Business Context and Reporting Period
This Form 8-K Current Report was filed by Alphatec Holdings, Inc. on March 18, 2014, covering events occurring on March 15 and March 17, 2014. The filing details the resolution of significant litigation and the execution of a new financing facility to fund the settlement and support operations.
Key Financial Metrics and Agreements
OrthoTec Litigation Settlement
- Total Settlement Amount: $49 million in cash to OrthoTec, LLC.
- Third-Party Contribution: HealthpointCapital agreed to contribute $5 million toward the settlement.
- Payment Schedule:
- $1.75 million initial payment by March 31, 2014.
- $15.75 million payment within 25 days of closing the Facility Agreement.
- Remaining $31.5 million paid in quarterly installments of $1.1 million, beginning in Q4 2014.
- Interest: 7% simple interest accrues on the unpaid $31.5 million portion, payable in $1.1 million quarterly installments after the principal is fully paid.
Facility Agreement with Deerfield
- Loan Capacity: Up to $50 million available.
- Interest Rate: 8.75% per annum, payable quarterly in cash.
- Transaction Fee: 2.5% of the principal amount disbursed.
- Repayment Terms: One-third of the aggregate principal payable on the third, fourth, and fifth anniversaries of the first disbursement.
- Prepayment: Allowed after the third anniversary at 105% of the outstanding principal plus accrued interest and fees.
- Security: Secured by a security interest in substantially all assets of Alphatec and its subsidiaries, subordinated to the existing MidCap facility.
Equity Issuance (Warrants)
- Initial Warrants: 6,250,000 shares at an exercise price of $1.39.
- Draw Warrants: Issued upon additional disbursements; total potential issuance up to 16,250,000 shares if the full $50 million is drawn.
- End-Term Draw Warrants: Up to 1,000,000 shares if an End-Term Draw is executed.
- Expiration: Six years from issuance.
Material Changes and Strategic Actions
The Company entered into a binding term sheet to settle the OrthoTec, LLC vs. Surgiview S.A.S. litigation and all related matters. This settlement results in mutual releases and the dismissal of cases with prejudice upon payment of the $15.75 million tranche. To fund this obligation, the Company secured a $50 million credit facility from Deerfield funds. Additionally, the Company amended its existing credit facility with MidCap to permit the new borrowing and the granting of liens to Deerfield.
Outlook, Risks, and Contingencies
- Forward-Looking Risks: Management notes that funding from Deerfield may not be completed as expected or at all if conditions for draws are not met.
- Default Provisions: The Facility Agreement includes events of default such as payment default, insolvency, or change of control, which could trigger higher interest rates or immediate acceleration of debt.
- Covenants: The agreement includes restrictions on incurring additional indebtedness, liens, and asset dispositions outside the ordinary course of business.
- Registration Rights: The Company must file a registration statement for the resale of warrant shares within 45 days of the Initial Warrant issuance.
Investor Verification Checklist
- Verify the execution of the long-form settlement agreement and the dismissal of litigation with prejudice.
- Confirm the timing and conditions for the initial draw under the Deerfield Facility Agreement.
- Review the impact of the 2.5% transaction fee and 8.75% interest rate on future cash flow projections.
- Assess the potential dilution from the issuance of up to 16,250,000+ warrants.
- Monitor compliance with the covenants restricting additional debt and asset dispositions.