Business Context and Reporting Period
Company: Alphatec Holdings, Inc.
Filing Type: Form 10-Q (Unaudited)
Period Ended: September 30, 2010
Business Overview: Alphatec designs, develops, manufactures, and markets products for the surgical treatment of spine disorders, focusing on the aging spine. The company operates globally through subsidiaries including Alphatec Spine, Scient'x (acquired March 26, 2010), and Alphatec Pacific.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2010 | Nine Months Ended Sep 30, 2010 |
|---|---|---|
| Revenues | $44.8 million | $125.6 million |
| Gross Profit | $28.9 million (64.5% margin) | $81.3 million (64.8% margin) |
| Operating Loss | $(3.5) million | $(10.1) million |
| Net Loss | $(3.8) million | $(11.5) million |
| Cash and Cash Equivalents | $28.9 million (as of Sep 30, 2010) | N/A |
| Total Debt (Current + Long-term) | $32.8 million | N/A |
| Net Cash Used in Operating Activities | N/A | $(13.2) million |
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 49.0% ($14.7 million) for the three months and 43.8% ($38.2 million) for the nine months compared to the prior year periods. Growth was driven primarily by the acquisition of Scient'x, which contributed $9.9 million (Q3) and $19.6 million (YTD) in sales.
- Expense Increases: Operating expenses rose significantly due to the integration of Scient'x. Sales and marketing expenses increased 41.1% (Q3) and 29.9% (YTD). General and administrative expenses increased 103.7% (Q3) and 41.3% (YTD).
- Acquisition Costs: The company incurred $3.7 million in transaction-related expenses and $2.4 million in restructuring expenses for the nine months ended September 30, 2010, compared to $1.2 million and $0 respectively in the prior year period.
- Goodwill and Intangibles: Total assets increased from $161.9 million to $390.4 million, largely due to $111.8 million in goodwill and $39.4 million in identifiable intangible assets recorded from the Scient'x acquisition.
Guidance, Outlook, Risks, and Unusual Items
- Liquidity and Capital Resources: Management believes existing cash ($28.9 million) and available credit ($2.6 million at period end) are sufficient to fund operations through September 30, 2011. In April 2010, the company raised approximately $43.1 million in net proceeds from a public offering.
- Debt Refinancing (Subsequent Event): On October 29, 2010, the company amended its Credit Facility with Silicon Valley Bank, removing Oxford Finance Corporation. The new facility allows borrowing up to $32 million. The company drew $17.6 million to pay off existing term loans.
- Goodwill Impairment Risk: The company performed an interim goodwill impairment test due to a decline in stock price. Fair value was marginally greater than carrying value, so no impairment was recorded. However, management noted that if forecasts vary marginally, material impairment charges could occur in the future.
- Legal Proceedings:
- Securities Class Action: Filed August 10, 2010, alleging false/misleading statements regarding the Scient'x transaction and financial guidance.
- Derivative Action: Filed August 25, 2010, alleging breach of fiduciary duties by directors and officers.
- Patent Litigation: Cross Medical Products alleges breach of a patent license agreement regarding royalty payments.
- False Claims Act: DOJ is continuing a review of Scient'x USA business practices regarding consulting payments to surgeons, though the private qui tam complaint was dismissed.
- Unusual Items: Significant non-cash charges included $2.4 million in in-process research and development (IPR&D) expenses for the quarter, primarily related to stem cell and bone-anchoring screw technology acquisitions.
Investor Verification Checklist
- Scient'x Integration: Verify the realization of projected cost synergies and revenue growth from the Scient'x acquisition against actual performance.
- Debt Covenants: Confirm continued compliance with the fixed charge coverage ratio and minimum cash balance covenants under the amended Credit Facility.
- Goodwill Valuation: Monitor stock price and market capitalization trends, as a further decline could trigger a Step 2 goodwill impairment analysis and potential charges.
- Legal Exposure: Track the status of the securities class action and derivative lawsuits, as well as the DOJ review of Scient'x USA practices.
- Cash Burn Rate: Assess whether the $28.9 million cash balance and $32 million credit line are sufficient to sustain operations and capital expenditures through the projected runway without additional equity dilution.