ALPHATEC HOLDINGS, INC. Under the 2019 Management Objective Strategic Incentive Plan, the Company is authorized to grant up to 500,000 shares of common stock to third-party individuals or entities that do not qualify under the Company's other existing equity plans, with a maximum grant of 50,000 shares per participant. As ofSeptember 30, 2021 , 122,500 restricted shares and a warrant to purchase up to 12,500 restricted common stock shares have been granted under the 2019 Management Objective Strategic Incentive Plan.
12. 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, and applies that rate to its ordinary quarterly
earnings. 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 expected operating income for the year, projections of
the proportion of income earned and taxed in foreign jurisdictions, permanent
and temporary differences between book and tax amounts, and the likelihood of
recovering deferred tax assets generated in the current year. 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 (.21%) and (.16%) for the three and nine months endedSeptember 30, 2021 , respectively, and (.26%) and (.27%) for the three and nine months endedSeptember 30, 2020 , 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.
13. Related Party Transactions
InJuly 2016 , the Company entered into a forbearance agreement withHealthpointCapital, LLC ,HealthpointCapital Partners, L.P. , andHealthpointCapital Partners II, L.P. (collectively, "HealthpointCapital"), pursuant to which HealthpointCapital, on behalf of the Company, paid$1.0 million of the$1.1 million payment due and payable by the Company to Orthotec onJuly 1, 2016 and agreed to not exercise its contractual rights to seek an immediate repayment of such amount. Pursuant to this forbearance agreement, the Company repaid this amount inSeptember 2016 . The Company and HealthpointCapital also entered into an agreement for joint payment of settlement whereby HealthpointCapital has agreed to contribute$5.0 million to the$49.0 million Orthotec settlement amount. InOctober 2020 , HealthpointCapital began making its$5.0 million contribution, which is in the form of five quarterly payments. As ofSeptember 30, 2021 HealthpointCapital had one remaining payment due in the amount of$0.7 million . During the second quarter of 2018,HealthpointCapital Partners, L.P. , andHealthpointCapital Partners II, L.P. distributed its holdings in the Company's common stock to its limited partners. As a result, the fund is no longer a shareholder of the Company. The remaining$0.7 million receivable from HealthpointCapital continues to be classified within stockholders' equity on the Company's condensed consolidated balance sheets due to the related party nature with HealthpointCapital affiliates. Payments to be received from HealthpointCapital are recorded as a reduction to stockholder's equity. InNovember 2018 , the Company entered into a Term Loan and Financing agreement with affiliates ofSquadron Capital, LLC . The Term Loan was amended inMarch 2019 ,May 2020 , andDecember 2020 , and was subsequently paid in full onAugust 10, 2021 .Squadron Capital, LLC was a lead investor in the private placement of shares of the Company's common stock that was closed onMarch 1, 2021 .David Pelizzon , President and Director ofSquadron Capital, LLC , currently serves on the Company's Board of Directors. 31
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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 theSecurities and Exchange Commission ("SEC"), onMarch 5, 2021 . 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 endedDecember 31, 2020 and any updates to those risk factors filed from time to time in our subsequent periodic and current reports filed with theSEC .
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 have a broad product portfolio designed to address the majority of the U.S. market for spinal disorders. We are focused on developing new approaches that integrate seamlessly with the SafeOp Neural InformatiX System to treat the spine's various pathologies and achieve the goals of spine surgery safely and reproducibly. 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 distributors 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 distributors 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 distributors to expand future growth. We believe this will allow us to reach an untapped market of surgeons, hospitals, and national accounts across theU.S. , as well as better penetrate existing accounts and territories.
