Business Context and Reporting Period
Company: Alphatec Holdings, Inc.
Filing Type: Form 10-Q (Unaudited)
Period Ended: June 30, 2008
Business Overview: Alphatec is a medical technology company focused on the design, development, manufacturing, and marketing of products for the surgical treatment of spine disorders. Operations are conducted primarily through Alphatec Spine and subsidiaries in the U.S., Japan, and recently Europe.
Key Financial Metrics
| Metric (in thousands) | Three Months Ended June 30, 2008 |
Six Months Ended June 30, 2008 |
Six Months Ended June 30, 2007 |
|---|---|---|---|
| Revenues | $23,853 | $47,050 | $38,370 |
| Gross Profit | $15,837 | $31,147 | $24,653 |
| Gross Margin | 66.4% | 66.2% | 64.3% |
| Operating Loss | $(3,319) | $(19,180) | $(3,162) |
| Net Loss | $(3,591) | $(19,370) | $(3,377) |
| Net Loss Per Share (Basic/Diluted) | $(0.08) | $(0.42) | $(0.10) |
| Cash and Cash Equivalents | $13,071 (End of Period) | N/A | |
| Net Cash Used in Operating Activities | N/A | $(14,075) | $(4,681) |
| Total Debt (Current + Long-term) | $13,929 | N/A |
Note: Total Debt includes Line of Credit ($9,310), Current portion of long-term debt ($3,104), and Long-term debt ($1,515).
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 26.7% ($5.0M) for the quarter and 22.6% ($8.7M) for the six months compared to the prior year periods. Growth was driven by increased sales of Trestle, Novel, and Zodiac product lines in the U.S. and organic growth plus foreign exchange effects in Asia.
- Operating Loss Expansion: The operating loss widened significantly to $19.2M for the six months ended June 30, 2008, compared to $3.2M in the prior year. This was primarily due to a one-time $11.0 million litigation settlement with Biedermann and DePuy.
- Expense Increases:
- R&D: Increased $3.8M (six months) due to higher headcount, prototype expenses, and professional services.
- Sales & Marketing: Increased $3.4M (six months) driven by higher commissions and marketing costs.
- IPR&D: $1.3M expense recorded for the six months ended June 30, 2008 (vs. $0 in 2007) related to new license acquisitions (Expandable VBR and Dynamic Cervical Plate).
- Accounting Change: The company extended the estimated useful life of spinal instrumentation from two to four years, reducing depreciation expense by $1.3M for the six-month period.
Guidance, Outlook, Risks, and Unusual Items
- Litigation Settlement: In May 2008, the company settled a patent infringement lawsuit with Biedermann and DePuy for $11.0 million plus ongoing royalties. This resolved the dispute and secured rights to the Zodiac and Solanas products.
- Deferred Revenue: $1.4 million in revenue from a new European distributor was deferred due to extended payment terms and lack of prior experience in the market.
- Liquidity: Cash and cash equivalents decreased by $12.8M to $13.1M. The company has a $20M credit facility with $8.5M drawn and approximately $7.2M available. Management believes current resources are sufficient to fund operations through June 30, 2009.
- Future Milestones: The company expects to record additional In-Process Research and Development (IPR&D) charges in the second half of 2008, including $1.0M for OsseoFix design milestones and $2.5M for OsseoScrew functional testing.
- Risks: Key risks include the ability to achieve profitability, dependence on key products, regulatory approval delays for new products, and foreign currency fluctuations (primarily Japanese Yen).
Investor Verification Checklist
- Litigation Impact: Verify the long-term impact of the $11.0M settlement and ongoing royalty obligations on future margins.
- Deferred Revenue: Monitor the collection status of the $1.4M deferred revenue from the new European distributor.
- Upcoming Charges: Confirm the timing and magnitude of expected IPR&D charges ($3.5M total) anticipated in the second half of 2008.
- Cash Burn: Assess the sustainability of the current cash burn rate ($14.1M operating cash outflow in six months) against available credit facilities.
- Inventory Reserves: Review the adequacy of inventory reserves, which increased by $1.3M in the six-month period due to excess and obsolete provisions.