ATEC

Business Context and Reporting Period

Company: Alphatec Holdings, Inc.
Filing Type: Form 10-Q (Unaudited)
Period Ended: March 31, 2009
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, with a specific emphasis on the aging spine. The company operates in the U.S., Asia, and Europe.

Key Financial Metrics

Note: Total Debt calculated as Current portion of long-term debt ($3,037) + Long-term debt ($26,360). Working Capital calculated as Total Current Assets ($65,680) - Total Current Liabilities ($37,790).

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased 32.0% to $30.6 million, driven by a $5.1 million increase in U.S. sales (Zodiac, Novel, Trestle, Biologics, Solanas lines) and a $1.3 million increase in Asia. The company also recognized $1.0 million in European sales, a new market segment.
• Profitability Improvement: The operating loss narrowed significantly from $15.9 million to $3.1 million. This improvement is largely attributable to the absence of an $11.0 million litigation settlement expense recorded in Q1 2008 related to a settlement with Biedermann and DePuy.
• Expense Trends:
  • Sales and Marketing: Increased 26.5% to $12.8 million due to higher commissions and expanded operations in Asia.
  • Interest Expense: Increased 414.6% to $0.9 million due to the new Credit Facility entered in December 2008.
  • Cost of Revenues: Increased 37.3% to $10.8 million, driven by higher product costs, royalties, and depreciation on a larger base of surgical instruments.
• Liquidity: Cash and cash equivalents decreased by $8.2 million to $10.1 million, primarily due to net cash used in operating activities ($6.4 million) and investing activities ($2.5 million).

Guidance, Outlook, Risks, and Contingencies

• Liquidity Outlook: Management believes existing cash ($10.1 million) and available credit ($2.1 million) are sufficient to fund operations through at least March 31, 2010. However, the company must achieve revenue growth to meet financial covenants.
• Debt Covenants: The company is subject to a Credit Facility with Silicon Valley Bank and Oxford Finance Corporation requiring minimum revenue and Adjusted EBITDA levels. Failure to meet these covenants could result in a default, acceleration of debt, and a material adverse effect on operations.
• Going Concern: The financial statements are prepared assuming the company will continue as a going concern. Management notes that if revenue forecasts are not met, they may need to reduce investment in surgical instruments and inventory.
• Legal Proceedings:
  • Surgeon Litigation: A lawsuit filed in 2006 by four surgeons claiming royalties on polyaxial screws is scheduled for trial in Q3 2009. The company has accrued $2.2 million for litigation costs but cannot predict the outcome.
  • Patent Litigation: The company is actively prosecuting its patent portfolio, contributing to increased legal fees.
• License Agreements: The company amended agreements with Stout Medical Group LP in April 2009 (effective March 31, 2009), suspending minimum royalty obligations until FDA approval is obtained for certain products.

Investor Verification Checklist

• Covenant Compliance: Verify if the company met the escalating quarterly revenue and Adjusted EBITDA covenants for the Credit Facility in subsequent quarters to avoid default.
• Cash Burn Rate: Monitor the rate of cash consumption against the $10.1 million cash balance to assess the runway before March 2010.
• European Expansion: Confirm the sustainability of European revenue growth, noting that some revenue was deferred due to extended payment terms with new distributors.
• Inventory Levels: Review inventory balances ($26.9 million) relative to sales velocity to ensure no significant write-downs for excess or obsolete stock are required.
• Litigation Outcome: Track the Q3 2009 trial regarding the surgeon royalty claims to assess potential liability beyond the current $2.2 million accrual.