Recent Developments
0.75% Senior Convertible Notes due 2026
InAugust 2021 , we issued$316.3 million principal amount of unsecured senior convertible notes with a stated interest rate of 0.75%, which we refer to as the 2026 Notes. The 2026 Notes began accruing interest immediately and is payable semi-annually in arrears onFebruary 1 andAugust 1 of each year, beginning onFebruary 1, 2022 . The initial conversion price of the 2026 Notes represents a premium of approximately 100% over the closing price of our common stock onAugust 5, 2021 , the date the 2026 Notes offering was priced. The net proceeds from the sale of the 2026 Notes were approximately$306.2 million after deducting the offering expenses. The 2026 Notes will mature onAugust 1, 2026 , unless earlier converted, redeemed, or repurchased. We used$39.9 million of the net proceeds from the 2026 Notes offering to enter into separate capped call instruments with certain financial institutions. The Capped Call Transactions effectively limit the premium for conversion of the 2026 Notes to 100% and are generally expected to reduce potential dilution to our common stock upon any conversion of the 2026 Notes and/or offset any payments we make upon conversion. In addition, we repurchased 1,806,358 shares of our common stock for approximately$25.0 million concurrently with the issuance of the 2026 Notes. We also used approximately$53.4 million of the net proceeds to repay all obligations under our Term Loan and Inventory Financing Agreement. We intend to use the remainder of the net proceeds from the 2026 Notes for general corporate purposes. 32
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Table of Contents Acquisition of EOS OnMay 13, 2021 , we acquired a controlling interest in EOS imaging S.A. ("EOS"), pursuant to the Tender Offer Agreement (the "Tender Offer Agreement") we entered onDecember 16, 2020 , and inJune 2021 we purchased the remaining issued and outstanding ordinary shares for a 100% interest in EOS. EOS, which now operates as our wholly owned subsidiary, is a global medical device company that designs, develops and markets innovative, low dose 2D/3D full body and 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. We plan to integrate this technology into our procedural approach to spine surgery in order to better inform and better achieve spinal alignment objectives in surgery.
COVID-19 Pandemic
Since the beginning of the COVID-19 pandemic, we have seen volatility in sales trends since elective surgeries that use our products have been impacted to varying degrees.
We continue to monitor the impact of the COVID-19 pandemic on our business and recognize it may continue to negatively impact our business and results of operations during the remainder of 2021 and beyond. Given the present uncertainty surrounding the pandemic, we expect to continue to see volatility through at least the remaining duration of the pandemic as the impact on individual markets and responses to conditions by state and local governments continues to vary.
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 distributors. Our products are requested directly by surgeons and shipped and billed 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 revenue. Cost of revenue consists of direct product costs, royalties, milestones, and the amortization of purchased intangibles. Our product costs consist primarily of direct labor, overhead, and raw materials and components. 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. Amortization of purchased intangibles consists of amortization of developed product technology. 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 in both cash and equity, and costs associated with ourScientific Advisory Board and Executive Surgeon Panels. Sales, general and administrative expenses. Sales, general and administrative expenses consist primarily of salaries and related employee benefits, sales commissions and support costs, depreciation of our surgical instruments, freight, regulatory affairs, quality assurance costs, professional service fees, travel, medical education, trade show and marketing costs, insurance, and legal expenses.
Litigation-related expenses. Litigation-related expenses are costs incurred for our ongoing litigation, primarily with NuVasive, Inc.
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 of ourMemphis distribution center and closing costs related to our old headquarters office inCarlsbad, California .
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.
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Income tax provision. Income tax provision from continuing operations primarily consists of an estimate of 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 accounting principles generally accepted in theU.S. 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 and 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. Aside from the changes disclosed in Note 2 to the Notes to Condensed Consolidated Financial Statements included in Item 1, Part I of this Quarterly Report on Form 10-Q, except as discussed below, management believes there have been no material changes during the nine months endedSeptember 30, 2021 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 endedDecember 31, 2020 filed with theSEC onMarch 5, 2021 . Valuation ofGoodwill Our goodwill represents the excess of the cost over the fair value of net assets acquired from our business combinations. The determination of the value of goodwill and intangible assets arising from business combinations and asset acquisitions requires extensive use of accounting estimates and judgments to allocate the purchase price to the fair value of the net tangible and intangible assets acquired.Goodwill is not amortized? however, it is assessed for impairment using fair value measurement techniques on an annual basis or more frequently if facts and circumstance warrant such a review. The goodwill is considered to be impaired if we determine that the carrying value of the reporting unit exceeds its respective fair value.
Valuation of Intangible Assets
Our intangible assets are comprised primarily of purchased technology, customer
relationships, manufacturing know-how and trade secrets, and trade name and
trademarks. We make significant judgments in relation to the valuation of
intangible assets resulting from business combinations and asset acquisitions.
