Business Context and Reporting Period
Company: Alphatec Holdings, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 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. The company operates primarily in the United States and Asia (Japan) and maintains a "surgeons' culture" to co-develop products. As of April 28, 2008, there were 47,402,516 shares of common stock outstanding.
Key Financial Metrics
| Metric (in thousands) | Q1 2008 | Q1 2007 |
|---|---|---|
| Revenues | $23,197 | $19,550 |
| Gross Profit | $15,310 | $12,669 |
| Gross Margin | 66.0% | 64.8% |
| Operating Loss | $(15,861) | $(2,612) |
| Net Loss | $(15,779) | $(2,674) |
| Net Loss Per Share (Basic/Diluted) | $(0.34) | $(0.08) |
| Cash and Cash Equivalents (End of Period) | $26,904 | $8,090 |
| Net Cash Used in Operating Activities | $(4,324) | $(4,931) |
| Total Debt (Current + Long-term) | $12,018 | N/A |
Note: Total Debt includes Lines of credit ($9,366), Current portion of long-term debt ($2,084), and Long-term debt ($1,568).
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 18.7% to $23.2 million, driven by a $2.0 million increase in U.S. sales (Trestle and Novel product lines) and a $1.6 million increase in Asia sales (partially due to the Japan Ortho Medical acquisition).
- Operating Loss Expansion: The operating loss widened significantly from $2.6 million to $15.9 million. This was primarily driven by a one-time $11.0 million litigation settlement with DePuy Spine, Inc., and an increase in In-Process Research and Development (IPR&D) expenses of $1.3 million.
- Expense Increases:
- R&D: Increased $1.7 million to $3.2 million due to higher headcount and prototype costs.
- IPR&D: Increased $1.3 million due to license acquisitions for expandable interbody and dynamic cervical plate technologies.
- Sales & Marketing: Increased $1.2 million to $9.1 million, largely due to higher commissions on increased sales volume.
- Liquidity: Cash and cash equivalents increased to $26.9 million from $8.1 million in the prior year, supported by $8.5 million in borrowings under the company's line of credit.
Guidance, Outlook, Risks, and Unusual Items
- Unusual Items:
- Litigation Settlement: In May 2008, the company settled a patent infringement lawsuit with DePuy Spine for $11.0 million plus ongoing royalties. This resolved the dispute regarding the 678 Patent and secured the right to sell Zodiac and Solanas products.
- Accounting Change: The company extended the useful life of spinal disorder product instrumentation from two to four years, reducing depreciation expense by $0.7 million for the quarter.
- Outlook & Capital Resources: Management believes current cash, operating revenues, and credit facilities are sufficient to fund operations through March 31, 2009. The company plans to begin selling products in Europe in 2008.
- Risks & Contingencies:
- Legal Proceedings: Aside from the DePuy settlement, the company is defending a lawsuit filed by four surgeons claiming royalties on polyaxial screws. The outcome is uncertain.
- Debt Covenants: The company has a $20.0 million credit facility with Merrill Lynch (acquired by GE Capital). Borrowings are limited to 85% of eligible accounts receivable and 75% of eligible inventory. Failure to meet covenants could trigger a default.
- Foreign Currency: Approximately $4.6 million of revenue is denominated in Japanese Yen, exposing the company to exchange rate fluctuations.
- Recent Agreements: Entered into new lease agreements for significant office and warehouse space (Building 1 and Building 2) and terminated a license agreement with Scient'x S.A., expecting a reversal of $0.4 million in amortization expense in Q2 2008.
Investor Verification Checklist
- Litigation Impact: Verify the cash outflow timing for the $11.0 million DePuy settlement and the terms of the ongoing royalty payments.
- Debt Capacity: Confirm the current utilization of the $20.0 million credit facility and the company's ability to meet covenants given the recent increase in inventory and receivables.
- IPR&D Viability: Assess the commercial viability of the newly licensed technologies (Expandable VBR, Dynamic Anterior Cervical Plate, OsseoScrew) which resulted in $1.3 million in immediate expensing.
- Scient'x Termination: Monitor the Q2 2008 financials for the expected $0.4 million reversal of amortization expense and the repayment of the $2.6 million license fee.
- Lease Obligations: Review the impact of the new long-term lease commitments (totaling over $19 million in operating lease obligations) on future cash flows.