ALPHATEC HOLDINGS, INC.

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ALPHATEC : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-K)

03/05/2021 | 04:35pm EDT
The following discussion of our financial condition and results of operations
should be read in conjunction with the financial statements and the notes to
those statements appearing elsewhere in this Annual Report on Form 10-K. Some of
the information contained in this discussion and analysis or set forth elsewhere
in this report include the identification of certain trends and other statements
that may predict or anticipate future business or financial results that are
subject to important factors that could cause our actual results to differ
materially from those indicated. See "Item 1A Risk Factors" included elsewhere
in this Annual Report on Form 10-K.

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
safely and reproducibly treat spine's various pathologies and achieve the goals
of spine surgery. 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 in the U.S. 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 the U.S.,
as well as better penetrate existing accounts and territories.

We have continued to make progress in the transition of our sales channel since
early 2017, driving the percent of sales contributed by our strategic
distribution channel from approximately 88% for the year ended December 31, 2019
to 92% for the year ended December 31, 2020. Going forward, we intend to
continue to relentlessly drive toward a fully exclusive network of independent
and direct sales agents. Consolidation in the industry has facilitated this
process, as large, seasoned agents seek opportunities to partner with
spine-focused companies that have broad, growing product portfolios.

Recent Developments

Proposed Acquisition of EOS


On December 16, 2020, we entered into a Tender Offer Agreement (the "Tender
Offer Agreement") with EOS imaging S.A., a société anonyme organized and
existing under the laws of France ("EOS"), pursuant to which we will 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"),
and outstanding convertible bonds (collectively, the "OCEANEs") of EOS. The
Offer will consist of a cash tender offer price of €2.45 (or approximately
$2.99) per EOS Share and €7.01 (or approximately $8.55) per OCEANE, (the "Offer
Consideration"), for a total purchase price of up to approximately $116.9
million. The Offer will need to be filed with and cleared by the Autorité des
marches financiers (the "AMF"). These Tender Commitments will terminate if (i)
the Tender Offer Agreement is terminated, (ii) the Offer is withdrawn by the
Company pursuant to applicable French laws and regulations, or (iii) the Offer
is not declared successful by the AMF as a result of certain conditions failing
to be satisfied or waived.

On March 5, 2021, we filed a draft offer with the AMF related to our Tender
Offer Agreement with EOS to purchase all of the EOS Shares and OCEANEs. The
Tender Offer Agreement is subject to clearance by the French Ministry of the
Economy and Finance and AMF. We expect the transaction to close in the second
quarter of 2021.

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In connection with the Offer, on December 16, 2020, we entered into a securities
purchase agreement (the "Purchase Agreement") with certain institutional and
accredited investors, including Squadron Capital, LLC (collectively, the
"Purchasers"), providing for the sale by the Company of 12,421,242 shares of our
common stock (the "Private Placement Shares") at a purchase price of $11.11 per
share (the "Private Placement Purchase Price"), in a private placement (the
"Private Placement"). The aggregate gross proceeds for the Private Placement
will be approximately $138.0 million. We intend to use the net proceeds from the
Private Placement to fund the Offer Consideration and for general corporate and
working capital purposes. Pursuant to the terms of the Purchase Agreement, from
the Private Placement Closing until the completion of the Offer, we are
prohibited from issuing, or entering into any agreement to issue, or announcing
the issuance or proposed issuance of, any shares of our common stock or common
stock equivalents, subject to certain permitted exceptions. If the Tender Offer
Agreement is terminated or the Offer is not completed on or before July 31,
2021, we will repurchase the Private Placement Shares from the Purchasers, once
issued, for an amount per share equal to the Private Placement Purchase Price
plus interest on the Private Placement Purchase Price at a rate of nine percent
per year computed from the date of the Private Placement Closing to the date of
the repurchase.

On March 1, 2021 we closed the Private placement which generated proceeds of approximately $132.0 million, net of fees related to the Private placement.

Follow-On Registered Public Offering


On October 16, 2020, we closed the 2020 Offering where we issued and sold a
total of 13,142,855 shares of our common stock at a price to the public of $8.75
per share. The net proceeds from the 2020 Offering were approximately $107.7
million, including net proceeds from the overallotment shares and deducting
underwriting discounts and commissions and estimated offering expenses payable
by us.

