Business Context and Reporting Period
This Form 8-K, dated December 8, 2015 (filed February 8, 2016), concerns Alphatec Holdings, Inc., a Delaware corporation. The filing addresses a material definitive agreement regarding debt terms and the discovery of financial covenant breaches under existing credit facilities. The reporting period focuses on events occurring between June 2015 and December 2015, with specific amendments effective February 5, 2016.
Key Financial Metrics and Obligations
- Debt Obligations: Approximately $57 million outstanding under the MidCap Credit Facility and approximately $26 million outstanding under the Deerfield Facility Agreement.
- Interest Rate Changes: The Deerfield Facility interest rate increased from 8.75% to 14.75% per annum.
- Payment in Kind (PIK): The Deerfield Facility now allows for 6% PIK interest until August 30, 2016, and 3% thereafter, added to the principal.
- Amendment Fee: A $600,000 fee is due in three installments of $200,000 on the third, fourth, and fifth anniversaries of the Facility Agreement.
- Liquidity Risk: Immediate repayment of the full debt amounts ($83 million combined) could be triggered if waivers are not maintained, posing a material adverse effect on liquidity.
Material Changes and Covenant Breaches
The Company discovered it was out of compliance with a minimum fixed charge coverage ratio covenant under the MidCap Credit Facility for June, August, September, October, and November 2015. This breach resulted from an incorrect calculation methodology that previously excluded debt repayments related to MidCap term loans. This non-compliance constitutes an event of default under the MidCap facility and a cross-default under the Deerfield facility.
Consequently, the Company's Audit Committee concluded that the unaudited condensed consolidated financial statements for the quarters ended June 30, 2015, and September 30, 2015, should no longer be relied upon. The debt previously classified as long-term must be reclassified as current liabilities due to the default status.
Outlook, Risks, and Management Commentary
- Waiver Status: MidCap has provided waivers for defaults through November 2015. Deerfield has provided waivers through December 2015 via the Second Amendment.
- December 2015 Default: The Company anticipates non-compliance in December 2015. A waiver has been received from Deerfield, but not yet from MidCap. Negotiations are ongoing.
- Future Compliance: There is no assurance the Company will be in compliance in January 2016 or thereafter. Failure to obtain future waivers could result in immediate acceleration of debt.
- Internal Controls: The Company identified a material weakness in internal control over financial reporting regarding the assessment of debt covenant compliance.
- Restatement: The Company expects to refile amended Form 10-Qs for the June and September 2015 quarters to reflect the reclassification of debt.
Investor Verification Checklist
- Verify the status of the waiver negotiation with MidCap for the December 2015 covenant breach.
- Confirm the timeline for the filing of amended Form 10-Qs for the June and September 2015 periods.
- Assess the Company's ability to meet the minimum fixed charge coverage ratio in January 2016 and subsequent months.
- Review the impact of the increased interest rate (14.75%) and PIK interest on future cash flow and debt principal.
- Monitor for any further disclosures regarding the material weakness in internal controls and remediation plans.