ATEC

Alphatec Holdings, Inc. - Q1 2010 Filing Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2010. Alphatec Holdings, Inc. is a medical device company focused on surgical treatments for spine disorders. The quarter was defined by the completion of the acquisition of Scient'x S.A. on March 26, 2010, a global medical device company based in France. While the acquisition closed during the quarter, Scient'x's operating results are not included in the consolidated financial statements for the three months ended March 31, 2010, as the five-day post-closing period was deemed immaterial.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased 25.6% year-over-year, driven by a 19.4% increase in U.S. sales (Zodiac, Illico, Novel, Trestle lines) and a significant 300%+ increase in European revenues due to an expanded distribution network.
• Acquisition Costs: The company incurred $3.2 million in transaction-related expenses and $0.9 million in restructuring expenses related to the Scient'x acquisition, which were not present in the prior year.
• Balance Sheet Expansion: Total assets more than doubled from $161.9 million to $357.2 million, primarily due to the recording of $112.5 million in goodwill and $39.4 million in intangible assets from the Scient'x acquisition.
• Debt Structure: The company amended its Credit Facility to combine its term loan with Scient'x's term loan. The combined term loan balance was $19.2 million (net of discount), and the working capital line of credit balance was $14.8 million.

Guidance, Outlook, and Risks

• Liquidity and Capital Resources: Management believes existing cash ($12.7 million) and proceeds from a subsequent April 2010 equity offering ($42.5 million) will fund operations through March 31, 2011.
• Debt Covenants: The amended Credit Facility requires a minimum fixed charge coverage ratio and a minimum cash balance of $10 million with Silicon Valley Bank. Management expects compliance throughout 2010.
• Subsequent Events: In April 2010, the company completed a public offering of 18.4 million shares, raising approximately $42.5 million in net proceeds. Additionally, the company sold its non-strategic Japanese subsidiary, IMC Co., for $0.6 million.
• Risks and Contingencies:
  • Litigation: Active lawsuits include a patent royalty dispute with Cross Medical Products, LLC; successor liability claims from Orthotec regarding a prior Eurosurgical judgment; and a change of control payment dispute with DAK Surgical, Inc.
  • Regulatory Review: The DOJ is continuing a review of facts alleged in a previously dismissed False Claims Act complaint regarding Scient'x's consulting payments to surgeons.
  • Healthcare Reform: New U.S. legislation imposes a 2.3% excise tax on medical devices starting in 2013, which could adversely affect margins.

Investor Verification Checklist

• Verify the final purchase price allocation for the Scient'x acquisition, as current figures are preliminary and subject to change.
• Monitor the company's ability to meet the new fixed charge coverage ratio covenant under the amended Credit Facility.
• Track the status of the DOJ review regarding the False Claims Act allegations and the outcomes of pending litigation (Cross Medical, Orthotec, DAK Surgical).
• Assess the integration progress of Scient'x's U.S. operations and the realization of projected cost synergies.
• Review the impact of the 2013 medical device excise tax on long-term margin projections.