The COVID-19 Pandemic

The COVID-19 pandemic had a moderate impact on our business in 2020. Since the
onset of the pandemic in early 2020, we have carefully monitored its impact on
our operations. We have taken steps to minimize the risk to our employees. A
significant number of our employees have been working remotely, except for
certain staff that require access to our manufacturing and laboratory research
facilities, in accordance with applicable government health and safety protocols
and guidance issued in response to the COVID-19 pandemic. To date, our remote
working arrangements have not affected our ability to maintain critical business
operations, and we have not experienced any material disruptions or shortages of
the supply of our products.

Since the beginning of the COVID-19 pandemic, we have seen volatility in sales
trends as elective surgeries that use our products have been affected by
COVID-19, particularly in the early phases of the pandemic. Demand has since
recovered to varying degrees by product as local conditions have improved in
some geographies that opened after an initial improvement in COVID-19 infection
rates, allowing surgeons to resume surgeries. During the second half of the
year, procedural volumes returned to pre-pandemic levels. Recently, higher rates
of infection have been observed in some geographies, including the United States
and Europe, which have further restricted elective surgeries, although not to
the extent experienced in the early phases of the pandemic. We expect to see
continued volatility through at least the duration of the pandemic as
governments respond to current local conditions. The depth and extent to which
the COVID-19 pandemic will continue to impact individual markets continues to
vary. We expect procedural volumes to remain somewhat difficult to estimate as
COVID-19 infections continue to spread and the roll-out of a vaccine remains
uncertain.

We continue to believe that existing funds, cash generated from operations and
existing sources of and access to financing are adequate to satisfy our needs
for working capital, capital expenditures and debt service requirements as well
as to engage in other business initiatives that we plan to strategically pursue.



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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. Spinal implant products
include pedicle screws and complementary implants, interbody devices, plates,
and tissue-based materials. 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 expense consists of
costs associated with the design, development, testing, and enhancement of our
products and technologies. Research and development expense also includes
salaries and related employee benefits, research-related overhead expenses, fees
paid to external service providers in both cash and equity, and costs associated
with our Scientific Advisory Board and Executive Surgeon Panels.

Sales, general and administrative expenses. Sales, general and administrative
expense consists primarily of salaries and related employee benefits, sales
commissions and support costs, depreciation of our surgical instruments,
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 throughout the year related to the prior tender offer agreement entered
into with EOS on February 28, 2020, which was subsequently terminated by the
Company in response to the then-expected market effects of the COVID-19 pandemic
on April 24, 2020, as well as costs incurred related to the renewed tender offer
agreement entered into with EOS on December 16, 2020. These expenses primarily
include third-party advisory and legal fees.

Restructuring expenses. Restructuring expenses consist of severance, social plan benefits and related taxes in connection with our historical cost rationalization efforts.


Loss on debt extinguishment. Loss on debt extinguishment is comprised of all
amounts previously recorded as debt issuance costs related to the MidCap Funding
IV, LLC ("MidCap") facility that was repaid in full as well as amounts
associated with Squadron Medical partial debt extinguishment.

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 (benefit). Income tax provision (benefit) from continuing
operations primarily consists of release of the valuation allowance from the
SafeOp acquisition, partially offset by state taxes.

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Results of Operations

The first table below sets forth our statements of operations data for the periods presented. Our historical results are not necessarily indicative of the operating results that may be expected in the future.



                                                                                      Increase
                                                 Year Ended December 31,             (Decrease)
                                                  2020              2019            $           %
                                                     (in thousands)
Revenue:
Revenue from U.S. products                    $    141,079       $  108,242     $  32,837         30 %
Revenue from international supply agreement          3,782            5,185        (1,403 )      (27 )%
Total revenue                                      144,861          113,427        31,434         28 %
Cost of revenue                                     42,360           35,833         6,527         18 %
Gross profit                                       102,501           77,594        24,907         32 %
Operating expenses:
Research and development                            18,745           13,849         4,896         35 %
Sales, general and administrative                  129,156          101,714        27,442         27 %
Litigation-related                                   8,552            8,549             3          - %
Amortization of acquired intangible assets             688              698           (10 )       (1 )%
Transaction-related                                  4,223                -         4,223        100 %
Restructuring                                            -               60           (60 )     (100 )%
Total operating expenses                           161,364          124,870        36,494         29 %
Operating loss                                     (58,863 )        (47,276 )     (11,587 )       25 %
Interest and other expense, net:
Interest expense, net                              (12,374 )         (9,865 )      (2,509 )       25 %
Loss on debt extinguishment                         (7,612 )              -        (7,612 )      100 %
Total interest and other expense, net              (19,986 )         (9,865 )     (10,121 )      103 %
Loss from continuing operations before
taxes                                              (78,849 )        (57,141 )     (21,708 )       38 %
Income tax provision (benefit)                         145             (239 )         384        161 %
Loss from continuing operations                    (78,994 )        (56,902 )     (22,092 )       39 %
Loss from discontinued operations, net of
applicable taxes                                         -             (100 )         100       (100 )%
Net loss                                      $    (78,994 )     $  (57,002 )   $ (21,992 )       39 %


