :----------- | :--------------------------- | :--------------------------- | :--------------------------- | | U.S. Domestic | $(146,627) | $(127,943) | $(78,849) | | Foreign | $(5,382) | $(16,219) | $— | | Net loss before taxes | $(152,009) | $(144,162) | $(78,849) | Provision for Income Taxes (in thousands) | Component | Year Ended December 31, 2022 | Year Ended December 31, 2021 | Year Ended December 31, 2020 | | :-------- | :--------------------------- | :--------------------------- | :--------------------------- | | Total current | $(6