9. Stock Benefit Plans and Stock-Based Compensation

In 2005, the Company adopted its 2005 Employee, Director, and Consultant Stock Plan (the “2005 Plan”). The 2005 Plan allows for the grant of options and restricted stock awards to employees, directors, and consultants of the Company. The 2005 Plan has 8,400,000 shares of common stock reserved for issuance. The Board of Directors determines the terms of the restricted stock and the term of each option, option price, number of shares for which each option is granted, whether restrictions will be imposed on the shares subject to options, and the rate at which each option is exercisable. Options granted under the 2005 Plan expire no later than 10 years from the date of grant (five years for incentive stock options granted to holders of more than 10% of the Company’s voting stock). Options generally vest over a four or five year period and may be immediately exercisable upon a change of control of the Company. The exercise price of incentive stock options may not be less than 100% of the fair value of the Company’s common stock on the date of grant. The exercise price of any option granted to a 10% stockholder may be no less than 110% of the fair value of the Company’s common stock on the date of grant. At December 31, 2012, approximately 530,000 shares of common stock remained available for issuance under the 2005 Plan.

Stock Options

A summary of the Company’s stock option activity under the 2005 Plan and related information is as follows (in thousands, except as indicated and per share data):


	Shares			Weighted average exercise price		Weighted average remaining contractual term (in years)		Aggregate intrinsic value
Outstanding at December 31, 2011		4,717		$	3.31		7.71	$	107
Granted		2,574		$	1.94		—		—
Exercised		(62	)	$	1.23		—		—
Forfeited		(2,309	)	$	3.51		—		—

Outstanding at December 31, 2012		4,920		$	2.51		8.03	$	64

Options vested and exercisable at December 31, 2012		1,702		$	3.32		5.59	$	51

Options vested and expected to vest at December 31, 2012		4,484		$	2.55		7.88	$	63

The weighted-average grant-date fair value of stock options granted during the years ended December 31, 2012, 2011 and 2010 was $1.10, $1.48 and $1.95, respectively. The aggregate intrinsic value of options at December 31, 2012 is based on the Company’s closing stock price on that date of $1.65 per share.

As of December 31, 2012, there was $3.2 million of unrecognized compensation expense for stock options and awards which is expected to be recognized on a straight-line basis over a weighted average period of approximately 2.6 years. The total intrinsic value of options exercised for the year ended December 31, 2011 and 2010 was $0.1 million and $0.1 million, respectively. The total intrinsic value of options exercised was immaterial for the year ended December 31, 2012.

In connection with the acquisition of Scient’x, 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, and such optionees were given credit for the vesting of their Scient’x options up to the closing date. The Company calculated the fair value of the Scient’x options attributable to pre-combination service using the Black-Scholes-Merton option pricing model with market assumptions. The fair value of the replacement options that was associated with pre-combination service was included in consideration transferred in the acquisition. The difference between the fair value of the replacement options and the amount included in consideration transferred is being recognized as compensation cost in the Company’s post-combination financial statements over the requisite service period. The Company granted 754,838 options, with an exercise price of $6.39, to purchase shares of Alphatec common stock to Scient’x optionees.

On November 19, 2012, the Company commenced a stock option exchange offer for its U.S. employees. The options eligible for exchange had an exercise price equal to or greater than $2.85. The exercise price of the exchanged options was the higher of 115% of the closing price of the Company’s common stock on the exchange date and $2.00. The exchange offer occurred on December 19, 2012 and the exercise price for the exchanged options was $2.05. A total of 1,109,604 options to purchase shares of the Company’s common stock were exchanged. Many of the outstanding options were either partially or fully vested. The exchanged options will be unvested upon issuance and will vest over three years, with one-third of each option vesting on the first anniversary date and the remaining portion of each option vesting in equal quarterly installments over the eight quarters following the first anniversary date.

In November 2010, the Company exchanged 330,549 options that were issued to Scient’x optionees for a reduced number of options at the then current Alphatec common stock price. The ratio of options exchanged was calculated so that the fair value of the new options was equal to the fair value of the previously issued options resulting in no incremental stock compensation expense. The Company granted 193,144 options with an exercise price of $2.31.

