Alphatec 10Q 2022 Q3 Quarterly report

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2022

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 000-52024

ALPHATEC HOLDINGS, INC.

(Exact name of registrant as specified in its charter)


Delaware	20-2463898
( State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
1950 Camino Vida Roble, Carlsbad, CA	92008
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (760) 431-9286

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common stock, par value $.0001 per share	ATEC	The NASDAQ Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes ☐ No ☒

As of October 27, 2022, there were 105,058,324 shares of the registrant’s common stock outstanding.

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ALPHATEC HOLDINGS, INC.

QUARTERLY REPORT ON FORM 10-Q

September 30, 2022

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		Page
	PART I – FINANCIAL INFORMATION

Item 1.	Financial Statements	3

	Condensed Consolidated Balance Sheets as of September 30, 2022 (unaudited) and December 31, 2021	3

	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2022 and 2021 (unaudited)	4

	Condensed Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended September 30, 2022 and 2021 (unaudited)	5

	Condensed Consolidated Statements of Stockholders’ (Deficit) Equity for the Three and Nine Months Ended September 30, 2022 and 2021 (unaudited)	6

	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2022 and 2021 (unaudited)	8

	Notes to Condensed Consolidated Financial Statements (unaudited)	9

Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	28

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	35

Item 4.	Controls and Procedures	35

	PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	36

Item 1A.	Risk Factors	36

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	36

Item 5.	Other Information	37

Item 6.	Exhibits	38

SIGNATURES		39

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

ALPHATEC HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except for par value data)


	September 30, 2022			December 31, 2021
Assets	(Unaudited)
Current assets:
Cash and cash equivalents	$	106,112		$	187,248
Accounts receivable, net of allowances of $591 and $2,307, respectively		50,723			41,893
Inventories		102,159			91,703
Prepaid expenses and other current assets		9,718			10,313
Total current assets		268,712			331,157
Property and equipment, net		98,908			87,401
Right-of-use assets		28,451			25,283
Goodwill		37,593			39,689
Intangible assets, net		79,738			85,274
Other assets		2,881			3,249
Total assets	$	516,283		$	572,053
Liabilities and Stockholders’ (Deficit) Equity
Current liabilities:
Accounts payable	$	33,374		$	25,737
Accrued expenses and other current liabilities		61,741			55,549
Contract liabilities		12,293			15,255
Short-term debt		13,550			342
Current portion of operating lease liabilities		4,529			4,212
Total current liabilities		125,487			101,095
Long-term debt		348,324			326,489
Operating lease liabilities, less current portion		26,952			24,383
Other long-term liabilities		14,486			17,061
Commitments and contingencies (Note 10)
Redeemable preferred stock, $0.0001 par value; 20,000 shares authorized at September 30, 2022 and December 31, 2021; 3,319 shares issued and outstanding at September 30, 2022 and December 31, 2021		23,603			23,603
Stockholders' (deficit) equity:
Series A convertible preferred stock, $0.0001 par value; 15 shares authorized, and 0 shares issued and outstanding at September 30, 2022 and December 31, 2021		—			—
Common stock, $0.0001 par value; 200,000 authorized; 105,042 shares issued and 104,984 shares outstanding at September 30, 2022; and 99,627 shares issued and 99,537 shares outstanding at December 31, 2021		11			10
Treasury stock, 1,808 shares, at cost		(25,097	)		(25,097	)
Additional paid-in capital		919,319			892,828
Accumulated other comprehensive deficit		(17,314	)		(5,994	)
Accumulated deficit		(899,488	)		(782,325	)
Total stockholders’ (deficit) equity		(22,569	)		79,422
Total liabilities and stockholders’ (deficit) equity	$	516,283		$	572,053

See accompanying notes to unaudited condensed consolidated financial statements.

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ALPHATEC HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(In thousands, except per share amounts)


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2022			2021			2022			2021
Revenue:
Revenue from products and services	$	89,839		$	62,735		$	244,908		$	168,336
Revenue from international supply agreement		—			145			15			914
Total revenue		89,839			62,880			244,923			169,250
Cost of sales		30,323			23,266			80,715			56,713
Gross profit		59,516			39,614			164,208			112,537
Operating expenses:
Research and development		12,111			9,391			32,429			23,031
Sales, general and administrative		75,954			61,494			218,093			162,578
Litigation-related expenses		3,602			1,209			16,629			5,711
Amortization of acquired intangible assets		2,774			2,012			7,181			3,392
Transaction-related expenses		—			373			120			6,156
Restructuring expenses		45			256			1,704			1,587
Total operating expenses		94,486			74,735			276,156			202,455
Operating loss		(34,970	)		(35,121	)		(111,948	)		(89,918	)
Interest and other expense, net:
Interest expense, net		(1,285	)		(1,272	)		(4,176	)		(5,604	)
Loss on debt extinguishment, net		—			(7,434	)		—			(7,434	)
Other (expense) income, net		(615	)		886			(578	)		(1,020	)
Total interest and other expense, net		(1,900	)		(7,820	)		(4,754	)		(14,058	)
Net loss before taxes		(36,870	)		(42,941	)		(116,702	)		(103,976	)
Income tax provision		129			90			461			163
Net loss	$	(36,999	)	$	(43,031	)	$	(117,163	)	$	(104,139	)
Net loss per share, basic and diluted	$	(0.35	)	$	(0.43	)	$	(1.14	)	$	(1.09	)
Weighted average shares outstanding, basic and diluted		104,804			99,571			102,561			95,204

See accompanying notes to unaudited condensed consolidated financial statements.

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ALPHATEC HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(UNAUDITED)

(In thousands)


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2022			2021			2022			2021
Net loss	$	(36,999	)	$	(43,031	)	$	(117,163	)	$	(104,139	)
Foreign currency translation adjustments		(4,851	)		(3,463	)		(11,320	)		(4,818	)
Comprehensive loss	$	(41,850	)	$	(46,494	)	$	(128,483	)	$	(108,957	)

See accompanying notes to unaudited condensed consolidated financial statements.

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ALPHATEC HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ (DEFICIT) EQUITY

(UNAUDITED)

(In thousands)


	Common stock				Additional paid-in			Treasury			Accumulated other comprehensive			Accumulated			Total stockholders’
	Shares		Par Value		capital			stock			loss			deficit			(deficit) equity
Balance at December 31, 2021		99,537	$	10	$	892,828		$	(25,097	)	$	(5,994	)	$	(782,325	)	$	79,422
Stock-based compensation		—		—		7,730			—			—			—			7,730
Sales agent equity incentives		199		—		2,178			—			—			—			2,178
Common stock issued for warrant exercises		551		—		1,289			—			—			—			1,289
Common stock issued for stock option exercises		39		—		140			—			—			—			140
Common stock issued for vesting of restricted stock units, net of shares withheld for tax liability		852		—		(4,751	)		—			—			—			(4,751	)
Foreign currency translation adjustments		—		—		—			—			(1,180	)		—			(1,180	)
Net loss		—		—		—			—			—			(42,844	)		(42,844	)
Balance at March 31, 2022		101,178	$	10	$	899,414		$	(25,097	)	$	(7,174	)	$	(825,169	)	$	41,984
Stock-based compensation		—		—		10,109			—			—			—			10,109
Sales agent equity incentives		20		—		361			—			—			—			361
Common stock issued for conversion of Series A preferred stock		29		—		—			—			—			—			—
Common stock issued for warrant exercises		1,914		1		2,674			—			—			—			2,675
Common stock issued for employee stock purchase plan and stock option exercises		535		—		2,331			—			—			—			2,331
Common stock issued for vesting of restricted stock units, net of shares withheld for tax liability		819		—		(4,562	)		—			—			—			(4,562	)
Common stock issued for asset acquisition		23		—		250			—			—			—			250
Foreign currency translation adjustments		—		—		—			—			(5,289	)		—			(5,289	)
Net loss		—		—		—			—			—			(37,320	)		(37,320	)
Balance at June 30, 2022		104,518	$	11	$	910,577		$	(25,097	)	$	(12,463	)	$	(862,489	)	$	10,539
Stock-based compensation		—		—		10,011			—			—			—			10,011
Sales agent equity incentives		—		—		178			—			—			—			178
Common stock issued for warrant exercises		49		—		196			—			—			—			196
Common stock issued for employee stock purchase plan and stock option exercises		11		—		47			—			—			—			47
Common stock issued for vesting of restricted stock units, net of shares withheld for tax liability		406		—		(1,690	)		—			—			—			(1,690	)
Foreign currency translation adjustments		—		—		—			—			(4,851	)		—			(4,851	)
Net loss		—		—		—			—			—			(36,999	)		(36,999	)
Balance at September 30, 2022		104,984	$	11	$	919,319		$	(25,097	)	$	(17,314	)	$	(899,488	)	$	(22,569	)

See accompanying notes to unaudited condensed consolidated financial statements.

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ALPHATEC HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(UNAUDITED)

(In thousands)


	Common stock					Additional paid-in			Shareholder note			Treasury			Accumulated other comprehensive			Accumulated			Total stockholders’
	Shares			Par Value		capital			receivable			stock			income (loss)			deficit			equity
Balance at December 31, 2020		82,104		$	8	$	770,764		$	(4,000	)	$	(97	)	$	1,204		$	(637,999	)	$	129,880
Stock-based compensation		—			—		3,889			—			—			—			—			3,889
Sales agent equity incentives		—			—		129			—			—			—			—			129
Common stock issued for warrant exercises		2,019			—		756			—			—			—			—			756
Common stock issued for stock option exercises		69			—		210			—			—			—			—			210
Common stock issued for vesting of restricted stock units, net of shares withheld for tax liability		379			—		(1,717	)		—			—			—			—			(1,717	)
Shareholder note receivable		—			—		—			1,100			—			—			—			1,100
Foreign currency translation adjustments		—			—		—			—			—			(3,052	)		—			(3,052	)
Net loss		—			—		—			—			—			—			(22,903	)		(22,903	)
Balance at March 31, 2021		84,571		$	8	$	774,031		$	(2,900	)	$	(97	)	$	(1,848	)	$	(660,902	)	$	108,292
Stock-based compensation		—			—		11,187			—			—			—			—			11,187
Sales agent equity incentives		—			—		94			—			—			—			—			94
Common stock issued for warrant exercises		1,576			—		1,729			—			—			—			—			1,729
Common stock issued for employee stock purchase plan and stock option exercises		356			—		1,479			—			—			—			—			1,479
Common stock issued for vesting of restricted stock units, net of shares withheld for tax liability		1,125			—		(5,687	)		—			—			—			—			(5,687	)
Issuance of common stock for public offering, net of offering costs of $6,200		12,421			2		131,826			—			—			—			—			131,828
Shareholder note receivable		—			—		—			1,100			—			—			—			1,100
Foreign currency translation adjustments		—			—		—			—			—			1,697			—			1,697
Net loss		—			—		—			—			—			—			(38,205	)		(38,205	)
Balance at June 30, 2021		100,049		$	10	$	914,659		$	(1,800	)	$	(97	)	$	(151	)	$	(699,107	)	$	213,514
Stock-based compensation		—			—		10,299			—			—			—			—			10,299
Sales agent equity incentives		65			—		799			—			—			—			—			799
Common stock issued for warrant exercises		331			—		731			—			—			—			—			731
Common stock issued for employee stock purchase plan and stock option exercises		169			—		518			—			—			—			—			518
Common stock issued for vesting of restricted stock units, net of shares withheld for tax liability		293			—		(3,844	)		—			—			—			—			(3,844	)
Shareholder note receivable		—			—		—			1,100			—			—			—			1,100
Repurchase of common stock		(1,806	)		—		—			—			(25,000	)		—			—			(25,000	)
Purchase of capped calls		—			—		(39,866	)		—			—			—			—			(39,866	)
Foreign currency translation adjustments		—			—		—			—			—			(3,463	)		—			(3,463	)
Net loss		—			—		—			—			—			—			(43,031	)		(43,031	)
Balance at September 30, 2021		99,101		$	10	$	883,296		$	(700	)	$	(25,097	)	$	(3,614	)	$	(742,138	)	$	111,757

See accompanying notes to unaudited condensed consolidated financial statements.