Intangible assets are generally amortized on a straight-line basis over their
estimated useful lives of 2 to 10 years. We base the useful lives and related
amortization expense on the period of time we estimate the assets will generate
net sales or otherwise be used. We also periodically review the lives assigned
to our intangible assets to ensure that our initial estimates do not exceed any
revised estimated periods from which we expect to realize cash flows from the
technologies. If a change were to occur in any of the above-mentioned factors or
estimates, the likelihood of a material change in our reported results would
increase. We evaluate our intangible assets with finite lives for indications of
impairment whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. Factors that could trigger an impairment
review include significant under-performance relative to expected historical or
projected future operating results, significant changes in the manner of our use
of the acquired assets or the strategy for our overall business or significant
negative industry or economic trends. If this evaluation indicates that the
value of the intangible asset may be impaired, we make an assessment of the
recoverability of the net carrying value of the asset over its remaining useful
life. If this assessment indicates that the intangible asset is not recoverable,
based on the estimated undiscounted future cash flows of the technology over the
remaining amortization period, we reduce the net carrying value of the related
intangible asset to fair value and may adjust the remaining amortization period.
Significant judgment is required in the forecasts of future operating results
that are used in the discounted cash flow valuation models. It is possible that
plans may change and estimates used may prove to be inaccurate. If our actual
results, or the plans and estimates used in future impairment analyses, are
lower than the original estimates used to assess the recoverability of these
assets, we could incur additional impairment charges.
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Results of Operations
The tables below set forth certain statements of operations data for the periods
indicated (in thousands). Our historical results are not necessarily indicative
of the operating results that may be expected in the future.
Three Months Ended Increase Nine Months Ended Increase
September 30, (Decrease) September 30, (Decrease)
2021 2020 $ % 2021 2020 $ %
Revenue:
Revenue from products and
services $ 62,735 $ 40,052 $ 22,683 57 % $ 168,336 $ 97,956 $ 70,380 72 %
Revenue from international
supply agreement 145 1,111 (966 ) (87 %) 914 2,951 (2,037 ) (69 %)
Total revenue 62,880 41,163 21,717 53 % 169,250 100,907 68,343 68 %
Cost of revenue 23,266 11,926 11,340 95 % 56,713 29,797 26,916 90 %
Gross profit 39,614 29,237 10,377 35 % 112,537 71,110 41,427 58 %
Operating expenses:
Research and development 9,391 4,984 4,407 88 % 23,031 13,390 9,641 72 %
Sales, general and
administrative 61,494 35,380 26,114 74 % 162,578 89,431 73,147 82 %Litigation-related expenses 1,209 1,560 (351 )
(23 %) 5,711 5,507 204 4 % Amortization of acquired intangible assets 2,012 172 1,840 1070 % 3,392 516 2,876 557 % Transaction-related expenses 373 2 371 18550 % 6,156 4,093 2,063 50 % Restructuring expenses 256 - 256 100 % 1,587 - 1,587 100 % Total operating expenses 74,735 42,098 32,637 78 % 202,455 112,937 89,518 79 % Operating loss (35,121 ) (12,861 ) (22,260 ) 173 % (89,918 ) (41,827 ) (48,091 ) 115 % Interest and other expense, net: Interest expense, net (1,272 ) (2,762 ) 1,490 (54 %) (5,604 ) (8,668 ) 3,064 (35 %) Loss on debt extinguishment, net (7,434 ) - (7,434 )
100 % (7,434 ) (1,555 ) (5,879 ) 378 % Other income (expense), net 886
(6 ) 892 (14867 %) (1,020 ) (6 ) (1,014 ) 16900 % Total interest and other expense, net
(7,820 ) (2,768 ) (5,052 ) 183 % (14,058 ) (10,229 ) (3,829 ) 37 % Loss before taxes
(42,941 ) (15,629 ) (27,312 ) 175 % (103,976 ) (52,056 ) (51,920 ) 100 % Income tax provision
90 40 50 125 % 163 140 23 16 %
Net loss $ (43,031 ) $ (15,669 ) $ (27,362 ) 175 % $ (104,139 ) $ (52,196 ) $ (51,943 ) 100 %
Three and Nine Months Ended
Total revenue. Revenue associated with our acquisition of EOS accounted for approximately 27% and 17% of the increase in total revenue for the three and nine months endedSeptember 30, 2021 , respectively, compared to the same periods in 2020. Product volume for our business, excluding the EOS acquisition, increased our revenue by approximately 26% and 51% for the three and nine months endedSeptember 30, 2021 , respectively, compared to the same periods in 2020, primarily due to the continued expansion of our new product portfolio, increases in our surgeon user base, and progress related to the transformation of our sales network. Revenue from international supply agreement, which is attributed to sales toGlobus Medical Ireland, Ltd. , a subsidiary of Globus Medical, Inc., and its affiliated entities (collectively "Globus"), under which we supply to Globus certain of its implants and instruments at agreed-upon prices for a minimum term of three years, decreased by$1.0 million , or 87%, during the three months