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                                                                                       Increase
                                                   Year Ended December 31,            (Decrease)
                                                     2020             2019           $           %
Revenue by source:                                      (in thousands)
Revenue from U.S. products                       $    141,079       $ 108,242     $ 32,837        30 %
Revenue from international supply agreement             3,782           5,185       (1,403 )     (27 )%
Total revenue                                    $    144,861       $ 113,427     $ 31,434        28 %

Gross profit by source:
Gross profit from U.S. products                  $    102,248       $  77,235     $ 25,013        32 %
Gross profit from international supply
agreement                                                 253             359         (106 )     (30 )%
Total gross profit                               $    102,501       $  77,594     $ 24,907        32 %

Gross profit margin by source:
Gross profit margin from U.S. products                     73 %            71 %                    2 %
Gross profit margin from international supply
agreement                                                   7 %             7 %                    - %
Total gross profit margin                                  71 %            68 %                    3 %

Year Ended December 31, 2020 Compared to the Year Ended December 31, 2019

Total Revenue. Total revenue was $144.9 million for the year ended December 31, 2020 compared to $113.4 million for the year ended December 31, 2019, representing an increase of $31.4 million, or 28%.

Revenue from U.S. products was $141.1 million for the year ended December 31, 2020 compared to $108.2 million for the year ended December 31, 2019, representing an increase of $32.8 million, or 30%.


During the year ended December 31, 2020 we launched a total of 11 new products,
bringing our total offerings to over 70 products across our various product
categories, of which over 30 were new products launched between July 2018 and
December 2020. As a result of the expansion of our product portfolio we continue
to see increases in year-over-year revenue contributions from our new product
pipeline as product categories per case, average revenue per case, and revenue
per surgeon continues to increase, consistent with our commitments to create
clinical distinction through organic product development and compel surgeon
adoption. For the year ended December 31, 2020, revenue contributions from our
new products represented approximately 67% of U.S. revenue compared to 37% for
the year ended December 31, 2019, with average product categories sold per case
increasing to 1.9 during the year ended December 31, 2020 compared to 1.7 during
the year ended December 31, 2019. As a result of the increases in our new
product contributions and average product categories sold per case, average
revenue per case increased by 13% for the year ended December 31, 2020 as
compared to the year ended December 31, 2019. Information related to revenue
from each of our product categories is detailed further below (in thousands):

                                                                                      Increase
                                           Year Ended December 31,                   (Decrease)
                                        2020                    2019                $           %
U.S. revenues by product type:
Fixation                         $  81,735        58 %   $  67,175        62 %   $ 14,560        22 %
Interbody                           42,381        30 %      31,940        30 %     10,441        33 %
Biologics                            7,270         5 %       5,624         5 %      1,646        29 %
Access Systems                       2,313         2 %       1,218         1 %      1,095        90 %
Information                          7,380         5 %       2,285         2 %      5,095       223 %
Total U.S. revenues              $ 141,079       100 %   $ 108,242       100 %   $ 32,837        30 %



In addition to increases in revenue contributions related to our product portfolio, contributions from our strategic distribution channel have also increased during the year ended December 31, 2020, as we continue to build

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partnerships with new surgeons and distributor partners, driving growth in our
sales network and distribution channel, and geographic footprint. During the
year ended December 31, 2020, the number of surgeon partners utilizing our
products increased by over 10%, and our strategic distribution partnerships
increased by over 27%, as compared to the year ended December 31, 2019. As a
result, contributions to U.S. revenue from our strategic distribution channel
increased to 92% during the year ended December 31, 2020 compared to 88% for the
year ended December 31, 2019. Information related to revenue contributions from
both our strategic and legacy distribution partnerships is detailed further
below (in thousands):



                                                                                        Increase
                                        Year Ended December 31,                        (Decrease)
                                    2020                        2019                 $            %
U.S. revenue by
distributor type:
Strategic                  $ 129,917           92 %    $  95,051           88 %   $ 34,866           37 %
Legacy and terminated         11,162            8 %       13,191          
12 %     (2,029 )      (15.4 )%
Total U.S. revenue         $ 141,079          100 %    $ 108,242          100 %   $ 32,837           30 %




Revenue from international supply agreement for the year ended December 31,
2020, which is attributed to sales to 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 $1.4 million compared to the year ended December
31, 2019. As part of the supply agreement, Globus had the option to extend the
term for up to two additional twelve-month periods subject to Globus meeting
specified purchase requirements. During the second quarter of 2020, Globus
notified us that it would exercise the option to extend the agreement for the
second additional twelve-month period through August 2021, at which time we
expect that the supply agreement will expire and revenue from Globus will
discontinue.