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ALPHATEC HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(In thousands)


	Nine Months Ended September 30,
	2022			2021
Operating activities:
Net loss	$	(117,163	)	$	(104,139	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		29,819			17,986
Stock-based compensation		30,464			26,724
Amortization of debt discount and debt issuance costs		1,470			1,589
Amortization of right-of-use assets		1,927			2,730
Write-down for excess and obsolete inventories		7,023			6,842
Loss on disposal of assets		1,739			969
Loss on extinguishment of debt, net		—			7,434
Other		573			861
Changes in operating assets and liabilities:
Accounts receivable		(10,133	)		(1,417	)
Inventories		(20,131	)		(23,817	)
Prepaid expenses and other current assets		19			4,815
Other assets		(840	)		69
Accounts payable		7,437			(298	)
Accrued expenses		4,144			258
Lease liabilities		(1,905	)		168
Contract liabilities		(1,133	)		(3,601	)
Other long-term liabilities		(50	)		4,251
Net cash used in operating activities		(66,740	)		(58,576	)
Investing activities:
Purchase of property and equipment		(35,984	)		(48,946	)
Purchase of intangible assets		(7,461	)		—
Acquisition of business, net of cash acquired		—			(62,133	)
Purchase of OCEANE		—			(21,097	)
Cash paid for investments		—			(3,000	)
Settlement of forward contract		—			(2,589	)
Net cash used in investing activities		(43,445	)		(137,765	)
Financing activities:
Proceeds from Revolving Credit Facility		35,000			—
Payment of debt issuance costs		(968	)		(10,028	)
Proceeds from common stock offering		—			131,828
Proceeds from issuance of convertible notes		—			316,250
Net cash paid from common stock exercises		(4,179	)		(5,825	)
Purchase of capped calls		—			(39,866	)
Repurchase of common stock		—			(25,000	)
Repayment of Squadron Medical term loan		—			(45,000	)
Proceeds from financed insurance		1,801			—
Repayment of Inventory Financing Agreement		—			(8,088	)
Principal payments on finance lease obligations		(126	)		(65	)
Principal payments on term loan and notes payable		(1,313	)		(1,545	)
Other		—			(208	)
Net cash provided by financing activities		30,215			312,453
Effect of exchange rate changes on cash		(1,166	)		(9	)
Net (decrease) increase in cash and cash equivalents		(81,136	)		116,103
Cash and cash equivalents at beginning of period		187,248			107,765
Cash and cash equivalents at end of period	$	106,112		$	223,868
Supplemental disclosure of cash flow information:
Cash paid for interest	$	2,723		$	4,297
Cash paid for income taxes	$	272		$	225
Supplemental disclosure of noncash activities:
PPP Loan Forgiveness	$	—		$	4,271
Financed insurance	$	1,801		$	—
Financed inventory	$	—		$	4,015
Debt issuance costs	$	347		$	—
Purchases of property and equipment in accounts payable and accrued expenses	$	2,019		$	4,459
Purchase of intangible assets	$	750		$	—
Recognition of lease liability	$	180		$	23,403
Modification of lease liability for lease amendment	$	4,288		$	—
Common stock issued for asset acquisition	$	250		$	—

See accompanying notes to unaudited condensed consolidated financial statements.

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ALPHATEC HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. The Company and Basis of Presentation

The Company

Alphatec Holdings, Inc. (the “Company”), through its wholly owned subsidiaries, Alphatec Spine, Inc. (“Alphatec Spine”), SafeOp Surgical, Inc. (“SafeOp”), and EOS imaging S.A. (“EOS”), is a medical technology company that designs, develops, and markets technology for the treatment of spinal disorders associated with disease and degeneration, congenital deformities, and trauma. The Company markets its products in the United States of America and internationally via a network of independent sales agents and direct sales representatives.

Basis of Presentation and Principles of Consolidation

The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. The Company translates the financial statements of its foreign subsidiaries using end-of-period exchange rates for assets and liabilities and average exchange rates during each reporting period for results of operations. All intercompany balances and transactions have been eliminated during consolidation.

The accompanying condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Pursuant to these rules and regulations, the Company has condensed or omitted certain information and footnotes it normally includes in its annual consolidated financial statements prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”). The unaudited interim condensed consolidated financial statements reflect all adjustments, including normal recurring adjustments which, in the opinion of management, are necessary for a fair statement of the financial position and results of operations for the periods presented. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2021, which are included in the Company’s Annual Report on Form 10-K that was filed with the SEC. Operating results for the nine months ended September 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022, or any other future periods.

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2. Summary of Significant Accounting Policies

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include the useful lives of property and equipment, goodwill, intangible assets, allowances for doubtful accounts, the valuation of share-based liabilities, deferred tax assets, inventory, stock-based compensation, revenues, income tax uncertainties, and other contingencies.

Fair Value Measurements

The carrying amount of financial instruments consisting of cash and cash equivalents, accounts receivable, prepaid expenses and other current assets, accounts payable, accrued expenses, and short-term debt included in the Company’s condensed consolidated financial statements are reasonable estimates of fair value due to their short maturities.

Authoritative guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

Level 1: Quoted prices in active markets for identical assets or liabilities.

Level 2: Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active; or other inputs that can be corroborated by observable market data for substantially the full term of the assets or liabilities.

Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

Excess and Obsolete Inventory

Most of the Company’s inventory is comprised of finished goods, which is primarily produced by third-party suppliers. Specialized implants, fixation products, biologics, and disposables are determined by utilizing a standard cost method that includes capitalized variances which approximates the weighted average cost. Imaging equipment and related parts are valued at weighted average cost. Inventories are stated at the lower of cost or net realizable value. The Company reviews the components of its inventory on a periodic basis for excess and obsolescence and adjusts inventory to its net realizable value as necessary.

The Company records a lower of cost or net realizable value (“LCNRV”) inventory reserve for estimated excess and obsolete inventory based upon its expected use of inventory on hand. The Company’s inventory, which consists primarily of specialized implants, fixation products, biologics, and disposables is at risk of obsolescence due to the need to maintain substantial levels of inventory. In order to market its products effectively and meet the demands of interoperative product placement, the Company maintains and provides surgeons and hospitals with a variety of inventory products and sizes. For each surgery, fewer than all components will be consumed. The need to maintain and provide a wide variety of inventory causes inventory to be held that is not likely to be used.

The Company’s estimates and assumptions for excess and obsolete inventory are reviewed and updated on a quarterly basis. The estimates and assumptions are determined primarily based on current usage of inventory and the age of inventory quantities on hand. Additionally, the Company considers recent experience to develop assumptions about future demand for its products, while considering market conditions, product life cycles and new product launches. Increases in the LCNRV reserve for excess and obsolete inventory result in a corresponding charge to cost of sales.

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Revenue Recognition

In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Revenue from Contracts with Customers (“Topic 606”), the Company recognizes revenue from sales of products and services when the customer obtains control of the promised goods or services, in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services. The principles in Topic 606 are applied using the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation. The Company only applies the five-step model to contracts when it is probable that the entity will collect the consideration it is entitled to in exchange for the goods or services it transfers to the customer.

Sales are derived primarily from the sale of spinal implant products to hospitals and medical centers through direct sales representatives and independent sales agents, and with the acquisition of EOS, includes imaging equipment and related services. Revenue is recognized when obligations under the terms of a contract with customers are satisfied, which occurs with the transfer of control of products to customers, either upon shipment of the product or delivery of the product to the customer depending on the shipping terms, or when the products are used in a surgical procedure (implanted in a patient). Revenue from the sale of imaging equipment is recognized as each distinct performance obligation is fulfilled and control transfers to the customer, beginning with shipment or delivery, depending on the terms. Revenue from other distinct performance obligations, such as maintenance on imaging equipment and other imaging related services, is recognized in the period the service is performed, and makes up less than 10% of the Company’s total revenue. Revenue is measured based on the amount of consideration expected to be received in exchange for the transfer of the goods or services specified in the contract with each customer. In certain cases, the Company does offer the ability for customers to lease its imaging equipment primarily on a non-sales type basis, but such arrangements are immaterial to total revenue in the periods presented. The Company generally does not allow returns of products that have been delivered. Costs incurred by the Company associated with sales contracts with customers are deferred over the performance obligation period and recognized in the same period as the related revenue, except for contracts that complete within one year or less, in which case the associated costs are expensed as incurred. Payment terms for sales to customers may vary but are commensurate with the general business practices in the country of sale.

To the extent that the transaction price includes variable consideration, such as discounts, rebates, and customer payment penalties, the Company estimates the amount of variable consideration that should be included in the transaction price. Estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of the Company’s anticipated performance and all information that is reasonably available, including historical, current, and forecasted information and whether, in the Company’s judgement, it is probable that a significant future reversal of cumulative revenue under the contract will not occur.

The Company records a contract liability, or deferred revenue, when it has an obligation to provide a product or service to the customer and payment is received in advance of its performance. When the Company sells a product or service with a future performance obligation, revenue is deferred on the unfulfilled performance obligation and recognized over the related performance period. Generally, the Company does not have observable evidence of the standalone selling price related to its future service obligations; therefore, the Company estimates the selling price using an expected cost plus a margin approach. The transaction price is allocated using the relative standalone selling price method. The use of alternative estimates could result in a different amount of revenue deferral.

Recent Accounting Pronouncements

In August 2021, the FASB issued Accounting Standards Update ("ASU") No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. The guidance requires application of Topic 606, Revenue from Contracts with Customers to recognize and measure contract assets and contract liabilities acquired in a business combination. ASU No. 2021-08 adds an exception to the general recognition and measurement principle in Topic 805 where assets acquired and liabilities assumed in a business combination, including contract assets and contract liabilities arising from contracts with customers, are measured at fair value on the acquisition date. Under the new guidance, the acquirer will recognize acquired contract assets and contract liabilities as if the acquirer had originated the contract. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022, with early adoption permitted. The Company does not intend to early adopt the standard and is in the process of assessing the impact, if any, on its condensed consolidated financial statements and related disclosures.

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3. Business Combination

The Company recognizes assets acquired, liabilities assumed, and any noncontrolling interest at fair value at the date of acquisition.

On December 16, 2020, the Company entered into a Tender Offer Agreement with EOS, pursuant to which the Company agreed to commence a public tender offer (the “Offer”) to purchase all of the issued and outstanding ordinary shares, nominal value €0.01 per share (collectively, the “EOS Shares”), for a cash offer of €2.45 per EOS Share, and outstanding convertible bonds of EOS (“OCEANEs”) for a cash offer of €7.01 per OCEANE, which included accrued but unpaid interest. On May 13, 2021 (the “Change in Control Date”), the Company substantially completed the Offer, pursuant to which the Company purchased 59% of the issued and outstanding EOS Shares and 53% of the OCEANEs for $66.5 million in cash pursuant to the Offer. In addition, prior to the Change in Control Date, the Company had also acquired 30% of the issued and outstanding EOS Shares and 4% of the OCEANEs on the open market for $25.0 million in cash. After the Change in Control Date, the Company held a controlling financial interest in EOS representing 89% of issued and outstanding EOS Shares and 57% of OCEANEs, equal to approximately 80% of the capital and voting rights of EOS on a fully diluted basis. The Offer was reopened on May 17, 2021 to purchase the remaining EOS Shares for $8.5 million, ultimately resulting in the acquisition of 100% of EOS Shares and 57% of the OCEANEs as of June 2, 2021. The total cash paid to acquire 100% of the EOS Shares and 57% of the OCEANEs was $100.0 million.

EOS, which now operates as a wholly owned subsidiary of the Company, is a global medical device company that designs, develops and markets innovative, low dose 2D/3D full body and biplanar weight-bearing imaging, rapid 3D modeling of EOS patient X-ray images, web-based patient-specific surgical planning, and integration of surgical plan into the operating room that collectively bridge the entire spectrum of care from imaging to post-operative assessment capabilities for orthopedic surgery. The Company plans to integrate this technology into its procedural approach to spine surgery to better inform and better achieve spinal alignment objectives in surgery.