endedSeptember 30, 2021 compared to the three months endedSeptember 30, 2020 , and decreased by$2.0 million , or 69%, during the nine months endedSeptember 30, 2021 compared to the nine months endedSeptember 30, 2020 . The decreases in revenue from the international supply agreement during the three and nine months endedSeptember 30, 2021 compared to the three and nine months endedSeptember 30, 2020 were primarily due the expiration of the supply agreement with Globus onAugust 31, 2021 . Total cost of revenue. Total cost of revenue, excluding EOS, increased by$2.2 million , or 18%, and by$12.2 million , or 41% during the three and nine months endedSeptember 30, 2021 , respectively, as compared to the three and nine months endedSeptember 30, 2020 , respectively. The increases are primarily due to product volume. Inventory expense associated with the purchase accounting of EOS accounted for approximately 22% and 14% of the total increases for the three and nine months endedSeptember 30, 2021 , respectively. Cost of revenue associated with EOS operations accounted for approximately 55% and 35% of the increase for the three and nine months endedSeptember 30, 2021 , respectively, as compared to the three and nine months endedSeptember 30, 2020 , respectively. Cost of revenue from the international supply agreement decreased by$1.0 million , or 87% during the three months endedSeptember 30, 2021 as compared to the three months endedSeptember 30, 2020 , and decreased by$2.0 million , or 69% during the nine months endedSeptember 30, 2021 as compared to the nine months endedSeptember 30, 2020 . The decreases in cost of revenue from the international supply agreement during the three and nine months endedSeptember 30, 2021 compared to the three and nine months endedSeptember 30, 2020 were primarily due to the expiration of the supply agreement with Globus onAugust 31, 2021 . 35
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Research and development expenses. The increases during the three and nine months endedSeptember 30, 2021 as compared to the three and nine months endedSeptember 30, 2020 were primarily due to personnel and new project costs. Research and development expense associated with EOS accounted for approximately 36% and 19% of the total increase for the three and nine months endedSeptember 30, 2021 , respectively, as compared to the three and nine months endedSeptember 30, 2020 , respectively. Sales, general and administrative expenses. Sales, general and administrative expenses, excluding EOS, increased by$22.0 million , or 62%, and by$66.4 million , or 74%, during the three and nine months endedSeptember 30, 2021 , respectively, compared to the three and nine months endedSeptember 30, 2020 , respectively. The increases during the three and nine months endedSeptember 30, 2021 compared to the three and nine months endedSeptember 30, 2020 were 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. Sales, general and administrative expenses associated with EOS accounted for approximately 12% and 8% of the total increases for the three and nine months endedSeptember 30, 2021 , respectively, as compared to the three and nine months endedSeptember 30, 2020 , respectively. Litigation-related expenses. Litigation expenses decreased by$0.4 million , or 23% during the three months endedSeptember 30, 2021 as compared to the three months endedSeptember 30, 2020 , and increased by$0.2 million , or 4% during the nine months endedSeptember 30, 2021 as compared to the nine months endedSeptember 30, 2020 . Litigation expense is primarily related to our ongoing litigation with NuVasive, Inc. and other legal activities. Amortization of acquired intangible assets. Amortization of acquired intangible assets primarily includes amortization of intangible assets acquired in the EOS acquisition. Transaction-related expenses. The increases in transaction-related expenses for both the three and nine months endedSeptember 30, 2021 are primarily due to third-party advisory and legal fees related to our acquisition of EOS, which closed onMay 13, 2021 , as well as costs supporting our ongoing integration activities. Restructuring expenses. The increases in restructuring costs for both the three and nine months endedSeptember 30, 2021 are primarily due to severance, social plan benefits and related taxes in connection with cost rationalization efforts as well as costs associated with the opening of ourMemphis distribution center and closing costs related to our old headquarters office. Total interest and other expense, net. The increase during the three and nine months endedSeptember 30, 2021 as compared to the three and nine months endedSeptember 30, 2020 was primarily due foreign currency losses related to the forward contract settlement and the loss on debt extinguishment associated with the early payoff of the term loan, offset by the gain on debt extinguishment from the PPP loan forgiveness and lower interest expense related to our indebtedness. Income tax provision. Income tax provision for the three and nine months endedSeptember 30, 2021 was negligible and remained consistent compared to the three and nine months endedSeptember 30, 2020 .