Cost of revenue. Cost of revenue for the year ended December 31, 2020 increased by $6.5 million, or 18%, primarily due to increased sales and excess and obsolescence expense related to new and legacy products.


Cost of revenue from U.S. products for the year ended December 31, 2020
increased to $38.8 million compared to $31.0 million for the year ended
December 31, 2019, which is consistent with our year-over-year revenue growth.
Additionally, our non-cash excess and obsolescence expense, which is primarily
related to the phase out of older legacy products decreased to $7.0 million for
the year ended December 31, 2020 from $8.6 million for the year ended
December 31, 2019, a decrease of $1.6 million, or 19%.

Cost of revenue from the international supply agreement for the year ended
December 31, 2020 decreased to $3.5 million compared to $4.8 million for the
year ended December 31, 2019. The decrease is primarily due to a reduction in
sales volume and related costs under the supply agreement with Globus.

Gross profit. Gross profit was $102.5 million for the year ended December 31, 2020 compared to $77.6 million for the year ended December 31, 2019, representing an increase of $24.9 million, or 32%.


Gross profit margin from U.S. product revenue increased by approximately 2% for
the year ended December 31, 2020 compared to the year ended December 31, 2019.
The change in gross profit margin from U.S. product revenue was primarily
attributed to the reduction in non-cash excess and obsolescence expense,
partially offset by an increase in amortization expense related to our SafeOp
Neural InformatiX system and product mix.

There were no changes to gross profit margin from the international supply agreement for the year ended December 31, 2020 compared to the year ended December 31, 2019.


Research and development expenses. Research and development expenses increased
by $4.9 million, or 35%, primarily related to the hiring of new personnel and
new project costs, partially offset by decreases in other various research and
development initiatives. We expect research and development expenses to increase
in future periods as we continue to hire additional engineering and development
talent and invest in our product pipeline.

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Sales, general and administrative expenses. Sales, general and administrative
expenses increased $27.4 million, or 27% during the year ended December 31, 2020
as compared to the year ended December 31, 2019. The increase was primarily
related to commissions, sales compensation, stock-based compensation, and
variable selling expenses associated with the increase in U.S. product revenue,
and in addition to 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. We expect our sales, general and administrative expenses to
continue to increase as we continue to invest in our business infrastructure to
fuel our organic growth, in addition to increases in our variable selling
expenses related to our projected increase in U.S. product revenue. As we
continue to make investments in our business infrastructure and achieve our
projected future revenue growth, we expect to attain greater operational
efficiencies and in turn, increased operating leverage on the fixed costs
associated with our sales, general and administrative expenses, which are
currently 92% of U.S. product revenue.

Litigation-related expenses. Litigation-related expenses increased by a negligible amount and was primarily related to our ongoing litigation with NuVasive, Inc. and fluctuations related to the timing of related legal activities.

Amortization of acquired intangible assets. Amortization of acquired intangible assets was $0.7 million for both the years ended December 31, 2020 and December 31, 2019. The expense represents amortization in the period for intangible assets associated with general business assets, intellectual property, licenses, and other assets obtained in acquisitions and licensing agreements.


Transaction-related expenses. Transaction-related expenses of $4.2 million are
costs incurred throughout the year related to the prior tender offer agreement
entered into with EOS on February 28, 2020, which was subsequently terminated by
the Company in response to the then-expected market effects of the COVID-19
pandemic on April 24, 2020, as well as costs incurred related to the renewed
tender offer agreement entered into with EOS on December 16, 2020. These
expenses primarily include third-party advisory and legal fees.

Total interest and other expense, net. Total interest and other expense, net
increased $10.1 million, or 103%, primarily due to interest expense on new debt
arrangements, additional draws on existing agreements, a loss on debt
extinguishment related to the payoff of the MidCap facility in the second
quarter of 2020, and amounts associated with the partial extinguishment of our
term loan with Squadron Medical in the fourth quarter of 2020.

Income tax provision. Income tax provision from continuing operations increased
$0.4 million, or 161%, primarily related to a release of the 2018 income tax
benefit recognized as part of the acquisition of SafeOp.