During the nine months ended September 30, 2022, the Company recorded a purchase accounting adjustment primarily related to deferred tax assets, which resulted in a $1.6 million increase to goodwill. The Company has completed its estimate of the fair value of the purchase consideration, the assets acquired, and the liabilities assumed. Accordingly, the Company has allocated the purchase consideration as follows:


(in thousands)	As of May 13, 2021
Cash paid for purchase of EOS Shares at Change in Control Date	$	46,908
Cash paid for purchase of OCEANEs at Change in Control Date		19,620
Total cash paid at Change in Control Date		66,528
Fair value of investment in EOS Shares held prior to Change in Control Date		23,549
Fair value of investment in OCEANEs held prior to Change in Control Date		1,477
Total fair value of investment in EOS held prior to Change in Control Date		25,026
Fair value of noncontrolling interest acquired after Change in Control Date		8,454
	$	100,008

Cash and cash equivalents	$	16,778
Accounts receivable		9,083
Inventory		26,681
Other current assets		4,422
Property, plant and equipment, net		1,650
Deferred tax assets		536
Right-of-use assets		4,341
Goodwill		29,469
Definite-lived intangible assets:
Developed technology		56,000
Customer relationships		9,500
Trade names		6,000
Other noncurrent assets		395
Contract liabilities		21,196
Long-term debt		15,297
Other liabilities assumed		28,354
Total identifiable net assets	$	100,008

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The purchase price, including cash paid at the Change in Control Date, the fair value of the investment held prior to the Change in Control Date, and the fair value of the noncontrolling interest acquired after the Change in Control Date, exceeded the fair value of the net tangible and identifiable intangible assets acquired as part of the acquisition. As a result, the Company recorded goodwill in connection with the acquisition. Goodwill primarily consists of expected revenue synergies resulting from the combination of product portfolios and cost synergies related to elimination of redundant facilities and functions associated with the combined entity. Goodwill recognized in this transaction is not deductible for tax purposes. The intangible assets acquired will be amortized on a straight-line basis over useful lives of ten years, seven years and ten years for technology-based, customer-related, and trade name related intangible assets, respectively. The estimated fair values of the intangible assets acquired were primarily determined using the income approach based on significant inputs that were not observable in the market.

Acquisition costs of $5.8 million were recognized during the nine months ended September 30, 2021 as transaction-related expenses on the condensed consolidated statements of operations as incurred. No such costs were recognized during the three months ended September 30, 2021. The Company's results of operations for the three months ended September 30, 2021 included the operating results of EOS of $11.1 million of revenue and a net loss of $6.2 million in the condensed consolidated statement of operations. The Company's results of operations for the nine months ended September 30, 2021 included the operating results of EOS of $17.2 million of revenue and a net loss of $13.6 million in the condensed consolidated statement of operations.

The following table presents the unaudited pro forma results for the three and nine months ended September 30, 2021, which combines the historical results of operations of the Company and its wholly owned subsidiaries as though the companies had been combined as of January 1, 2020 and therefore many of the non-recurring business combination adjustments would have been included in the year ended December 31, 2020 by nature of such adjustments, instead of the periods presented. The pro forma information is presented for informational purposes only and is not indicative of the results of operations that may have been achieved if the acquisition had taken place at such time. The comparable period for the three and nine months ended September 30, 2021 includes adjustments directly attributable to the business combination, including $1.8 million and $5.6 million in amortization charges for acquired intangible assets, respectively. The comparable period for the nine months ended September 30, 2021 also includes $7.4 million in acquisition related expenses. The unaudited pro forma results include IFRS to U.S. GAAP adjustments for EOS historical results and adjustments for accounting policy alignment, which were materially similar to the Company. Any differences in accounting policies were adjusted to reflect the accounting policies of the Company in the unaudited pro forma results presented.


	Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands, except per share amounts)	2022			2021			2022			2021
Total revenue	$	89,839		$	62,880		$	244,923		$	178,393
Net loss		(36,999	)		(43,031	)		(117,163	)		(101,739	)
Net loss per share, basic and diluted	$	(0.35	)	$	(0.43	)	$	(1.14	)	$	(1.07	)

4. Fair Value Measurements

Assets and liabilities measured at fair value on a recurring basis include the following as of September 30, 2022, and December 31, 2021 (in thousands):


	September 30, 2022
	Level 1		Level 2		Level 3		Total
Cash equivalents:
Money market funds	$	87,405		—		—	$	87,405
Total cash equivalents	$	87,405		—		—	$	87,405

Liability classified equity award	$	—		—		1,949	$	1,949

	December 31, 2021
	Level 1		Level 2		Level 3		Total
Cash equivalents:
Money market funds	$	140,010		—		—	$	140,010
Total cash equivalents	$	140,010		—		—	$	140,010

Liability classified equity award	$	—		—		2,052	$	2,052

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The Company did not have any transfers of assets and liabilities between the levels of the fair value measurement hierarchy during the periods presented.

The Company issued a liability classified equity award to one of its executive officers. The award vests in 2023 subject to continued service and a specific market condition. As the award will be settled in cash, it is classified as a liability within Level 3 of the fair value hierarchy as the Company is using a probability-weighted income approach, utilizing significant unobservable inputs including the probability of achieving the specific market condition with the valuation updated at each reporting period. The full fair value of the award was $2.3 million as of September 30, 2022 and is being recognized ratably as the underlying service period is provided.

The following table provides a reconciliation of liabilities measured at fair value using significant unobservable inputs (Level 3) for the nine months ended September 30, 2022 (in thousands):


	Level 3 Liabilities
Balance at December 31, 2021	$	2,052
Straight-line recognition of liability classified equity award		196
Change in fair value measurement		80
Balance at March 31, 2022	$	2,328
Straight-line recognition of liability classified equity award		202
Change in fair value measurement		(1,469	)
Balance at June 30, 2022	$	1,061
Straight-line recognition of liability classified equity award		85
Change in fair value measurement		803
Balance at September 30, 2022	$	1,949

Fair Value of Long-term Debt

The fair value, based on a quoted market price (Level 1), of the Company’s outstanding Senior Convertible Notes due 2026 was approximately $257.9 million at September 30, 2022 and approximately $308.1 million at December 31, 2021. The fair value, based on a quoted market price (Level 1), of the Company’s outstanding OCEANEs was approximately $12.2 million at September 30, 2022 and approximately $14.1 million at December 31, 2021. See Note 9 for further information.

5. Inventories

Inventories reported at the lower of cost or net realizable value consist of the following (in thousands):


	September 30, 2022		December 31, 2021
Raw materials	$	15,121	$	14,671
Work-in-process		4,587		5,712
Finished goods		82,451		71,320
Inventories	$	102,159	$	91,703

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6. Property and Equipment, net

Property and equipment, net consist of the following (in thousands, except as indicated):


	Useful lives (in years)	September 30, 2022			December 31, 2021
Surgical instruments	4	$	151,743		$	130,432
Machinery and equipment	7		8,091			11,092
Computer equipment	3		4,505			5,694
Office furniture and equipment	5		4,358			3,861
Leasehold improvements	various		2,863			1,754
Construction in progress	n/a		14,102			7,292
			185,662			160,125
Less: accumulated depreciation and amortization			(86,754	)		(72,724	)
Property and equipment, net		$	98,908		$	87,401

Total depreciation expense was $8.0 million and $22.6 million for the three and nine months ended September 30, 2022, respectively, and $5.3 million and $13.8 million for three and nine months ended September 30, 2021, respectively. Construction in progress is not depreciated until placed in service. Property and equipment includes assets under financing leases and the related amortization of assets under financing leases is included in depreciation expense. Construction in progress includes costs associated with internal-use software.

7. Goodwill and Intangible Assets

Goodwill

The change in the carrying amount of goodwill during the period ended September 30, 2022 include the following (in thousands):


December 31, 2021	$	39,689
Purchase price allocation adjustment		1,628
Foreign currency fluctuation		(3,724	)
September 30, 2022	$	37,593

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Intangible assets, net

Intangible assets, net consist of the following (in thousands, except as indicated):


	Remaining Avg. Useful lives	Gross		Accumulated			Intangible
September 30, 2022:	(in years)	Amount		Amortization			Assets, net
Developed product technology	7	$	69,724	$	(10,380	)	$	59,344
Trademarks and trade names	8		4,974		(792	)		4,182
Customer relationships	4		13,532		(6,344	)		7,188
Distribution network	2		2,413		(1,991	)		422
Total amortized intangible assets			90,643		(19,507	)		71,136

Software in development	n/a		3,340					3,340
In-process research and development	n/a		5,262					5,262
Total intangible assets		$	99,245	$	(19,507	)	$	79,738
		.
	Remaining Avg. Useful lives	Gross		Accumulated			Intangible
December 31, 2021:	(in years)	Amount		Amortization			Assets, net
Developed product technology	12	$	74,543	$	(5,768	)	$	68,775
Trademarks and trade names	10		5,732		(477	)		5,255
Customer relationships	5		14,732		(5,264	)		9,468
Distribution network	3		2,413		(1,840	)		573
Total amortized intangible assets			97,420		(13,349	)		84,071

In-process research and development	n/a		1,203					1,203
Total intangible assets		$	98,623	$	(13,349	)	$	85,274

Total amortization expense attributed to intangible assets was $2.8 million and $7.2 million for the three and nine months ended September 30, 2022, respectively, and $2.3 million and $4.2 million for the three and nine months ended September 30, 2021, respectively. Software in development will be amortized when the projects are complete and the assets are ready for their intended use. In-process research and development assets begin amortizing when the relevant products reach full commercial launch.

Future amortization expense related to intangible assets is as follows (in thousands):


Remainder of 2022	$	2,734
2023		10,936
2024		10,833
2025		10,248
2026		10,248
Thereafter		26,137
	$	71,136

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8. Contract Liabilities

Contract liabilities consists of the following (in thousands):


	September 30, 2022			December 31, 2021
Contract liabilities	$	15,068		$	18,151
Less: Non-current portion of contract liabilities		(2,775	)		(2,896	)
Current portion of contract liabilities	$	12,293		$	15,255

The non-current contract liabilities balance is included in other long-term liabilities on the condensed consolidated balance sheets. Contract liabilities relates to contracts with customers for which partial or complete payment of the transaction price has been received from the customer and the related obligations must be completed before revenue can be recognized. These amounts primarily relate to undelivered equipment, services, or maintenance agreements. The Company recognized $6.4 million and $16.5 million of revenue from its contract liabilities during the three and nine months ended September 30, 2022, respectively, and $4.8 million and $8.2 million of revenue from its contract liabilities during the three and nine months ended September 30, 2021, respectively. The opening and closing balances of the Company’s contract liabilities are as follows (in thousands):


Balance at December 31, 2021	$	18,151
Payments received		13,410
Revenue recognized		(16,493	)
Balance at September 30, 2022	$	15,068

9. Debt

Revolving Credit Facility

In September 2022, the Company entered into a revolving credit facility (the “Revolving Credit Facility”) with entities affiliated with MidCap Financial Trust (“MidCap”). The Revolving Credit Facility provides up to $50.0 million in borrowing capacity to the Company based on a borrowing base. The borrowing base is calculated based on certain accounts receivable and inventory assets. The Company may request a $25.0 million increase in the Revolving Credit Facility for a total commitment of up to $75.0 million. The Revolving Credit Facility matures on the earlier of September 29, 2027, or 90 days prior to the final maturity date of the Company’s 2026 Notes. As of September 30, 2022, the outstanding balance under the Revolving Credit Facility was $35.0 million. In October 2022, the Company repaid $27.5 million of the outstanding balance.

In conjunction with obtaining the Revolving Credit Facility, the Company incurred $1.3 million in debt issuance costs. These costs were capitalized to other assets on the condensed consolidated balance sheets and are being amortized over the life of the Revolving Credit Facility. As of September 30, 2022, debt issuance costs, net of accumulated amortization, associated with the Revolving Credit Facility were $1.3 million.

