Business Context and Reporting Period
Company: Alphatec Holdings, Inc.
Filing Type: Form 8-K (Current Report)
Date of Report: November 2, 2015
Event: Entry into a Material Definitive Agreement (First Amendment to Collaboration Agreement) and Issuance of Unregistered Securities.
Key Financial Metrics and Transaction Details
- Agreement Value: The underlying Collaboration Agreement provides for the issuance of an aggregate $8.0 million of common stock to Collaborators (Elite Medical Holdings, LLC and Pac 3 Surgical Products, LLC) for development and commercialization services.
- Stock Issuance Price: $1.95 per share (average closing price on NASDAQ Global Select Market for four days prior to the effective date).
- Recent Issuance: On October 9, 2015, the Company issued 883,152 unregistered shares of common stock for services performed in the second year of the agreement.
- Contingent Liability (Existing Shares): Based on the October 30, 2015 closing price, a potential additional liability of $3.5 million exists for shares previously issued.
- $2.1 million payable in 2017.
- $1.4 million payable in 2018.
- Contingent Liability (Future Shares): Based on the October 30, 2015 closing price, a potential additional liability of $2.8 million exists for shares issuable under remaining terms.
- $0.7 million payable in 2018.
- $2.1 million payable in 2019.
Material Changes and Agreement Terms
The First Amendment introduces a "lock-up" restriction and valuation caps/floors on the shares issued to Collaborators:
- Lock-Up Periods: Shares issued in 2014, 2015, and 2016 are locked until Q1 2017, Q1 2018, and Q1 2019, respectively.
- Valuation Adjustment:
- Minimum Value: If the market value of a tranche at the end of the lock-up period is below a minimum threshold, the Company must make a cash payment to the Collaborators.
- Maximum Value: If the market value exceeds a certain cap, Collaborators must forfeit shares back to the Company.
- Termination of Restrictions: Restrictions are null and void if Collaborators sell/transfer more than 20% of shares prior to the first valuation date or any shares subject to lock-up after the first valuation date.
- Change of Control: The surviving entity assumes the agreement. Valuation adjustments remain in effect based on successor consideration, with restrictions applying to non-cash portions of the consideration.
Guidance, Outlook, and Risks
- Future Issuance: The Company anticipates issuing additional shares prior to the end of 2015 for the remainder of the second year of services.
- Market Risk: The Company's cash liability is directly tied to the market price of its common stock at the end of specific lock-up periods. A decline in stock price increases the potential cash payout obligation.
- Regulatory Status: The October 9, 2015 issuance was made under Section 4(2) of the Securities Act of 1933. The Company does not anticipate registering these shares for resale.
Investor Verification Checklist
- Verify the exact closing stock price on October 30, 2015, to confirm the basis for the $3.5 million and $2.8 million contingent liability estimates.
- Review the full text of the First Amendment (exhibit to the 2015 Form 10-K) to understand the specific formulas for the minimum and maximum value caps.
- Monitor the Company's stock price performance leading up to Q1 2017, 2018, and 2019 to assess the likelihood of cash payments being triggered.
- Confirm whether the anticipated additional share issuance for the remainder of 2015 occurs and the volume of shares issued.
- Check for any announcements regarding the sale or transfer of Collaborator shares that might void the lock-up restrictions.