Liquidity and Capital Resources


Our principal sources of liquidity are our existing cash and additional
borrowings available under our Term Loan. 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 should be able to secure reasonable
borrowing rates.

Cash was $107.8 million and $47.1 million at December 31, 2020 and December 31,
2019, respectively, and available borrowings under our Term Loan were $40.0
million and $20.0 million at December 31, 2020 and December 31, 2019,
respectively. The increase in cash during the year ended December 31, 2020 of
$60.7 million was primarily due to the public offering that closed in October
2020, which raised $107.7 million in net proceeds. The $20.0 million increase in
available borrowings under the Term Loan during the year ended December 31, 2020
is mainly due to the debt amendment we entered into in December 2020; whereby,
we exchanged $30.0 million of outstanding principal for our common stock and
expanded the Term Loan by $15.0 million. We believe that our cash on hand, and
the amount available to us under our Term Loan will be sufficient to fund our
operations for at

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least the next twelve months subsequent to the date the consolidated financial
statements are issued. 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.

Squadron Medical Credit Agreement, Paycheck Protection Loan and Other Debt and Commitments


We have an $85.0 million Term Loan with Squadron Medical which matures on June
30, 2026. The Term Loan bears interest at London Interbank Offered Rate
("LIBOR") plus 8.0% per annum (subject to a 9.0% floor and 12.0% ceiling).
Interest-only payments are due monthly until December 2023 and joined by $1.0
million monthly principal payments beginning December 2023. Any remaining
principal amounts of the Term Loan will be due on June 30, 2026. In addition to
paying interest on outstanding principal on the Term Loan, we will pay a
commitment fee at a rate of 1.0% per annum to Squadron Medical in respect of the
unutilized Term Loan. As collateral for the Term Loan, Squadron Medical has a
first lien security interest in substantially all of our assets, except for
accounts receivable. Our obligation outstanding under the Term Loan as of
December 31, 2020 was $45.0 million.

On April 23, 2020, we received the proceeds from a loan in the amount of
approximately $4.3 million (the "PPP Loan") from Silicon Valley Bank, as lender,
pursuant to the Paycheck Protection Program ("PPP") of the Coronavirus Aid,
Relief, and Economic Security Act (the "CARES Act"). The PPP Loan matures on
April 21, 2022 and bears interest at a rate of 1.0% per annum. Commencing August
21, 2021, we are required to pay the lender equal monthly payments of principal
and interest as required to fully amortize by April 21, 2022 the principal
amount outstanding on the PPP Loan as of the date prescribed by guidance issued
by the U.S. Small Business Administration ("SBA"). The PPP Loan is evidenced by
a promissory note dated April 21, 2020, which contains customary events of
default relating to, among other things, payment defaults and breaches of
representations and warranties. We may prepay the PPP Loan at any time prior to
maturity with no prepayment penalties.



All or a portion of the PPP Loan may be forgiven by the SBA upon application. We
submitted our application for forgiveness of the loan in November 2020. Under
the CARES Act, loan forgiveness is available for the sum of documented payroll
costs, covered rent payments, covered mortgage interest and covered utilities
during the twenty-four-week period, beginning on the date of loan approval. For
purposes of the CARES Act, payroll costs exclude compensation of an individual
employee in excess of $100,000, prorated annually. Not more than 25% of the
forgiven amount may be for non-payroll costs. Forgiveness is reduced if
full-time headcount declines, or if salaries and wages for employees with
salaries of $100,000 or less annually are reduced by more than 25%. In the event
the PPP Loan, or any portion thereof, is forgiven pursuant to the PPP, the
amount forgiven is applied to outstanding principal. We used all of the proceeds
from the PPP Loan to retain employees and maintain payroll. Although we have
applied for loan forgiveness as afforded by the PPP, we cannot provide assurance
that such loan forgiveness will be granted in whole or in part.

We entered into an Inventory Financing Agreement whereby we may draw up to $6.0
million for the purchase of inventory to accrue interest at a rate of LIBOR plus
8.0% per annum, subject a 10.0% floor and 13.0% ceiling. All principal will
become due and payable upon maturity on November 6, 2023 and all interest will
be paid monthly. Should we elect to prepay the Squadron Medical Term Loan, all
amounts due under the Inventory Financing Agreement will become mandatorily due.
Our obligation outstanding under the Inventory Financing Agreement as of
December 31, 2020 was $3.8 million.

As of December 31, 2020, we have made $45.0 million in Orthotec settlement payments and there remains an aggregate $12.8 million of Orthotec settlement payments (including interest) to be paid by us.