Restricted Stock Awards

The following table summarizes information about the restricted stock awards activity (in thousands, except as indicated and per share data):


	Shares			Weighted average grant date fair value		Weighted average remaining recognition period (in years)
Unvested at December 31, 2011		361		$	2.61		3.22
Awarded		702		$	1.57
Vested		(77	)	$	2.95
Forfeited		(109	)	$	2.10

Unvested at December 31, 2012		877		$	1.81		1.49

The weighted average fair value per share of awards granted during the years ended December 31, 2012, 2011 and 2010 was $1.57, $2.61 and $2.60, respectively.

Warrants

In March 2012, the Company entered into a consulting agreement with a third-party entity and pursuant to such consulting agreement, the Company issued a warrant to the consultant to purchase an aggregate of 500,000 shares of the Company’s common stock at an exercise price of $2.50 per share. The warrant expires on March 1, 2015 and vested 25% on the last day of September 2012, December 2012 and will vest 25% on each of the day of March 2013 and June 2013.

In December 2011, in connection with the third amendment to the SVB Credit Facility, finance charges totaling $0.2 million were waived in exchange for the issuance of 93,750 warrants to SVB to purchase shares of the Company’s common stock. The warrants are immediately exercisable, can be exercised through a cashless exercise, have an exercise price of $1.60 per share and have a ten year term. The Company recorded the value of the warrants of $0.1 million as a debt discount. The value of the warrants was determined on the date of grant using the Black-Scholes-Merton valuation method with the following assumptions: risk free interest rate of 1.23%, volatility of 57.4%, a ten year term and no dividend yield.

In December 2008, the Company issued warrants to the lenders of the Lenders Credit Facility to purchase an aggregate of 476,190 shares of the Company’s common stock with an exercise price of $1.89 per share. The warrants were immediately exercisable, could be exercised through a cashless exercise and had a ten-year term. The Company recorded the value of the warrants of $0.9 million as a debt discount. The value of the warrants was determined on the grant date using the Black-Scholes-Merton valuation method with the following assumptions: risk free interest rates of 2.67%, volatility of 60.9%, a ten year term and no dividends yield.

In September 2009, one of the lenders to the Lender Credit Facility exercised all of its warrants pursuant to the cashless exercise provision of its warrant agreement resulting in the Company issuing 113,388 shares of its common stock to the lender. The net value of the shares issued was $530,000. Following this exercise, warrants to purchase 285,714 shares of common stock were outstanding as of December 31, 2009.

In March 2010, one of the lenders to the Lender Credit Facility exercised all of its warrants pursuant to the cashless exercise provision of its warrant agreement resulting in the Company issuing 196,161 shares of its common stock to the lender. The net value of the shares issued was $1.2 million.

Media Advertising Agreement

In 2012, the Company entered into consulting agreements with a third-party entity for marketing and advertising services. In connection with these agreements the Company paid the consultant $0.2 million, issued 500,000 registered shares of the Company’s common stock and issued 352,000 unregistered shares of the Company’s common stock. The Company recorded total stock compensation of $1.1 million in the year ended December 31, 2012 related to these agreements.

Phygen Success Fee

In 2012, in connection with the Phygen acquisition the Company entered into a consulting agreement with a third-party entity for financial services. In connection with this agreement the Company issued 86,705 shares of the Company’s common stock valued at $0.2 million to the third party entity.

Treasury Stock

On August 31, 2009, pursuant to a settlement agreement with the claimants in a lawsuit filed against the Company, the Company issued 114,766 shares of its common stock, valued at a price per share of $4.35, to the claimants. The resale of such shares was not covered by a registration statement. As required by the settlement agreement, nine months after the issuance, the value of such stock ($0.5 million) was measured against the then-current value of the Company’s common stock on such date. The Company performed the measurement calculation on February 28, 2010 using a per share price of the Company’s common stock of $5.20, which resulted in the forfeiture of 18,612 shares by the claimants. The Company recorded the fair value of the forfeited shares of $0.1 million as treasury stock. As per the agreement, through the third quarter of 2010, the Company reviewed the fair value of the $0.5 million equity issuance on a quarterly basis to determine if additional accounting was warranted based on a fluctuation in the Company’s stock price. Based on this review, the Company recorded a fair value adjustment totaling $0.3 million to decrease litigation expense.

Common Stock Reserved for Future Issuance

Common stock reserved for future issuance consists of the following (in thousands):


	December 31, 2012
Stock options outstanding		4,920
Awards outstanding		877
Warrants outstanding		594
Authorized for future grant under 2005 Plan		531

		6,922