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v2.3.0.15
Acquisitions
9 Months Ended
Sep. 30, 2011
Acquisitions [Abstract] 
Acquisitions

3. Acquisitions

Purchase of Scient'x

On December 17, 2009, the Company entered into an acquisition agreement to acquire all of the shares of Scient'x, with Scient'x continuing after the acquisition as a wholly-owned subsidiary of the Company's newly formed and wholly owned Dutch subsidiary. The acquisition, which closed on March 26, 2010, is accounted for under the acquisition method of accounting. The effective acquisition date for accounting purposes was the close of business on March 31, 2010, the end of Scient'x's fiscal first quarter. The Company purchased Scient'x to acquire Scient'x's product portfolio and technology, its international distribution network and existing customer base, and because of the increased scale of the combined entities.

The transaction was structured as an all stock transaction such that all of the outstanding stock of Scient'x was exchanged, pursuant to a fixed ratio, for 24,000,000 shares of the Company's common stock. The shares to be paid by the Company at the closing were reduced to 23,730,644 shares in exchange for the Company paying certain acquisition fees and expenses incurred by HealthPointCapital Partners, L.P. and HealthPointCapital Partners II, L.P. (collectively, "HealthPointCapital"), the Company's and Scient'x's principal stockholders.

As required by the acquisition agreement, the holders of both vested and unvested options to purchase shares of Scient'x common stock who were employed by either Scient'x or Alphatec on the closing date were entitled to receive replacement options to purchase shares of Alphatec common stock upon closing of the acquisition ("Replacement Options"), and such optionees were given credit for the vesting of their Scient'x options up to the closing date. $1.0 million was included in the purchase price to represent the fair value of the Scient'x options attributable to pre-combination service and was estimated using the Black-Scholes-Merton option pricing model with market assumptions. Option pricing models require the use of highly subjective market assumptions, including expected stock price volatility, which if changed can materially affect fair value estimates. The assumptions used in estimating the fair value of the Replacement Options include expected volatility of 56.0%, expected term of 6.0 years, and a risk-free interest rate of 2.5%. The difference between the total fair value of the Replacement Options and the fair value of $1.0 million attributable to pre-combination service is being recognized as compensation cost in the Company's post-combination financial statements over the requisite service period.

Based on the closing price of Alphatec's common stock of $6.39 on March 26, 2010, the fair value of the Replacement Options, and the amount payable in exchange for reduction in shares, the total purchase price was as follows (in thousands):

 

Fair value of Alphatec common stock issued upon closing

   $ 151,639   

Fair value of Scient'x Replacement Options attributable to pre-combination service

     1,040   

Payable in exchange for reduction in shares to be paid in cash

     1,618   
  

 

 

 

Total purchase price

   $ 154,297   
  

 

 

 

Under the acquisition method of accounting, the total purchase price is allocated to Scient'x's net tangible and intangible assets based on their estimated fair values at the date of the completion of the acquisition.

 

The following table summarizes the allocation of the purchase price (in thousands) for Scient'x and the estimated useful lives for the acquired intangible assets:

 

     Useful lives
(in years)
     Estimated
Fair Value
 

Net tangible assets assumed

      $ 2,577   

Acquired intangibles:

     

Core technology

     10         3,632   

Developed technology

     8         9,552   

In-process technology

     Indefinite         1,749   

Corporate trademarks

     5         1,614   

Key product trademarks

     9         2,179   

Customer-related intangible

     15         16,009   

Distribution network

     10         1,614   

Physician education programs

     10         3,095   

Goodwill

        112,276   
     

 

 

 

Total purchase price allocation

      $ 154,297   
     

 

 

 

The Company allocated $2.6 million to Scient'x net tangible assets assumed and $39.4 million to identifiable intangible assets acquired. A value of $112.3 million, representing the difference between the total purchase price and the aggregate fair values assigned to the net tangible and intangible assets acquired, less liabilities assumed, was assigned to goodwill. Alphatec acquired Scient'x to expand its product offerings, increase its addressable market, increase the size of its international business, and increase its revenues primarily outside of the U.S. Alphatec also believes that significant cost reduction synergies may be realized when the integration of the acquired business is complete. These are among the factors that contributed to a purchase price for the Scient'x acquisition that resulted in the recognition of goodwill. The amount recorded as acquired intangibles and goodwill is not expected to be deductible for tax purposes.

The Company increased the value of inventory it acquired from Scient'x to its estimated fair value ("step up"), which represented an amount equivalent to estimated selling prices less distribution related costs and a normative selling profit. Consistent with stock rotation, the inventory step up reversed ratably over 14 months and was included in the Company's post-combination financial statements. The increase to inventory was offset by a decrease in estimated fair value of redundant inventory based on the highest and best use of a similar market participant.

For the technology-related assets, the Company separated the acquired product families into the following three categories: core, developed, and in-process technology. The Company determined the values for each of these categories by estimating the present values of the net cash flows expected to be generated by each category of technology.