We entered into a distribution agreement with a third-party provider in January
2020 in which we are obligated to certain minimum purchase requirements related
to inventory and equipment leases. As of December 31, 2020, the minimum purchase
commitment required by us under the agreement was $3.2 million to be paid over a
three-year period.

Our various debt agreements include several event of default provisions, such as
payment default, insolvency conditions and a material adverse effect clause,
which could cause interest to be charged at a rate which is up to five

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percentage points above the rate effective immediately before the event of
default or result in our lenders' rights to declare all outstanding obligations
immediately due and payable We were in compliance with the covenants under the
credit agreements at December 31, 2020.

Operating Activities


We used net cash of $46.4 million from operating activities for the year ended
December 31, 2020. During this period, net cash used in operating activities
consisted of our net loss adjusted for $48.5 million of non-cash adjustments
including amortization, depreciation, stock-based compensation, provision for
excess and obsolete inventory, interest expense related to amortization of debt
discount and issuance costs, debt extinguishment charges, loss on disposal of
instruments, and $16.0 million use of cash related to working capital and other
assets.

Investing Activities

We used cash of $23.9 million in investing activities for the year ended December 31, 2020, primarily for the purchase of surgical instruments to support the commercial launch of new products.

Financing Activities


Financing activities provided net cash of $130.8 million for the year ended
December 31, 2020, primarily related to $107.7 million of proceeds from the 2020
Offering, $3.3 million from the exercise of stock options or warrants, $42.4
million in borrowings under lines of credit, and $34.0 million in proceeds from
the issuance of term debt, partially offset by $56.6 million in repayments under
existing lines of credit.

Contractual obligations and commercial commitments

Total contractual obligations and commercial commitments as of December 31, 2020 are summarized in the following table (in thousands):


                                                                    Payment 

Due by Year

                                  Total         2021         2022         2023         2024         2025        Thereafter
Paycheck Protection Program     $   4,271     $  2,344     $  1,927     $      -     $      -     $      -     $          -
Inventory financing                 3,821            -            -        3,821            -            -                -
Squadron Medical Term Loan         45,000            -            -        1,000       12,000       12,000           20,000
Interest expense                   20,782        5,091        4,499        4,463        3,522        2,416              791
Note payable for software
agreements, insurance
premiums and PP&E                   1,887        1,823           23           24           17            -                -
Capital lease obligations              74           37           37            -            -            -                -
Facility lease obligations
(1)                                30,943        1,552        2,977        3,025        3,116        3,209           17,064
Other purchase commitments
and operating lease
obligations                         3,392        3,392            -            -            -            -                -
Litigation settlement
obligations, gross (2)             12,833        4,000        4,400        4,400           33            -                -
Guaranteed minimum royalty
obligations & milestones (3)        6,574          918          918          948          918        2,329              543
License agreement milestones
(4)                                 1,240           40          440          240          240           40              240
Total                           $ 130,817     $ 19,197     $ 15,221     $ 17,921     $ 19,846     $ 19,994     $     38,638

(1) Includes our new headquarters building lease that commenced in February

2021.

(2) Represents gross payments due to Orthotec, LLC pursuant to 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. In September

2014, the Company and HealthpointCapital entered into an agreement for

joint payment of settlement whereby HealthpointCapital is obligated to

pay $5.0 million of the settlement amount, which payments commenced in

         the fourth quarter of 2020 and continuing through 2021. See Note 11 of
         our Notes to Consolidated Financial Statements included this Annual
         Report on Form 10-K for further information.


    (3)  Commitments representing cash and equity related royalty payments and are
         subject to attaining certain sales and equity milestones.


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(4) Commitments representing payments in cash that are subject to attaining

         certain sales milestones which we believe are reasonably likely to be
         achieved.




Real Property Leases

In January 2016, we entered into a lease agreement, or the Building Lease, for
office, engineering, and research and development space in Carlsbad, California
with the lease term through July 31, 2021. Under the Building Lease our monthly
rent payable is approximately $105,000 per month during the first year and
increases by approximately $3,000 each year thereafter.

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 $195,000 per month subject to full abatement during months two
through ten. Base rent for the second year of the term will be $244,115 per
month and thereafter will increase annually by 3.0%. At the beginning of each
exercised option period, base rent will be adjusted to the market rental value,
and thereafter will increase annually by 3.0% through the end of such option
period.

Off-Balance Sheet Arrangements

As of December 31, 2020, we did not have any off-balance sheet arrangements.

Critical Accounting Policies and Estimates


Our discussion and analysis of our financial condition and results of operations
is based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the U.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.

