ATEC

Business Context and Reporting Period

Company: Alphatec Holdings, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 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 conditions affecting the aging spine. The company operates in the U.S., Asia, and Europe.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased 26.6% year-over-year for the quarter and 31.1% for the nine-month period. Growth was driven by increased sales of the Illico product line and existing products in the U.S., as well as volume and favorable currency effects in Asia. European sales began contributing meaningfully in 2009.
• Profitability Improvement: The operating loss narrowed significantly compared to the prior year. For the nine months ended September 30, 2008, the company recorded an $11.0 million litigation settlement expense which was absent in the 2009 period.
• Expense Trends:
  • In-Process R&D (IPR&D): Increased to $5.8 million for the nine months ended 2009 (vs. $2.6 million in 2008) due to milestone payments and acquisitions of new technologies (e.g., OsseoScrew, ISI License).
  • Sales and Marketing: Increased 23.5% for the nine-month period, primarily due to higher commissions driven by increased sales volume.
  • Interest Expense: Increased to $2.8 million for the nine months ended 2009 (vs. $0.7 million in 2008) due to the new Credit Facility entered into in December 2008.
• Cash Flow: Net cash used in operating activities improved to $3.0 million for the nine months ended 2009, compared to $18.2 million in the prior year period, largely due to the absence of the prior year's litigation settlement cash outflow.

Guidance, Outlook, Risks, and Unusual Items

• Liquidity and Going Concern: Management believes existing cash ($14.1 million) and available credit ($1.7 million) are sufficient to fund operations through at least September 30, 2010. However, the company operates under a Credit Facility with strict financial covenants (minimum revenue and Adjusted EBITDA). Failure to meet these covenants could result in a default, requiring immediate repayment of debt or renegotiation.
• Capital Raising: In June 2009, the company completed a private placement of common stock, raising approximately $9.8 million in net proceeds. Management may seek additional financing in the future, which could result in dilution.
• Litigation Settlement: In August 2009, the company settled the "Brodke" litigation. The settlement involved a $1.5 million cash payment, the issuance of $0.5 million in stock, and future royalty obligations. This resolved a significant contingency that had previously resulted in a $2.2 million reserve.
• Risks: Key risks include the ability to meet Credit Facility covenants, the success of new product commercialization, regulatory approvals (FDA), and the volatility of foreign currency exchange rates affecting Asian and European operations.

Investor Verification Checklist

• Covenant Compliance: Verify if the company continues to meet the minimum revenue and Adjusted EBITDA covenants required by its Silicon Valley Bank/Oxford Finance Credit Facility to avoid default.
• Product Pipeline: Assess the progress of in-process R&D assets (e.g., OsseoScrew, ISI License) toward regulatory approval and commercial launch, as these represent significant recent expenditures.
• European Expansion: Monitor the realization of deferred revenue from European distributors, which is recognized only upon cash receipt or payment due dates.
• Debt Maturity: Review the repayment schedule for the $15 million term loan and $15 million line of credit, with principal repayments commencing in October 2009 and maturity in April 2012.
• Stock-Based Compensation: Note the $4.3 million of unrecognized compensation expense expected to be recognized over the next 2.9 years, which will impact future operating expenses.