The outstanding loans bear interest at the sum of the Term Secured Overnight Financing Rate ("SOFR"), a rate per annum equal to the secured overnight financing rate for such SOFR business day, plus 3.5% per annum. Interest on borrowings is due monthly. The interest rate as of September 30, 2022 was 6.5%. The loan agreements include an unused line fee, which is calculated as 0.5% per annum of either the unused Revolving Credit Facility or a minimum balance. Upon the Revolving Credit Facility’s maturity, any outstanding principal balance, unpaid accrued interest, and all other obligations under the Revolving Credit Facility will be due and payable.

The Revolving Credit Facility contains a lockbox arrangement clause requiring the Company to maintain a lockbox bank account. If the revolving loan availability is less than 30% of the revolving loan limit for five consecutive business days, or the Company is in default, MidCap will apply funds collected from the Company's lockbox account to reduce the outstanding balance of the Revolving Credit Facility (“Lockbox Deductions”). As of September 30, 2022, the Company's loan availability level has not activated Lockbox Deductions, nor is it expected to for the next 12 months; therefore, the Company has determined that the outstanding balance under the Revolving Credit Facility is long-term debt on the condensed consolidated balance sheets.

The outstanding loans are secured by substantially all of the Company’s assets, excluding intellectual property. The loan agreements and other ancillary documents contain customary representations and warranties and affirmative and negative covenants. Under the loan agreements, the Company is required to maintain a minimum level of liquidity. The loan agreements also include certain events of default, and upon the occurrence of such events of default, all outstanding loans under the Revolving Credit Facility may be accelerated and/or the lenders’ commitments terminated. The Company is in compliance with all required financial covenants as of September 30, 2022.

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0.75% Senior Convertible Notes due 2026

In August 2021, the Company issued $316.3 million aggregate principal amount of unsecured Senior Convertible Notes (the "2026 Notes") with a stated interest rate of 0.75% and a maturity date of August 1, 2026. Interest on the 2026 Notes is payable semi-annually in arrears on February 1 and August 1 of each year, beginning on February 1, 2022. The net proceeds from the sale of the 2026 Notes were approximately $306.2 million after deducting the initial purchasers’ offering expenses and before cash use for the privately negotiated capped call transactions (the “Capped Call Transactions”), as described below, the repurchase of stock, and the repayment of the outstanding term loan with Squadron Medical Finance Solutions, LLC (“Squadron Medical”) and outstanding obligation under the Inventory Financing Agreement, as described below. The 2026 Notes do not contain any financial covenants.

The 2026 Notes are convertible into shares of the Company’s common stock based upon an initial conversion rate of 54.5316 shares of the Company’s common stock per $1,000 principal amount of 2026 Notes (equivalent to an initial conversion price of approximately $18.34 per share). The conversion rate will be subject to adjustment upon the occurrence of certain specified events, including certain distributions and dividends to all or substantially all of the holders of the Company’s common stock. Based on the terms of the 2026 Notes, when a conversion notice is received, the Company has the option to pay or deliver cash, shares of the Company’s common stock, or a combination thereof.

Holders of the Convertible Notes have the right to convert their notes in certain circumstances and during specified periods. Prior to the close of business on the business day immediately preceding February 2, 2026, holders may convert all or a portion of their 2026 Notes only under the following circumstances: (1) during any calendar quarter (and only during such calendar quarter) commencing after the calendar quarter ending on September 30, 2021, if the last reported sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (2) during the 5 consecutive business days immediately after any 10 consecutive trading day period (the “measurement period”) in which the trading price per $1,000 principal amount of 2026 Notes for each trading day of the measurement period was less than 98% of the product of the last reported sale price of the Company’s common stock and the conversion rate on each such trading day; or (3) upon the occurrence of specified corporate events. From and after February 2, 2026, holders of the 2026 Notes may convert their notes at any time at their election until the close of business on the second scheduled trading day immediately before the maturity date. As of September 30, 2022, none of the conditions permitting the holders of the 2026 Notes to convert have been met. The 2026 Notes are classified as long-term debt on the condensed consolidated balances sheet as of September 30, 2022.

The 2026 Notes are redeemable, in whole or in part, at the Company’s option at any time, and from time to time, on or after August 6, 2024 and on or before the 40th scheduled trading day immediately before the maturity date, at a cash redemption price equal to the principal amount of the 2026 Notes to be redeemed, plus accrued and unpaid interest, if any, but only if the last reported sale price per share of the Company’s common stock exceeds 130% of the conversion price for a specified period of time. In addition, calling any note for redemption will constitute a “make-whole fundamental change” with respect to that note, in which case the conversion rate applicable to the conversion of that note will be increased in certain circumstances if such note is converted after it is called for redemption.

If a fundamental change occurs prior to the maturity date, holders may require the Company to repurchase all or a portion of their 2026 Notes for cash at a price equal to 100% of the principal amount of the 2026 Notes plus accrued and unpaid interest. No principal payments are otherwise due on the 2026 Notes prior to maturity.

The Company recorded the full principal amount of the 2026 Notes as a long-term liability net of deferred issuance costs. The annual effective interest rate for the 2026 Notes is 1.4%. The Company recognized interest expense on the 2026 Notes of $1.1 million and $3.3 million for the three and nine months ended September 30, 2022, respectively, which includes $0.5 million and $1.5 million for the amortization of debt issuance costs, respectively. The Company recognized interest expense of $0.6 million for the three and nine months ended September 30, 2021 which includes $0.3 million for the amortization of debt issuance costs. The Company uses the if-converted method for assumed conversion of the 2026 Notes to compute the weighted-average shares of common stock outstanding for diluted earnings per share, if applicable.

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The outstanding principal amount and carrying value of the 2026 Notes consist of the following (in thousands):


	September 30, 2022
Principal	$	316,250
Unamortized debt issuance costs		(7,789	)
Net carrying value	$	308,461

Capped Call Transactions

In connection with the offering of the 2026 Notes, the Company entered into the Capped Call Transactions with certain financial institutions. The Capped Call Transactions are expected generally to reduce the potential dilution and/or offset the cash payments the Company is required to make in excess of the principal amount of the 2026 Notes upon conversion of the 2026 Notes in the event that the market price per share of the Company’s common stock is greater than the strike price of the Capped Call Transactions with such reduction and/or offset subject to a cap. The Capped Call Transactions have an initial cap price of $27.68 per share of the Company’s common stock, which represents a premium of 100% over the last reported sale price of the Company’s common stock on August 5, 2021, and is subject to certain adjustments under the terms of the Capped Call Transactions. Collectively, the Capped Call Transactions cover, initially, the number of shares of the Company’s common stock underlying the 2026 Notes, subject to anti-dilution adjustments substantially similar to those applicable to the 2026 Notes. The cost of the Capped Call Transactions was approximately $39.9 million.

The Capped Call Transactions are separate transactions and are not part of the terms of the 2026 Notes and will not affect any holder’s rights under the notes. Holders of the 2026 Notes will not have any rights with respect to the Capped Call Transactions.

The Capped Call Transactions meet all of the applicable criteria for equity classification and, as a result, the related $39.9 million cost was recorded as a reduction to additional paid-in capital on the Company’s condensed consolidated statements of shareholders’ (deficit) equity.

OCEANE Convertible Bonds

On May 31, 2018, EOS issued 4,344,651 OCEANE convertible bonds, denominated in Euros, due May 2023 for aggregate gross proceeds of $34.3 million (€29.5 million). The OCEANEs are unsecured obligations of EOS, rank equally with all other unsecured and unsubordinated obligations of EOS, and pay interest at a rate equal to 6% per year, payable semiannually in arrears on May 31 and November 30 of each year, beginning November 30, 2018. Unless either earlier converted or repurchased, the OCEANEs will mature on May 31, 2023. Interest expense was $0.2 million and $0.6 million for the three and nine months ended September 30, 2022, respectively. Interest expense was $0.3 million for the three months ended September 30, 2021 and $0.4 million from the date of the acquisition to September 30, 2021.

As discussed in Note 3, in connection with the Offer to acquire EOS, the Company purchased 2,486,135 OCEANE convertible bonds, and as such, 1,858,516 OCEANE convertible bonds with a principal amount of $15.3 million (€12.6 million) remained outstanding at the time of acquisition.

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The OCEANEs are convertible by their holders into new EOS Shares or exchangeable for existing EOS Shares, at the Company’s option, at an initial conversion rate of one share per OCEANE, and the initial conversion rate is subject to customary anti-dilution adjustments. The OCEANEs are convertible at any time until the seventh business day prior to maturity or seventh business day prior to an earlier redemption of the OCEANE. If the number of shares calculated is not a whole number, the holder may request allocation of either the whole number of shares immediately below the number and receive an amount in cash equal to the remaining fractional share value, or the whole number of shares immediately above the number and pay an amount in cash equal to the remaining fractional share value. Holders of the OCEANEs have the option to convert all or any portion of such OCEANEs, regardless of any conditions, at any time until the close of seventh business day immediately preceding the maturity date.

EOS has a right to redeem all of the OCEANEs at its option any time after June 20, 2021 at a cash redemption price equal to the par value of the OCEANEs plus accrued and unpaid interest if the product of the volume-weighted-average price of the shares and the conversion ratio as specified in the agreement in effect on each trading day exceeds 150% of the par value of each OCEANE on each of at least twenty consecutive trading days during any forty consecutive trading days, if EOS redeems the OCEANEs when the number of OCEANEs outstanding is 15% or less of the number of OCEANEs originally issued, or the occurrence of a tender or exchange offer. As a result of the Company’s acquisition of EOS, the OCEANEs are now convertible into new shares of EOS, as a wholly-owned subsidiary of the Company. OCEANE holders can redeem the notes upon the occurrence of an event of default or upon the occurrence of a change of control. In July 2021, in connection with the change of control, holders of 25,971 OCEANEs chose to redeem their bonds for approximately $0.2 million (€0.2 million).

The carrying value of the outstanding OCEANEs was $12.2 million (€12.5 million) as of September 30, 2022.

Other Debt Agreements

In January and April 2021, prior to the acquisition, EOS obtained two loan agreements, denominated in Euros, under French government sponsored COVID-19 relief initiatives (pret garanti par l’etat or “PGE” loans). Each loan contains a 12-month term and 90% of the principal balance of each loan is state guaranteed. The cost of the state guaranty is 0.25% of the loan amounts. The loans carry an interest-free rate from the commercial banks (€3.3 million) and a 1.75% interest from the lender (€1.5 million). The loan capital and loan guaranty costs are payable in full at the end of the 12-month term or the loan may be extended up to 5 additional years. If the Company chooses to extend the debt, the election must be made by the Company between months 8 and 11 of the 12-month term. The extension will carry an interest rate at the banks’ refinancing cost, to be applied from year 2 to year 6 and an increased state guaranty cost (50 to 200 bps, as per a scale with company size and extension year).

In February 2022, the Company extended the maturity for each loan agreement to 2027. Each loan has a 12-month period from the applicable extension date where interest only payments will occur (the “Interest Only Period”). Following the Interest Only Period, monthly and quarterly installments of principal and interest under each loan agreement will be due until the original principal amounts and applicable interest is fully repaid in 2027. The outstanding obligation under each loan as of September 30, 2022 was $3.2 million and $1.4 million (€3.3 million and €1.5 million) at weighted average interest rates of 0.98% and 1.25%, respectively, and weighted average costs of the state guaranty of 0.69% and 1.00%, respectively.

Total Indebtedness

Principal payments remaining on the Company's debt are as follows as of September 30, 2022 (in thousands):


Remainder of 2022	$	906
2023	��	13,220
2024		1,422
2025		1,155
2026		317,406
Thereafter		35,554
Total		369,663
Less: debt discount		(7,789	)
Total		361,874
Less: current portion of long-term debt		(13,550	)
Long-term debt	$	348,324

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10. Commitments and Contingencies

Leases

The Company determines if an arrangement is a lease at inception by assessing whether there is an identified asset and whether the contract conveys the right to control the use of the identified asset in exchange for consideration over a period of time. The Company recognizes right-of-use assets (“ROU assets”) and lease liabilities for office buildings and certain equipment with lease terms of 1 year to 10 years, some of which include options to extend and/or terminate the leases. Any short-term leases defined as twelve months or less or month-to-month leases were excluded and continue to be expensed each month. Total costs associated with these short-term leases is immaterial to all periods presented.