We believe the following accounting policies to be critical to the judgments and estimates used in the preparation of our consolidated financial statements.

Revenue Recognition


The Company recognizes revenue from products sales in accordance with Financial
Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC")
Topic 606, Revenue from Contracts with Customers ("Topic 606"). This standard
applies to all contracts with customers, except for contracts that are within
the scope of other standards, such as leases, insurance, collaboration
arrangements and financial instruments. Under Topic 606, an entity recognizes
revenue when its customer obtains control of promised goods or services, in an
amount that reflects the consideration that the entity expects to receive in
exchange for those goods or services. To determine revenue recognition for
arrangements that an entity determines are within the scope of Topic 606, the
entity performs 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. At contract inception, once the contract is
determined to be within the scope of Topic 606, the Company assesses the goods
or services promised within each contract and determines those that are
performance obligations and assesses whether each promised good or service is
distinct. The Company then recognizes as revenue the amount of the transaction
price that is allocated to the respective performance obligation when (or as)
the performance obligation is satisfied.

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Excess and Obsolete Inventory


Our inventories are stated at the lower of cost or net realizable value, with
cost primarily determined under the first-in, first-out method. A majority of
our inventory is comprised of finished goods and we primarily utilize
third-party suppliers to produce our products. We evaluate the carrying value of
our inventory in relation to the estimated forecast of product demand, which
also takes into consideration estimated product lifecycles. Our estimates and
assumptions for excess and obsolete inventory are reviewed and updated on a
quarterly basis. Increases in the reserve for excess and obsolete inventory
results in a corresponding charge to cost of goods sold. Historically our
reserves have been adequate to cover losses.

The need to maintain substantial levels of inventory impacts the risk of
inventory obsolescence. We maintain a number of different products in our
inventory portfolio. In addition, we continue to introduce new products and
product innovations which we believe will increase our revenue, enhance spine
surgery, and compel surgeons to adopt our products. Though we believe this
strategy provides us with a competitive advantage, it also increases the risk
that our products will become excess or obsolete inventory prior to sale or
prior to the end of their anticipated useful lives. As a result, the
introduction of new or next-generation products may require us to take charges
for excess and obsolete inventory which may have impact the value of our current
inventory as well as our operating results.

Leases


Effective January 1, 2019, we adopted ASC No. 2016­02, Leases ("Topic 842")
("ASC 842"), which supersedes the current accounting for leases, using the
modified retrospective transition method. The Company has elected to apply the
practical expedients allowed by the standard for existing leases. The new
standard, while retaining two distinct types of leases, finance and operating,
(i) requires lessees to record a right-of-use ("ROU") asset and a related
liability for the rights and obligations associated with a lease, regardless of
lease classification, and recognize lease expense in a manner similar to current
accounting, (ii) eliminates current real estate specific lease provisions,
(iii) modifies the lease classification criteria and (iv) aligns many of the
underlying lessor model principles with those in the new revenue standard. We
determined the initial classification and measurement of our ROU, assets and
lease liabilities at the lease commencement date, or the adoption date, if
later, and thereafter if modified. We recognized a right-of-use asset for our
operating leases with lease terms greater than 12 months.  The lease term
includes any renewal options and termination options that we are reasonably
assured to exercise. The present value of lease payments is determined by using
the incremental borrowing rate for operating leases determined by using the
incremental borrowing rate of interest that we would pay to borrow on a
collateralized basis an amount equal to the lease payments in a similar economic
environment. We applied the new guidance to our existing facility lease at the
time of adoption and recognized a right-of-use asset of $2.4 million and
operating lease liability of $2.9 million, during the first period of adoption,
and recorded a reversal of the previous deferred rent balance under the previous
lease guidance of approximately $0.6 million. We entered into another facility
lease for smaller office space during the third quarter of 2019 and also applied
this guidance to create an additional ROU asset and operating lease liability.
The two leases are presented together on the Company's consolidated balance
sheet.

Rent expense for operating leases is recognized on a straight-line basis over
the reasonably assured lease term based on the total lease payments and is
included in research and development and general and administrative expenses in
the statements of operations and comprehensive loss.

Valuation of Intangible Assets


We assess the impairment of our intangible assets annually in December or
whenever business conditions change and an earlier impairment indicator arises.
This assessment requires us to make assumptions and judgments regarding the
carrying value of these assets. These assets are considered to be impaired if we
determine that their carrying value may not be recoverable based upon our
assessment of certain events or changes in circumstances, including the
following:

     •    a determination that the carrying value of such assets cannot be
          recovered through undiscounted cash flows;


  • loss of legal ownership or title to the assets;


                                       52
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• significant changes in our strategic business objectives and utilization

          of the assets; or


  • the impact of significant negative industry or economic trends.