The Company separated trademarks into the following two categories: corporate trademarks and key product trademarks. The Company calculated the values of each of these trademark categories by estimating the present value of future royalty costs that would be avoided by a market participant due to ownership of the trademarks acquired.

The customer-related intangible includes hospitals and distributors that take title to Scient'x's products. The Company determined the value of such customer-related intangible by estimating the present value of expected future net cash flows derived from such customers.

The distribution network includes U.S.-based distributors that sell Scient'x products to customers on a consignment basis. The Company determined the value of the intangibles related to the distribution network by estimating the difference between the present values of expected future net cash flows generated with and without the distribution network in place.

The Company determined the value of physician education programs value by estimating the costs to rebuild such programs.

The fair value of the non-controlling interest as of March 26, 2010 was $0.5 million and was determined by reviewing the fair value of Scient'x's Italian subsidiary's net equity and multiplying such amount by 30%, which represents the ownership interest of the non-controlling party.

Scient'x is subject to legal and regulatory requirements, including but not limited to those related to taxation in each of the jurisdictions in which it operates. The Company has conducted an assessment of liabilities arising from these tax matters in each of such jurisdictions, and has recognized provisional amounts in its accounting for the acquisition of Scient'x for the identified liabilities.

 

The changes in the carrying amount of goodwill since the acquisition date through September 30, 2011 were as follows (in thousands):

 

Goodwill recorded for Scient'x acquisition as of March 31, 2010

   $ 112,524   

Cumulative purchase price adjustments to net tangible assets

     (248

Net effect of foreign exchange rate on goodwill

     1,096   
  

 

 

 

Balance at September 30, 2011

   $ 113,372   
  

 

 

 

The following unaudited pro forma information presents the consolidated results of operations of the Company and Scient'x as if the acquisition had occurred on January 1, 2010 (in thousands, except share data):

 

     Three Months Ended September 30,     Nine Months Ended September 30,  
             2011                     2010                     2011                     2010          

Revenues

   $ 47,619      $ 44,846      $ 148,201      $ 136,927   

Loss from operations

     (1,968     (2,767     (7,035     (5,209

Net loss

     (910     (3,082     (5,222     (5,922

Net loss per share, basic and diluted

   $ (0.01   $ (0.04   $ (0.06   $ (0.07

The pro forma information is not necessarily indicative of what the results of operations actually would have been had the acquisition been completed on the date indicated. In addition, it does not purport to project the future operating results of the combined entity. The pro forma condensed combined financial information is presented for illustrative purposes only and does not reflect the realization of potential cost savings, revenue synergies or any restructuring costs.

For the three months ended September 30, 2011 and 2010 and the nine months ended September 30, 2011, the Company did not incur any transaction costs related to the acquisition. For the nine months ended September 30, 2010, the Company incurred transaction costs related to the acquisition of $3.7 million. These costs were expensed as incurred.

For the three months ended September 30, 2011 and 2010, the Company incurred restructuring charges related to the acquisition of $0.4 million and $0.7 million, respectively. For the nine months ended September 30, 2011 and 2010, the Company incurred restructuring charges related to the acquisition of $1.0 million and $2.4 million, respectively. These restructuring charges consist of severance payments and severance-related benefits, rent and other expenses for facilities and the cost of exiting two terminated European distributor agreements.

The amount of Scient'x revenue included in the Company's condensed consolidated statement of operations for the three months ended September 30, 2011 and 2010 totaled $6.6 million and $8.2 million, respectively. The amount of Scient'x net loss included in the Company's condensed consolidated statement of operations for the three months ended September 30, 2011 and 2010 totaled $(2.0) million and $(3.3) million, respectively.

In future periods, the combined business may incur charges to operations that reflect costs associated with integrating the two businesses. The Company cannot reasonably estimate such costs at this time.

Purchase of Minority Interest

During December 2010, Scient'x acquired the non-controlling interest of its Italian subsidiary from the non-controlling party for $0.5 million. The fair value of the non-controlling interest as of the repurchase date was $0.5 million.

Acquisition of Cibramed

In January 2011, the Company acquired Cibramed Productos Medicos ("Cibramed"), a Brazilian medical device company. The Company purchased Cibramed to acquire its ANVISA regulatory registration certificates and its general licenses to conduct business in Brazil. The Company recorded an intangible asset of $0.8 million, which includes $0.2 million related to the deferred tax impact from the acquisition, for the ANVISA regulatory registration certificates and licenses it purchased to conduct business in Brazil. The Company is amortizing this asset on a straight-line basis over its estimate life of 15 years. No product distribution rights were acquired. The purchase price of $0.6 million was paid in installments consisting of (i) 60% upon execution of the acquisition agreement; (ii) 20% due 90 days from the execution of the acquisition agreement and; (iii) 20% due 180 days from the execution of the acquisition agreement. As of September 30, 2011, the Company had paid the full purchase price of $0.6 million.