The Company aggregates all lease and non-lease components for each class of underlying assets into a single lease component and variable charges for common area maintenance and other variable costs are recognized as expense as incurred. Total variable costs associated with leases for the three and nine months ended September 30, 2022 were immaterial. The Company had an immaterial amount of financing leases as of September 30, 2022, which is included in property and equipment, net, accrued expenses and other current liabilities, and other long-term liabilities, on the condensed consolidated balance sheets.

Operating Lease

The Company occupies approximately 121,541 square feet of office, engineering, and research and development space in Carlsbad, California. On December 4, 2019, the Company entered into a 10-year operating lease that commenced on February 1, 2021 and will terminate on January 31, 2031, subject to two sixty-month options to renew which are not reasonably certain to be exercised. The Company recognized a $21.1 million ROU asset and $21.5 million lease liability on the condensed consolidated balance sheet upon taking control of the premises on the lease commencement date. Base rent under the building lease for the first twelve months of the term will be $0.2 million per month subject to full abatement during months two through ten, and thereafter will increase annually by 3.0% throughout the remainder of the lease. On May 11, 2022, the Company entered into a lease amendment for the build out of additional space within the building which resulted in a lease modification increasing the ROU asset and lease liability.

On April 9, 2021, the Company entered into a 7-year operating lease agreement for a distribution center which consists of approximately 75,643 square feet of office and warehouse space in Memphis, Tennessee. The term of the lease commenced on May 1, 2021 and will terminate on May 1, 2028, subject to two thirty-six-month options to renew which were not reasonably certain to be exercised. The Company recognized a $1.7 million ROU asset and $1.6 million lease liability upon taking control of the premises on the lease commencement date. Base rent under the building lease will be commensurate with the Company’s proportionate share of occupancy of the building and will increase annually by 3.0% throughout the remainder of the lease.

With the acquisition of EOS, the Company assumed its ROU assets and lease liabilities in the amount of $4.3 million. EOS occupies its main office in Paris, France. The EOS office in Paris, France is a 10-year operating lease that commenced in 2019 and will terminate in September 2028. Base rent under the lease is approximately $0.6 million per year.

Future minimum annual lease payments for all operating leases of the Company are as follows as of September 30, 2022 (in thousands):


Remainder of 2022	$	1,101
2023		4,773
2024		4,900
2025		4,944
2026		5,013
Thereafter		18,093
Total undiscounted lease payments		38,824
Less: imputed interest		(7,343	)
Operating lease liabilities		31,481
Less: current portion of operating lease liabilities		(4,529	)
Operating lease liabilities, less current portion	$	26,952

The Company’s weighted average remaining lease term and weighted average discount rate as of September 30, 2022 and December 31, 2021 are as follows:


	September 30, 2022			December 31, 2021
Weighted-average remaining lease term (years)		7.8			8.6
Weighted-average discount rate		5.5	%		8.5	%

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Information related to the Company’s operating leases is as follows (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Rent expense	$	1,210	$	1,156	$	3,457	$	3,358
Cash paid for amounts included in measurement of lease liabilities	$	1,032	$	393	$	3,183	$	1,268

Purchase Commitments

With the acquisition of EOS, the Company assumed its inventory purchase commitment agreement with a third-party supplier. The Company is obligated to certain minimum purchase commitment requirements through December 2026. As of September 30, 2022, the remaining minimum purchase commitment required by the Company under the agreement is $26.1 million.

Litigation

The Company is and may become involved in various legal proceedings arising from its business activities. While management is not aware of any litigation matter that in and of itself would have a material adverse impact on the Company’s condensed consolidated results of operations, cash flows or financial position, litigation is inherently unpredictable, and depending on the nature and timing of a proceeding, an unfavorable resolution could materially affect the Company’s future consolidated results of operations, cash flows or financial position in a particular period. The Company assesses contingencies to determine the degree of probability and range of possible loss for potential accrual or disclosure in the Company’s condensed consolidated financial statements. An estimated loss contingency is accrued in the Company’s condensed consolidated financial statements if it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Because litigation is inherently unpredictable and unfavorable resolutions could occur, assessing contingencies is highly subjective and requires judgments about future events. When evaluating contingencies, the Company may be unable to provide a meaningful estimate due to a number of factors, including the procedural status of the matter in question, the presence of complex or novel legal theories, and/or the ongoing discovery and development of information important to the matters. In addition, damage amounts claimed in litigation against the Company may be unsupported, exaggerated or unrelated to reasonably possible outcomes, and as such are not meaningful indicators of the Company’s potential liability.

In February 2018, NuVasive, Inc. filed suit against the Company in the United States District Court for the Southern District of California (NuVasive, Inc. v. Alphatec Holdings, Inc. et al., Case No. 3:18-cv-00347-CAB-MDD (S.D. Cal.)), alleging that certain of the Company’s products, infringed, or contributed to the infringement of, U.S. Patent Nos. 7,819,801, 8,355,780, 8,361,156, 8,439,832, 8,753,270, 9,833,227 and U.S. Design Patent Nos. D652,519 and D750,252.

In May 2018, the Court dismissed the asserted design patents with prejudice. In September 2018, NuVasive filed an Amended Complaint, asserting infringement claims of U.S. Patent Nos. 9,924,859, 9,974,531 and 8,187,334.

In December 2018, the Company filed a petition with the Patent Trial and Appeal Board (“PTAB”) challenging the validity of certain claims of the ’156 and ’334 Patents. In July 2020, PTAB ruled that all challenged claims of the ‘156 Patent were valid, that several claims of the ‘334 Patent were invalid and that other challenged claims of the ‘334 Patent valid. In February 2022, the U.S. Court of Appeals for the Federal Circuit affirmed that ruling.

In August 2021, the Court found the ’156 Patent invalid and, in September 2021, NuVasive elected not to proceed with its remaining claims for the ’334 Patent, ’780 Patent, ’270 Patent, ’227 Patent and ’859 Patent. Trial on the remaining patents concluded on March 11, 2022. On March 15, 2022, the Court ordered the parties to participate in post-trial settlement conference. In June 2022, the parties reached a final resolution of all matters and executed a confidential settlement agreement. The Court dismissed the action with prejudice. The outcome of these proceedings did not have any material adverse effect on the Company’s consolidated results of operations, cash flows or financial position.

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Indemnifications

In the normal course of business, the Company enters into agreements under which it occasionally indemnifies third-parties for intellectual property infringement claims or claims arising from breaches of representations or warranties. In addition, from time to time, the Company provides indemnity protection to third-parties for claims relating to past performance arising from undisclosed liabilities, product liabilities, environmental obligations, representations and warranties, and other claims. In these agreements, the scope and amount of remedy, or the period in which claims can be made, may be limited. It is not possible to determine the maximum potential amount of future payments, if any, due under these indemnities due to the conditional nature of the obligations and the unique facts and circumstances involved in each agreement.

In October 2017, NuVasive filed a lawsuit in Delaware Chancery Court against Mr. Miles, the Company’s Chairman and CEO, who was a former officer and board member of NuVasive. The Company itself was not initially a named defendant in this lawsuit; however, in June 2018, NuVasive amended its complaint to add the Company as a defendant. In October 2018, the Delaware Court ordered that NuVasive advance legal fees for Mr. Miles’ defense in the lawsuit, as well as Mr. Miles’ legal fees incurred in pursuing advancement of his fees, pursuant to an indemnification agreement between NuVasive and Mr. Miles. As of September 30, 2022, the Company has not recorded any liability on the condensed consolidated balance sheet related to this matter.

Royalties

The Company has entered into various intellectual property agreements requiring the payment of royalties based on the sale of products that utilize such intellectual property. These royalties primarily relate to products sold by Alphatec Spine and are based on fixed fees or are calculated either as a percentage of net sales or on a per-unit sold basis. Royalties are included on the accompanying condensed consolidated statements of operations as a component of cost of sales.

11. Orthotec Settlement

On September 26, 2014, the Company entered into a Settlement and Release Agreement, dated as of August 13, 2014, by and among the Company and its direct subsidiaries, including Alphatec Spine, Inc., Alphatec Holdings International C.V., Scient'x S.A.S. and Surgiview S.A.S.; HealthpointCapital, LLC, HealthpointCapital Partners, L.P., HealthpointCapital Partners II, L.P., John H. Foster and Mortimer Berkowitz III; and Orthotec, LLC and Patrick Bertranou, (the “Settlement Agreement”). Pursuant to the Settlement Agreement, the Company agreed to pay Orthotec, LLC $49.0 million in cash, including initial cash payments totaling $1.75 million, which the Company paid in March 2014, and an additional lump sum payment of $15.75 million, which the Company paid in April 2014. The Company agreed to pay the remaining $31.5 million in 28 quarterly installments of $1.1 million and one additional quarterly installment of $0.7 million, commencing October 1, 2014. The unpaid balance of the principal amount due accrues interest at the rate of 7% per year until the balance is paid in full. The accrued but unpaid interest will be paid in quarterly installments of $1.1 million (or the full amount of the accrued but unpaid interest if less than $1.1 million) following the full payment of the $31.5 million in quarterly installments.

The payments set forth above are guaranteed by Stipulated Judgments held against the Company, HealthpointCapital Partners, L.P., HealthpointCapital Partners II, L.P., HealthpointCapital, LLC, John H. Foster and Mortimer Berkowitz III and, in the event of a default, will be entered and enforced against these entities and/or individuals in that order. In September 2014, the Company and HealthpointCapital entered into an agreement for joint payment of settlement whereby HealthpointCapital agreed to contribute $5.0 million to the $49.0 million settlement amount. During the year ended December 31, 2021, HealthpointCapital completed its contribution to the settlement amount.

As of September 30, 2022, the Company has made installment payments in the aggregate of $52.3 million, with a remaining outstanding balance of $5.3 million (including imputed interest). The Settlement Agreement provides for mutual releases of all claims in the Orthotec, LLC v. Surgiview, S.A.S, et al. matter in the Superior Court of California, Los Angeles County and all other related litigation matters involving the Company and its directors and affiliates.

A reconciliation of the total net settlement obligation is as follows (in thousands):


	September 30, 2022		December 31, 2021
Litigation settlement obligation - short-term portion	$	4,400	$	4,400
Litigation settlement obligation - long-term portion		765		3,587
Total		5,165		7,987
Future imputed interest		166		478
Total settlement obligation, net	$	5,331	$	8,465

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The short-term portion of the litigation settlement obligation is included in accrued expenses and other current liabilities on the condensed consolidated balance sheets and the long-term portion of the litigation settlement obligation is included in other long-term liabilities on the condensed consolidated balance sheets.

12. Stock-Benefit Plans and Equity Transactions

Stock-Based Compensation

The Company has stock-based compensation plans under which it grants stock options, RSUs, and PRSUs to officers, directors and third parties. Total stock-based compensation for the periods presented are as follows (in thousands):


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021
Cost of sales	$	735	$	310	$	1,440	$	489
Research and development		1,653		1,440		3,987		2,602
Sales, general and administrative		8,689		9,004		25,037		23,633
Total	$	11,077	$	10,754	$	30,464	$	26,724

As of September 30, 2022, there is $47.8 million of unrecognized compensation expense for RSUs and PRSUs to be recognized over a weighted average period of 1.65 years.

Restricted Stock Units and Performance Based Restricted Stock Units Awards

The Company issued approximately 563,000 and 3,103,000 shares of common stock, before net share settlement, upon vesting of RSUs and PRSUs during the three and nine months ended September 30, 2022, respectively, and issued approximately 504,000 and 2,581,000 shares of common stock, before net share settlement, upon vesting of RSUs and PRSUs during the three and nine months ended September 30, 2021, respectively.