If the assets are considered to be impaired, the impairment we recognize is the
amount by which the carrying value of the assets exceeds the fair value of the
assets. Significant management judgment is required in estimating the fair value
of our intangible assets.

Warrants to purchase common stock


Warrants are accounted for in accordance with the applicable accounting guidance
provided in ASC 815 - Derivatives and Hedging as either derivative liabilities
or as equity instruments depending on the specific terms of the agreements.
Liability-classified instruments are recorded at fair value at each reporting
period with any change in fair value recognized as a component of change in fair
value of derivative liabilities in the consolidated statements of operations. We
estimate liability classified instruments using the Black Scholes model, which
requires management to develop assumptions and inputs that have significant
impact on such valuations.

During each reporting period, we evaluate changes in facts and circumstances
that could impact the classification of warrants from liability to equity, or
vice versa.

Stock-Based Compensation

We account for stock-based compensation under provisions which require that
share-based payment transactions with employees be recognized in the financial
statements based on their fair value and recognized as compensation expense over
the vesting period. The amount of expense recognized during the period is
affected by subjective assumptions, including estimates of our future
volatility, the expected term for our stock options, the number of options
expected to ultimately vest, and the timing of vesting for our share-based
awards.

We use a Black-Scholes option-pricing model to estimate the fair value of our
stock option awards. The calculation of the fair value of the awards using the
Black-Scholes option-pricing model is affected by our stock price on the date of
grant as well as assumptions regarding the following:

• Estimated volatility is a measure of the amount by which our stock price

          is expected to fluctuate each year during the expected life of the
          award. Our estimated volatility through December 31, 2020 was based on
          our actual historical volatility. An increase in the estimated

volatility would result in an increase to our stock-based compensation

expense.

• The expected term represents the period of time that awards granted are

          expected to be outstanding. Our estimated expected term through
          December 31, 2020 was calculated using a weighted-average term based on
          historical exercise patterns and the term from option grant date to
          exercise for the options granted within the specified date range. An
          increase in the expected term would result in an increase to our
          stock-based compensation expense.

• The risk-free interest rate is based on the yield curve of a zero-coupon

U.S. Treasury bond on the date the stock option award is granted with a

maturity equal to the expected term of the stock option award. An

increase in the risk-free interest rate would result in an increase to

our stock-based compensation expense.

• The assumed dividend yield is based on our expectation of not paying

dividends in the foreseeable future.



We use historical data to estimate the number of future stock option
forfeitures. Share-based compensation recorded in our consolidated statements of
operations is based on awards expected to ultimately vest and has been reduced
for estimated forfeitures. Our estimated forfeiture rates may differ from our
actual forfeitures which would affect the amount of expense recognized during
the period.

We account for stock option grants to non-employees under provisions which require that the fair value of these instruments be recognized as an expense over the period in which the related services are rendered.

                                       53

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Stock-based compensation expense of awards with performance conditions is
recognized over the period from the date the performance condition is determined
to be probable of occurring through the time the applicable condition is met.
Determining the likelihood and timing of achieving performance conditions is a
subjective judgment made by management which may affect the amount and timing of
expense related to these share-based awards. Share-based compensation is
adjusted to reflect the value of options which ultimately vest as such amounts
become known in future periods. As a result of these subjective and
forward-looking estimates, the actual value of our share-based awards could
differ significantly from those amounts recorded in our financial statements.

Stock-based awards with market conditions are valued using the Monte Carlo
valuation technique which requires management to make significant estimates and
assumptions that are not observable from the market. Stock based compensation
for awards with both service and market conditions are recognized on a
straight-line basis over the longer of the derived service period or the
requisite service period.



Income Taxes

We account for income taxes in accordance with provisions which set forth an
asset and liability approach that requires the recognition of deferred tax
assets and deferred tax liabilities for the expected future tax consequences of
temporary differences between the carrying amounts and the tax bases of assets
and liabilities. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount that is more likely than not expected to be
realized. In making such a determination, a review of all available positive and
negative evidence must be considered, including scheduled reversal of deferred
tax liabilities, projected future taxable income, tax planning strategies, and
recent financial performance.

We recognize interest and penalties related to uncertain tax positions as a component of the income tax provision.

Recent Accounting Pronouncements

See "Notes to Financial Statements - Note 2 - Recent Accounting Pronouncements" included elsewhere in this Annual Report on Form 10-K.

                                       54

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