Liquidity and Capital Resources
Our principal sources of liquidity are our existing cash 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 was$223.9 million and$107.8 million atSeptember 30, 2021 andDecember 31, 2020 , 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. 36
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Table of Contents Debt and Commitments As ofSeptember 30, 2021 we had$316.3 outstanding under the 2026 Notes. The 2026 Notes accrue interest at a rate of 0.75% paid semi-annually payable in arrears onFebruary 1 andAugust 1 of each year. Prior to maturity inAugust 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. We assumed theOCEANE 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 onMay 31 andNovember 30 of each year. Unless either earlier converted or repurchased, the outstanding OCEANEs of$14.4 million (€12.5 million) will mature onMay 31, 2023 .
We also assumed
As of
We entered into a distribution agreement with a third-party provider inJanuary 2020 in which we are obligated to certain minimum purchase requirements over a three-year period related to inventory and equipment leases. As ofSeptember 30, 2021 , the minimum purchase commitment required by us under the agreement was$1.0 million to be paid over the remaining period.
With the acquisition of EOS, we assumed its inventory purchase commitment
agreement with a third-party supplier. EOS is obligated to certain minimum
purchase commitment requirements through
Operating Activities
We used cash of
Investing Activities
We used cash of$137.8 million in investing activities for the nine months endedSeptember 30, 2021 which is primarily related to our acquisition of EOS, including the purchase of OCEANEs, the purchase of surgical instruments to support our business growth and the commercial launch of new products, other investments, and the settlement of a forward contract.
Financing Activities
Financing activities provided$312.5 million of cash for the nine months endedSeptember 30, 2021 , primarily related to proceeds from the issuance of our 2026 Notes and the closing of the Private Placement onMarch 1, 2021 , partially offset by cash paid for the full repayment of our obligations under Term Loan and Inventory Financing Agreement, purchase of capped calls, and our repurchase of common stock.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements.
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Contractual obligations and commercial commitments
Total contractual obligations and commercial commitments as of
Payment Due by Year
2021
Total (remainder) 2022
2023 2024 2025 Thereafter
Senior Convertible Notes
- $ - $ - $ - $ - $ 316,250
Interest expense 13,052 1,077 2,348 2,406 2,411 2,405 2,405
Note payable 341 276 23 24 18 - -
Finance lease obligations 462 53 195 158 56 - -
Facility lease obligations (1) 41,629 784 4,413 4,621 4,635 4,602 22,574
Purchase commitments (2) 27,421 1,755 4,602 6,305 6,448 8,311 -
Litigation settlement
obligations, gross (3) 9,165 700 4,400 4,065 - - -
Guaranteed minimum royalty
obligations 2,475 75 320 320 320 320 1,120
Development services plans 3,236 - - - - 3,236 -
License agreement milestones
(4) 2,150 550 1,090 390 40 40 40
OCEANEs 14,427 - - 14,427 - - -
Other (5) 5,825 - 5,825 - - - -
Total $ 436,433 $ 5,270 $ 23,216 $ 32,716 $ 13,928 $ 18,914 $ 342,389 (1) Includes our new headquarters building lease that commenced in
(2) Includes inventory purchase commitments with vendors, including commitments
of
(3) Represents gross payments due to
Release Agreement, dated as of
its direct subsidiaries, including
International C.V., Scient'x S.A.S. and Surgiview S.A.S.; HealthpointCapital,
LLC,
Bertranou. In
an agreement for joint payment of settlement whereby HealthpointCapital is
obligated to pay
in the fourth quarter of 2020 and continue through 2021. See Note 11 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.