Employee Stock Purchase Plan

Employees are eligible to participate in the Employee Stock Purchase Plan ("ESPP") approved by its shareholders. During the three months ended September 30, 2022, there were no shares issued under the ESPP. During the nine months ended September 30, 2022, there were approximately 222,000 shares issued under the ESPP. During the three months ended September 30, 2021, there were no shares issued under the ESPP. During the nine months ended September 30, 2021, there were approximately 112,000 shares issued under the ESPP.

The Company estimates the fair value of shares issued to employees under the ESPP using the Black-Scholes option-pricing model. The assumptions used to estimate the fair value of stock options granted and stock purchase rights under the ESPP are as follows:


	Three and Nine Months Ended
	September 30,
	2022		2021
Risk-free interest rate	0.07% - 1.54%		0.04% - 0.10 %
Expected dividend yield		—		—
Expected term (years)		0.50		0.50
Volatility	50.29% - 64.53%		49.98% - 78.51%

Warrants Outstanding

2017 PIPE Warrants

The 2017 common stock warrants (the “2017 PIPE Warrants”) had a five-year life and were exercisable by cash exercise only. During the nine months ended September 30, 2022, there were approximately 2,312,000 2017 PIPE Warrant exercises for total cash proceeds of $3.5 million. During the three and nine months ended September 30, 2021, there were approximately 275,000 and 795,000 2017 PIPE Warrant exercises, respectively, for total cash proceeds of $0.6 million and $1.6 million, respectively. As of September 30, 2022, the 2017 PIPE Warrants were expired, and no 2017 PIPE Warrants remained outstanding.

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2018 PIPE Warrants

The 2018 common stock warrants (the “2018 PIPE Warrants”) have a five-year life and are exercisable by cash or cashless exercise. During the three months ended September 30, 2022, there were approximately 14,000 2018 PIPE Warrant cashless exercises. During the nine months ended September 30, 2022, there were approximately 140,000 2018 PIPE Warrant exercises for total cash proceeds of $0.4 million. During the three and nine months ended September 30, 2021, there were approximately 40,000 and 2,881,000 2018 PIPE Warrant exercises, respectively, for total cash proceeds of $0.1 million and $1.5 million, respectively. As of September 30, 2022, approximately 8,340,000 2018 PIPE Warrants remained outstanding.

SafeOp Surgical Merger Warrants

The SafeOp common stock warrants (the “SafeOp Warrants”), have a five-year life and are exercisable by cash or cashless exercise. During the three months ended September 30, 2022, there were no SafeOp Warrant exercises. During the nine months ended September 30, 2022, there were approximately 257,000 SafeOp Warrant cashless exercises. There were no SafeOp Warrant exercises during the three months ended September 30, 2021. During the nine months ended September 30, 2021, there were approximately 970,000 SafeOp Warrant exercises for total cash proceeds of $0.1 million. As of September 30, 2022, approximately 938,000 SafeOp Warrants remained outstanding.

Squadron Medical Warrants

In connection with debt financing entered into with Squadron Medical in 2018, and amended in 2019 and 2020, the Company issued common stock warrants to Squadron Medical and a participant lender (the “Squadron Medical Warrants”). The Squadron Medical Warrants expire in May 2027 and are exercisable by cash exercise. No Squadron Medical Warrants have been exercised as of September 30, 2022.

Executive Warrants

The Company issued warrants to Mr. Patrick S. Miles, the Company’s Chairman and Chief Executive Officer (the “Executive Warrants”). The Executive Warrants have a five-year term and are exercisable by cash or cashless exercise. No Executive Warrants have been exercised as of September 30, 2022.

A summary of all outstanding warrants for common stock as of September 30, 2022, are as follows (in thousands, except for strike price data):


	Number of Warrants		Strike Price		Expiration
2018 PIPE Warrants		8,340	$	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 2022
Other(1)		121	$	6.28	Various through February 2026
Total		17,486

(1)

Weighted-average strike price.

All outstanding warrants were deemed to qualify for equity classification under authoritative accounting guidance.

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13. Business Segment and Geographic Information

The Company operates in one segment based upon the Company’s organizational structure, the way in which the operations and investments are managed and evaluated by the chief operating decision maker (“CODM”) as well as the lack of available discrete financial information at a level lower than the consolidated level. The Company shares common, centralized support functions which report directly to the CODM and decision-making regarding the Company’s overall operating performance and allocation of Company resources is assessed on a consolidated basis.

Net revenue and property and equipment, net, by geographic region are as follows (in thousands):


	Revenue								Property and equipment, net
	Three Months Ended September 30,				Nine Months Ended September 30,				September 30,		December 31,
(in thousands)	2022		2021		2022		2021		2022		2021
United States	$	84,801	$	55,865	$	229,720	$	158,875	$	96,173	$	85,320
International		5,038		7,015		15,203		10,375		2,735		2,081
Total	$	89,839	$	62,880	$	244,923	$	169,250	$	98,908	$	87,401

14. Net Loss Per Share

Basic net loss per share is calculated by dividing the net loss available to common stockholders by the weighted-average number of common shares outstanding for the period. If applicable, diluted net loss per share attributable to common stockholders is calculated by dividing net loss available to common stockholders by the diluted weighted-average number of common shares outstanding for the period.

The following table presents the computation of basic and diluted net loss per share (in thousands, except per share amounts):


	Three Months Ended September 30,						Nine Months Ended September 30,
	2022			2021			2022			2021
Numerator:
Net loss	$	(36,999	)	$	(43,031	)	$	(117,163	)	$	(104,139	)
Denominator:
Weighted average common shares outstanding		104,804			99,571			102,561			95,204
Net loss per share, basic and diluted:	$	(0.35	)	$	(0.43	)	$	(1.14	)	$	(1.09	)

The following potentially dilutive shares of common stock were excluded from the calculation of diluted net loss per share because their effect would have been anti-dilutive for the periods presented (in thousands):


	As of September 30,
	2022		2021
Series A convertible preferred stock		—		29
Options to purchase common stock and employee stock purchase plan		3,142		3,524
Unvested restricted stock unit awards		8,744		8,733
Warrants to purchase common stock		17,486		20,214
Senior convertible notes		17,246		17,246
Total		46,618		49,746

15. Income Taxes

To calculate its interim tax provision, at the end of each interim period the Company estimates the annual effective tax rate, adjusted for discrete items arising in that quarter. The computation of the annual estimated effective tax rate at each interim period requires certain estimates and significant judgment including, but not limited to, the estimated annual taxable income or loss for the year and projections of the proportion of income earned and taxed in foreign jurisdictions. The accounting estimates used to compute the provision for income taxes may change as new events occur, additional information is obtained, or the tax environment changes.

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The Company’s effective tax rate from continuing operations was (0.35%) and (0.40%) for the three and nine months ended September 30, 2022, respectively, and (0.21%) and (0.16%) for the three and nine months ended September 30, 2021, respectively. The Company’s effective tax rate differs from the federal statutory rate of 21% in each period primarily due to the Company’s net loss position and valuation allowance.

16. Related Party Transactions

In November 2018, the Company entered into the Term Loan and Inventory Financing Agreement with certain affiliates of Squadron Capital, LLC (“Squadron”), including an inventory supplier (the “Squadron Supplier Affiliate”). The Term Loan and the Inventory Financing Agreement were terminated and all obligations thereunder were repaid on August 10, 2021. For the three and nine months ended September 30, 2022, the Company purchased inventory in the amounts of $2.7 million and $7.7 million, respectively, from the Squadron Supplier Affiliate. For the three and nine months ended September 30, 2021, the Company purchased inventory in the amounts of $2.4 million and $6.3 million, respectively, from the Squadron Supplier Affiliate. As of September 30, 2022, and December 31, 2021, the Company had $2.2 million and $0.8 million, respectively, due to the Squadron Supplier Affiliate, for inventory purchases. Squadron was a lead investor in the private placement of the Company's common stock that was closed on March 1, 2021. David Pelizzon, President and Director of Squadron, currently serves on the Company’s Board of Directors.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following management's discussion and analysis of our financial condition and results of operations in conjunction with our unaudited condensed consolidated financial statements and the related notes thereto that appear elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto and under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”). In addition to historical information, the following management’s discussion and analysis of our financial condition and results of operations includes forward-looking information that involves risks, uncertainties, and assumptions. Our actual results and the timing of events could differ materially from those anticipated by these forward-looking statements as a result of many factors, such as those set forth under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021, and any updates to those risk factors filed from time to time in our subsequent periodic and current reports filed with the SEC.

Overview

We are a medical technology company focused on the design, development, and advancement of technology for better surgical treatment of spinal disorders. We are dedicated to revolutionizing the approach to spine surgery through clinical distinction. We are focused on developing new approaches that integrate seamlessly with our expanding Alpha InformatiX™ product platform to better inform surgery and to achieve the goals of spine surgery more safely and reproducibly. We have a broad product portfolio designed to address the spine’s various pathologies. Our ultimate vision is to be the standard bearer in spine.

We intend to drive growth by capitalizing on our collective spine experience and investing in the research and development to continually differentiate our solutions and improve spine surgery. We believe our future success will be fueled by introducing market-shifting innovation to the spine market, and that we are well-positioned to capitalize on current spine market dynamics.

We market and sell our products through a network of independent sales agents and direct sales representatives. An objective of our leadership team is to deliver increasingly consistent, predictable growth. To accomplish this, we have partnered more closely with new and existing independent sales agents to create a more dedicated and loyal sales channel for the future. We have added, and intend to continue to add, new high-quality exclusive and dedicated independent sales agents and direct sales representatives to expand future growth. We believe this will allow us to reach an untapped market of surgeons, hospitals, and national accounts across the United States of America and internationally, as well as better penetrate existing accounts and territories.

Recent Developments

Revolving Credit Facility

In September 2022, we entered into a revolving credit facility (the “Revolving Credit Facility”) with entities affiliated with MidCap Financial Trust (“MidCap”). The Revolving Credit Facility provides up to $50.0 million in borrowing capacity based on a borrowing base. The borrowing base is calculated based on certain accounts receivable and inventory assets. We may request a $25.0 million increase in the Revolving Credit Facility for a total commitment of up to $75.0 million. The Revolving Credit Facility matures on the earlier of September 29, 2027, or 90 days prior to the final maturity date of any of our 2026 Notes. As of September 30, 2022, the outstanding balance under the Revolving Credit Facility was $35.0 million.

The outstanding loans bear interest at the sum of Term SOFR plus 3.5% per annum. Interest on borrowings is due monthly. The loan agreements include an unused line fee, which is calculated as 0.50% per annum of either the unused Revolving Credit Facility or a minimum balance. Upon the Revolving Credit Facility’s maturity, any outstanding principal balance, unpaid accrued interest, and all other obligations under the Revolving Credit Facility will be due and payable.

The Revolving Credit Facility contains a lockbox arrangement clause requiring us to maintain a lockbox bank account. If the revolving loan availability is less than 30% of the revolving loan limit for five consecutive business days, or we are in default, MidCap will apply funds collected from our lockbox account to reduce the outstanding balance of the Revolving Credit Facility (“Lockbox Deductions”). As of September 30, 2022, our loan availability level has not activated Lockbox Deductions.

The outstanding loans are secured by substantially all of our assets, excluding intellectual property. The loan agreements and other ancillary documents contain customary representations and warranties and affirmative and negative covenants. Under the loan agreements, we are required to maintain a minimum level of liquidity. The loan agreements also include certain events of default, and upon the occurrence of such events of default, all outstanding loans under the Revolving Credit Facility may be accelerated and/or the lenders’ commitments terminated. We are in compliance with all required financial covenants as of September 30, 2022.

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Revenue and Expense Components

The following is a description of the primary components of our revenue and expenses:

Revenue. We derive our revenue primarily from the sale of spinal surgery implants used in the treatment of spine disorders as well as the sale of medical imaging equipment which is used for surgical planning and post-operative assessment. Spinal implant products include pedicle screws and complementary implants, interbody devices, plates, and tissue-based materials. Medical imaging equipment includes our EOS full-body and weight-bearing x-ray imaging devices, and related services. Our revenue is generated by our direct sales force and independent sales agents. Our products are shipped and invoiced to hospitals and surgical centers. Currently, most of our business is conducted with customers within markets in which we have experience and with payment terms that are customary to our business. We may defer revenue until the time of collection if circumstances related to payment terms, regional market risk or customer history indicate that collectability is not certain.

Cost of sales. Cost of sales consists primarily of direct product costs, royalties, service labor hours, and parts. Our product costs consist primarily of raw materials, component parts, direct labor, and overhead. The product costs of certain of our biologics products include the cost of procuring and processing human tissue. We incur royalties related to the technologies that we license from others and the products that are developed in part by surgeons with whom we collaborate in the product development process.

Research and development expenses. Research and development expenses consist of costs associated with the design, development, testing, and enhancement of our products. Research and development expenses also include salaries and related employee benefits, research-related overhead expenses, fees paid to external service providers and development consultants in the form of both cash and equity.

Sales, general and administrative expenses. Sales, general and administrative expenses consist primarily of salaries and related employee benefits, sales commissions and other variable costs, depreciation of our surgical instruments, regulatory affairs, quality assurance costs, professional service fees, travel, medical education, trade show and marketing costs, and insurance.

Litigation-related expenses. Litigation-related expenses are costs incurred for our ongoing litigation.

Amortization of acquired intangible assets. Amortization of acquired intangible assets consists of intangible assets acquired in business combinations and asset purchases.

Transaction-related expenses. Transaction-related expenses are certain costs incurred related primarily to the acquisition and integration of EOS.

Restructuring expenses. Restructuring expenses are costs incurred related primarily to severance, social plan benefits and related taxes in connection with cost rationalization efforts, as well as costs associated with the opening or closing of office and warehouse facilities.

Total interest and other expense, net. Total interest and other expense, net includes interest income, interest expense, gains and losses from foreign currency exchanges and other non-operating gains and losses.

Income tax provision. Income tax provision primarily consists of an estimate of federal, state, and foreign income taxes based on enacted state, and foreign tax rates, as adjusted for allowable credits, deductions, uncertain tax positions, changes in the valuation of our deferred tax assets and liabilities, and changes in tax laws.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations is based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States of America. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosures. On an on-going basis, we evaluate our estimates and assumptions, including those related to revenue recognition, allowances for accounts receivable, inventories, intangible assets, stock-based compensation, and income taxes. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumption conditions.

Critical accounting policies are those that, in management’s view, are most important in the portrayal of our financial condition and results of operations. Management believes there have been no material changes during the three months ended September 30, 2022, to the critical accounting policies discussed in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC.

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Results of Operations

Total revenue


	Three Months Ended September 30,				Change						Nine Months Ended September 30,				Change
(in thousands, except %)	2022		2021		$			%			2022		2021		$			%
Revenue:
Revenue from products and services	$	89,839	$	62,735	$	27,104			43	%	$	244,908	$	168,336	$	76,572			45	%
Revenue from international supply agreement		—		145		(145	)		(100	)%		15		914		(899	)		(98	)%
Total revenue	$	89,839	$	62,880	$	26,959			43	%	$	244,923	$	169,250	$	75,673			45	%

Revenue from products and services increased $27.1 million and $76.5 million, or 43% and 45%, during the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021. The increase was primarily due to an increase in product volume that was due to the increase in our surgeon user base, continued expansion of our new product portfolio, and increasing adoption of our technology. Revenue associated with our acquisition of EOS accounted for approximately $16.0 million of the increase in revenue from products and services for the nine months ended September 30, 2022, compared to the pre-acquisition period during the nine months ended September 30, 2021.

Cost of sales


	Three Months Ended September 30,				Change					Nine Months Ended September 30,				Change
(in thousands, except %)	2022		2021		$		%			2022		2021		$		%
Cost of sales	$	30,323	$	23,266	$	7,057		30	%	$	80,715	$	56,713	$	24,002		42	%

Cost of sales increased $7.0 million and $24.0 million, or 30% and 42%, during the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021. The increase was primarily due to product volume, offset by a decrease in inventory expense associated with the purchase accounting of EOS. Inventory expense associated with the purchase accounting of EOS offset the increase by approximately $2.2 million and $3.6 million, or 32% and 15%, during the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021. Cost of sales associated with our acquisition of EOS accounted for approximately $10.1 million of the increase for the nine months ended September 30, 2022, compared to the pre-acquisition period during the nine months ended September 30, 2021.

Operating expenses


	Three Months Ended September 30,				Change						Nine Months Ended September 30,				Change
(in thousands, except %)	2022		2021		$			%			2022		2021		$			%
Operating expenses:
Research and development	$	12,111	$	9,391	$	2,720			29	%	$	32,429	$	23,031	$	9,398			41	%
Sales, general and administrative		75,954		61,494		14,460			24	%		218,093		162,578		55,515			34	%
Litigation-related expenses		3,602		1,209		2,393			198	%		16,629		5,711		10,918			191	%
Amortization of acquired intangible assets		2,774		2,012		762			38	%		7,181		3,392		3,789			112	%
Transaction-related expenses		—		373		(373	)		(100	)%		120		6,156		(6,036	)		(98	)%
Restructuring expenses		45		256		(211	)		(82	)%		1,704		1,587		117			7	%
Total operating expenses	$	94,486	$	74,735	$	19,751			26	%	$	276,156	$	202,455	$	73,701			36	%

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Research and development expenses. Research and development expenses increased $2.7 million and $9.4 million, or 29% and 41%, for the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021. The increase was primarily due to an increase in personnel to support the expansion of our new product portfolio. Research and development expense associated with our acquisition of EOS accounted for approximately $2.0 million of the total increase for the nine months ended September 30, 2022, compared to the pre-acquisition period during the nine months ended September 30, 2021.

Sales, general and administrative expenses. Sales, general and administrative expenses increased $14.5 million and $55.5 million, or 24% and 34%, during the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021. The increase was primarily due to higher compensation-related costs and variable selling expenses associated with the increase in revenue, and our continued investment in building our strategic distribution channel. Additionally, we have increased our investment in our sales and marketing functions by increasing headcount to support the growth of our business, as well as necessary administrative support. Sales, general and administrative expenses associated with our acquisition of EOS accounted for approximately $7.6 million of the total increase for the nine months ended September 30, 2022, compared to the pre-acquisition period during the nine months ended September 30, 2021.

Litigation-related expenses. Litigation expenses increased by $2.4 million and $10.9 million, or 198% and 191%, during the three and nine months ended September 30, 2022, respectively, compared to the same periods in 2021. The increase is primarily related to an increase in legal fees associated with our ongoing and settled litigation matters.

Amortization of acquired intangible assets. The increase in amortization of acquired intangible assets is primarily due to the amortization of intangible assets acquired in the EOS acquisition.

Transaction-related expenses. The decrease in transaction-related expenses for the three and nine months ended September 30, 2022, is primarily due to the closing of the EOS acquisition on May 13, 2021.

Restructuring expenses. The decrease in restructuring expenses for the three months ended September 30, 2022 is due to non-recurring costs associated with the opening of our Memphis distribution center incurred during the same period in 2021. The increase in restructuring expenses for the nine months ended September 30, 2022 is due to severance, social plan benefits and related taxes in connection with cost rationalization efforts, offset by a decrease due to non-recurring costs associated with the opening of our Memphis distribution center and closing costs related to our prior headquarters incurred during the same period in 2021.

Total interest and other expense, net


	Three Months Ended September 30,						Change						Nine Months Ended September 30,						Change
(in thousands, except %)	2022			2021			$			%			2022			2021			$		%
Interest and other expense, net:
Interest expense, net	$	(1,285	)	$	(1,272	)	$	(13	)		1	%	$	(4,176	)	$	(5,604	)	$	1,428		(25	)%
Loss on debt extinguishment, net		—			(7,434	)		7,434			(100	)%		—			(7,434	)		7,434		(100	)%
Other (expense) income, net		(615	)		886			(1,501	)		(169	)%		(578	)		(1,020	)		442		(43	)%
Total interest and other expense, net	$	(1,900	)	$	(7,820	)	$	5,920			(76	)%	$	(4,754	)	$	(14,058	)	$	9,304		(66	)%

The decrease in interest expense, net for the nine months ended September 30, 2022, compared to the same period in 2021, was primarily due to lower interest rates on the 2026 Notes compared to the Term Loan that was repaid in full during the year ended December 31, 2021. A net loss on debt extinguishment of $7.4 million was recognized during the three and nine months ended September 30, 2021 associated with the early payoff of the Term Loan and the PPP loan forgiveness.

Income tax provision


	Three Months Ended September 30,				Change					Nine Months Ended September 30,				Change
(in thousands, except %)	2022		2021		$		%			2022		2021		$		%
Income tax provision	$	129	$	90	$	39		43	%	$	461	$	163	$	298		183	%

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The increase in the income tax provision for the three and nine months ended September 30, 2022, compared to the same periods in 2021, was primarily related to the recognition of uncertain tax positions.

Liquidity and Capital Resources

Our principal sources of liquidity are our existing cash and cash equivalents, our Revolving Credit Facility, and cash from operations. Our liquidity and capital structure are evaluated regularly within the context of our annual operating and strategic planning process. We consider the liquidity necessary to fund our operations, which include working capital needs, investments in research and development, investments in inventory and instrument sets to support our customers, as well as other operating costs. Our future capital requirements will depend on many factors including our rate of revenue growth, the timing and extent of spending to support development efforts, the expansion of sales, marketing and administrative activities, and the timing of introductions of new products and enhancements to existing products. As current borrowing sources become due, we may be required to access the capital markets for additional funding. If we are required to access the debt market, we expect to be able to secure reasonable borrowing rates.

Cash and cash equivalents were $106.1 million and $187.2 million at September 30, 2022, and December 31, 2021, respectively. We believe that our existing funds, cash generated from our operations and our existing sources of and access to financing are adequate to satisfy our needs for working capital, capital expenditure and debt service requirements, and other business initiatives we plan to strategically pursue.

Summary of Cash Flows


	Nine Months Ended September 30,
(in thousands)	2022			2021
Cash (used in) provided by:
Operating activities	$	(66,740	)	$	(58,576	)
Investing activities		(43,445	)		(137,765	)
Financing activities		30,215			312,453
Effect of exchange rate changes on cash		(1,166	)		(9	)
Net (decrease) increase in cash and cash equivalents	$	(81,136	)	$	116,103

Operating Activities

We used cash of $66.7 million from operating activities for the nine months ended September 30, 2022. The cash used in operating activities primarily related to costs associated with the continued expansion of our business and inventory purchases, offset by the timing of cash payments and receipts.

Investing Activities

We used cash of $43.4 million in investing activities for the nine months ended September 30, 2022, which is primarily related to the purchase of surgical instruments to support the commercial launch of new products and growth of our business.

Financing Activities

Financing activities provided $30.2 million of cash for the nine months ended September 30, 2022, which is primarily related to proceeds from the Revolving Credit Facility.

Debt and Commitments

As of September 30, 2022, we had $35.0 million outstanding under the Revolving Credit Facility. The outstanding loans bear interest at the sum of Term SOFR plus 3.5% per annum. The Revolving Credit Facility matures on the earlier of September 29, 2027, or 90 days prior to the final maturity date of any of our 2026 Notes.

As of September 30, 2022, we had $316.3 million outstanding under the 2026 Notes. The 2026 Notes accrue interest at a rate of 0.75%, payable semi-annually in arrears on February 1 and August 1 of each year. Prior to maturity in August 2026, the holders of the 2026 Notes may, under certain circumstances, choose to convert their notes into shares of our common stock. Based on the terms we have the option to pay or deliver cash, shares of our common stock, or a combination thereof, when a conversion notice is received.

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We assumed the OCEANE convertible bonds issued by EOS in connection with our acquisition of EOS. The OCEANEs bear interest at 6% per year, payable semi-annually in arrears on May 31 and November 30 of each year. Unless either earlier converted or repurchased, the outstanding OCEANEs of $12.2 million (€12.5 million) will mature on May 31, 2023.