(4) Commitments representing payments in cash that are subject to attaining
certain sales milestones which we believe are reasonably likely to be
achieved.
(5) Commitments representing cash repayments of state sponsored COVID relief
initiatives at EOS.
Real Property Leases
On April 9, 2021 , we entered into a new 7-year operating lease agreement for a
new distribution center which consists of approximately 75,643 square feet of
office and warehouse space in Memphis, Tennessee . The term of the new 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. We expect to occupy a proportionate share of the building upon
commencement of the lease on May 1, 2021 and we are expected to occupy 100% of
the premises beginning in November 2022 . Base rent under the new building lease
will be commensurate with our proportionate share of occupancy of the new
building and will increase annually by 3.0% throughout the remainder of the
lease.
On December 4, 2019 , we entered into a new lease agreement, or New Building
Lease, for a new headquarters location which consists of 121,541 square feet of
office, engineering, and research and development space in Carlsbad,
California . The term of the New Building Lease commenced on February 1, 2021 and
is expected to terminate January 31, 2031 , subject to two sixty-month options to
renew. Base rent under the New 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.
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Recent Accounting Pronouncements
Aside from newly implemented accounting policies related to leases discussed above under "Critical Accounting Policies and Estimates" and for the changes disclosed in Note 2 to the Notes to Condensed Consolidated Financial Statements (Unaudited) under the heading "Recent Accounting Pronouncements," there have been no new accounting pronouncements or changes to accounting pronouncements during the nine months endedSeptember 30, 2021 , as compared to the recent accounting pronouncements described in the Company's Annual Report on Form 10-K for the year endedDecember 31, 2020 , that was filed with theSEC onMarch 5, 2021 .
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 meet the affirmative and negative covenants under our debt
commitments;
• our ability to ensure that we have effective disclosure controls and
procedures;
• our ability to meet, and potential liability from not meeting, the payment
obligations under the
• our ability to maintain compliance with the quality requirements of the
• 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 beliefs about the features, strengths and benefits of our products;
• our ability to continue to enhance our product offerings, outsource our
manufacturing operations and expand the commercialization of our products,
and the effect of our strategy;
• our ability to successfully integrate, and realize benefits from licenses
and acquisitions
• the effect of any existing or future federal, state or international
regulations on our ability to effectively conduct our business;
• our estimates of market sizes and anticipated uses of our products;
• our business strategy and our underlying assumptions about market data,
demographic trends, reimbursement trends and pricing trends;
• our ability to achieve profitability, and the potential need to raise
additional funding;
• our ability to maintain an adequate sales network for our products,
including to attract and retain independent distributors;
• our ability to enhance our U.S. distribution network;
• our ability to increase the use and promotion of our products by training
and educating spine surgeons and our sales network;
• our ability to attract and retain a qualified management team, as well as
other qualified personnel and advisors;
• the impact of the COVID-19 pandemic upon the scheduling and surgical
staffing of elective and semi-emergent procedures;
• the impact of the COVID-19 pandemic on our global manufacturing anddistribution system, including the quality of our products, availability and
cost of raw materials and direct labor;
• our ability to enter into licensing and business combination agreements with
third parties and to successfully integrate the acquired technology and/or
businesses; and
• other factors discussed in our Annual Report on Form 10-K for the fiscal
year ended December 31, 2020 or any document incorporated by reference
herein or therein.
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Table of Contents
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 endedDecember 31, 2020 and any updates to those risk factors filed from time to time in our subsequent periodic and current reports filed with theSEC . 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 endedDecember 31, 2020 and any updates to those risk factors filed from time to time in our subsequent periodic and current reports filed with theSEC . 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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