We also assumed $4.6 million (€4.8 million) in other debts with the acquisition of EOS that are due in monthly and quarterly installments beginning in 2023 through maturity in 2027.

As of September 30, 2022, we have made $52.3 million in Orthotec settlement payments and we have an outstanding balance of $5.3 million in Orthotec settlement payments (including imputed interest) to be paid by us.

With the acquisition of EOS, we assumed its inventory purchase commitment agreement with a third-party supplier. We are obligated to certain minimum purchase commitment requirements through December 2026. As of September 30, 2022, the remaining minimum purchase commitment under the agreement was $26.1 million.

Contractual obligations and commercial commitments

As of September 30, 2022, with the exception of the outstanding balance under the Revolving Credit Facility discussed above, there have been no material changes, outside the normal course of business, in our outstanding contractual obligations from those disclosed within the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

Real Property Leases

On April 9, 2021, we entered into a 7-year operating lease agreement for a distribution center which consists of approximately 75,643 square feet of office and warehouse space in Memphis, Tennessee. The term of the lease commenced on May 1, 2021, and will terminate on May 1, 2028, subject to two thirty-six-month options to renew. Base rent under the building lease will be commensurate with our proportionate share of occupancy of the building and will increase annually by 3.0% throughout the remainder of the lease.

With the acquisition of EOS, we assumed its right-of-use assets and leases liabilities in the amount of $4.3 million. EOS occupies its main office in Paris, France. The EOS office in Paris, France is an operating lease that commenced in 2019 and will terminate in September 2028.

On December 4, 2019, we entered into a lease agreement for our headquarters location which consists of 121,541 square feet of office, engineering, and research and development space in Carlsbad, California. The term of the lease commenced on February 1, 2021, and will terminate January 31, 2031, subject to two sixty-month options to renew. Base rent under the lease increases annually by 3.0% throughout the remainder of the lease.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Recent Accounting Pronouncements

Aside from the changes disclosed in Note 2 to the Notes to Condensed Consolidated Financial Statements (Unaudited) under the heading “Recent Accounting Pronouncements,” if any, there have been no new accounting pronouncements or changes to accounting pronouncements during the three months ended September 30, 2022, as compared to the recent accounting pronouncements described in our Annual Report on Form 10-K for the year ended December 31, 2021, that was filed with the SEC.

Forward Looking Statements

This Quarterly Report on Form 10-Q incorporates a number of forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including statements regarding:

•

our estimates regarding anticipated operating losses, future revenue, expenses, capital requirements, uses and sources of cash and liquidity, including our anticipated revenue growth and cost savings;

•

our ability to achieve profitability, and the potential need to raise additional funding;

•

our ability to ensure that we have effective disclosure controls and procedures;

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•

our ability to meet, and potential liability from not meeting, any outstanding commitments and contractual obligations;

•

our ability to maintain compliance with the quality requirements of the U.S. Food and Drug Administration and similar foreign regulatory requirements;

•

our ability to market, improve, grow, commercialize and achieve market acceptance of any of our products or any product candidates that we are developing or may develop in the future;

•

our ability to continue to enhance our product offerings, and to commercialize and achieve market acceptance of any of our products or product candidates;

•

the effect of any existing or future federal, state or international regulations on our ability to effectively conduct our business;

•

our business strategy and our underlying assumptions about market data, demographic trends, reimbursement trends and pricing trends;

•

our ability to maintain an adequate global sales network for our products, including to attract and retain independent sales agents and direct sales representatives;

•

our ability to increase the use and promotion of our products by training and educating spine surgeons and our global sales network;

•

our ability to attract and retain a qualified management team, as well as other qualified personnel and advisors;

•

our ability to enter into licensing and business combination agreements with third parties and to successfully integrate the acquired technology and/or businesses;

•

the impact of global economic and political conditions and public health crises on our business and industry; and

•

other factors discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 or any document incorporated by reference herein or therein.

Any or all of our forward-looking statements in this Quarterly Report on Form 10-Q may turn out to be wrong. They can be affected by inaccurate assumptions and/or by known or unknown risks and uncertainties. Many factors mentioned in our discussion in this Quarterly Report on Form 10-Q will be important in determining future results. Consequently, no forward-looking statement can be guaranteed. Actual future results may vary materially from expected results.

We also provide a cautionary discussion of risks and uncertainties under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021, and any updates to those risk factors filed from time to time in our subsequent periodic and current reports filed with the SEC. These are factors that we think could cause our actual results to differ materially from expected results. Other factors besides those listed there could also adversely affect us.

Without limiting the foregoing, the words “believe,” “anticipate,” “plan,” “expect,” “estimate,” “may,” “will,” “should,” “could,” “would,” “seek,” “intend,” “continue,” “project,” and similar expressions are intended to identify forward-looking statements. There are a number of factors and uncertainties that could cause actual events or results to differ materially from those indicated by such forward-looking statements, many of which are beyond our control, including the factors set forth under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021 and any updates to those risk factors filed from time to time in our subsequent periodic and current reports filed with the SEC. In addition, the forward-looking statements contained herein represent our estimate only as of the date of this filing and should not be relied upon as representing our estimate as of any subsequent date. While we may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so to reflect actual results, changes in assumptions or changes in other factors affecting such forward-looking statements.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

We have evaluated the information required under this item that was disclosed under Item 7A in our Annual Report on Form 10-K for the year ended December 31, 2021, and there have been no significant changes to this information.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended, or the Exchange Act, is recorded, processed, summarized and reported within the time lines specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of achieving the desired control objectives, and in reaching a reasonable level of assurance, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we carried out an evaluation of the effectiveness of our disclosure controls and procedures (as defined in SEC Rules 13a - 15(e) and 15d - 15(e)) as of September 30, 2022. Based on such evaluation, our management has concluded that as of September 30, 2022, our disclosure controls and procedures are effective.

Changes in Internal Control over Financial Reporting

We are in the process of implementing a new enterprise resource planning (“ERP”) system that affects many of our financial processes and is expected to improve the efficiency and effectiveness of certain financial and business transaction processes, as well as the underlying systems environment. There have been no changes to our internal control over financial reporting during the three months ended September 30, 2022, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Litigation

We are and may become involved in various legal proceedings arising from our business activities. While the Company has no material accruals for pending litigation or claims for which accrual amounts are not disclosed in the Company’s condensed consolidated financial statements, litigation is inherently unpredictable, and depending on the nature and timing of a proceeding, an unfavorable resolution could materially affect our future condensed consolidated results of operations, cash flows or financial position in a particular period. We assess contingencies to determine the degree of probability and range of possible loss for potential accrual or disclosure in our condensed consolidated financial statements. An estimated loss contingency is accrued in our condensed consolidated financial statements if it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Because litigation is inherently unpredictable and unfavorable resolutions could occur, assessing contingencies is highly subjective and requires judgments about future events. When evaluating contingencies, we may be unable to provide a meaningful estimate due to a number of factors, including the procedural status of the matter in question, the presence of complex or novel legal theories, and/or the ongoing discovery and development of information important to the matters. In addition, damage amounts claimed in litigation against us may be unsupported, exaggerated or unrelated to reasonably possible outcomes, and as such are not meaningful indicators of our potential liability.

Refer to Note 10 to the Notes to Condensed Consolidated Financial Statements included in Item 1, Part I of this Quarterly Report on Form 10-Q for further information regarding the NuVasive, Inc. litigation.

Item 1A. Risk Factors

There have been no material changes to the risk factors described under Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, filed with the SEC, except for those noted below:

The United States has recently experienced historically high levels of inflation. If the inflation rate continues to increase, such as increases in the costs of labor and supplies, it will likely affect our expenses. Additionally, the United States is experiencing an acute workforce shortage, which in turn, has created a hyper-competitive wage environment that may increase our operating costs. To the extent inflation results in rising interest rates and has other adverse effects on the market, it may adversely affect our business, financial condition or results of operations.

We must comply with certain affirmative, negative, and financial covenants under our Revolving Credit Facility with MidCap. These covenants could adversely affect our ability to operate our business, our liquidity or our results of operations, and our inability to comply with any of these covenants could result in a default under the Revolving Credit Facility. If a default occurs, MidCap could charge an increase to the applicable interest rate, refuse to make further extensions of credit to us, and require all amounts borrowed under the Revolving Credit Facility, together with accrued interest and other fees, to be immediately due and payable. If our indebtedness under the Revolving Credit Facility were to be accelerated or if MidCap elects to charge us additional interest, we may not have sufficient cash available to repay the amounts due, and we may be forced to seek an amendment to the terms of the Revolving Credit Facility or obtain alternative financing, which may not be available to us on acceptable terms, if at all. In addition, if we are unable to repay outstanding borrowings when due or upon an event of default, MidCap would also have the right to proceed against the collateral, including substantially all of our assets, granted to MidCap to secure the indebtedness under the Revolving Credit Facility. If MidCap proceeds against the collateral, such assets would no longer be available for use in our business, which would have a significant adverse effect our business, financial condition and results of operations.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

During the three months ended September 30, 2022, the Company issued unregistered equity securities as described below:

On September 12, 2022, September 13, 2022, September 14, 2022, and September 30, 2022 the Company issued 2,500, 15,000, 2,500, and 20,000 restricted shares of the Company’s common stock with a grant date fair values of $9.19, $8.86, $8.90, and $8.74, respectively, based on the market price of common stock on grant dates, to an independent sales agent for distribution and related services rendered to the Company.

The issuances of the foregoing securities were made in reliance on the exemption from registration provided by Section 4(a)(2) of the Securities Act of 1933, as amended, as there was no general solicitation and the transactions did not involve a public offering.

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Item 5. Other Information

On November 2, 2022, the Compensation Committee of the Company’s Board of Directors approved an amendment to an existing performance incentive cash award granted to Patrick S. Miles in May 2019. As amended, the award will be paid in shares of the Company’s common stock rather than in cash, provided that the original performance criteria for the award are satisfied. Additionally, the payment date, if the performance criteria are satisfied, was extended from May 13, 2023 to June 30, 2023. As an inducement for Mr. Miles to accept the changes in the incentive award, the Compensation Committee also approved increasing the number of shares that Mr. Miles is eligible to receive under the award from 312,500 to 359,375.

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Item 6. Exhibits


Exhibit		Number Exhibit Description
10.1		Credit Agreement, dated as of September 29, 2022, by and among Alphatec Holdings, Inc., Alphatec Spine, Inc. and the other borrowers from time to time party thereto, the guarantors from time to time party thereto, MidCap Financial Trust and the other lenders from time to time party thereto, and MidCap Funding IV Trust, as administrative agent (1)

31.1		Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32		Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101		The following materials from the Alphatec Holdings, Inc. Quarterly Report on Form 10-Q for the Three and Nine Months Ended September 30, 2022, formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets (Unaudited) as of September 30, 2022 and December 31, 2021, (ii) Condensed Consolidated Statements of Operations (Unaudited) for the Three and Nine Months Ended September 30, 2022 and 2021, (iii) Condensed Consolidated Statements of Comprehensive Loss (Unaudited) for the Three and Nine Months Ended September 30, 2022 and 2021, (iv) Condensed Consolidated Statements of Stockholders’ (Deficit) Equity (Unaudited) for the Nine Months Ended September 30, 2022 and 2021, (v) Condensed Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2022 and 2021, and (vi) Notes to Condensed Consolidated Financial Statements (Unaudited).

104		Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101.INS)

(1) Incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed with the SEC on October 3, 2022.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	ALPHATEC HOLDINGS, INC.

	By:	/s/ Patrick S. Miles
		Patrick S. Miles
		Chairman and Chief Executive Officer
		(principal executive officer)

	By:	/s/ J. Todd Koning
		J. Todd Koning
		Executive Vice President and Chief Financial Officer
		(principal financial officer and principal accounting officer)

Date: November 3, 2022

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Alphatec (ATEC) 10-Q2022 Q3 Quarterly report

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