On March 12, former Alphatec CEO and founder of Alphatec’s largest shareholder, Healthpoint Capital, resigned from Alphatec’s board. John Foster has left the building. Also resigning that day was fellow board member Rohit M. Desai.
No details explaining why these two directors resigned came from either the company or the resigning directors other than the following filing with the SEC: “Mr. Foster’s resignation will allow him to devote increased attention to other business commitments. Mr. Foster did not communicate to the Company any disputes regarding the Company’s operations, policies or practices in connection with his resignation, nor is the Company aware of any such disputes.”
Three days after Foster’s resignation, the company released its financial results for 2015. Sales, the company reported, declined 10% to $185 million in 2015. The company also wrote off a whopping $171 million of goodwill and with that reported an overall loss of $179 million.
If those asset write-offs and a number of other non-cash expenses were added back in, then a more positive picture of a $21 million cash (earnings before interest, tax, depreciation and amortization) profit emerges.
Alphatec ended 2015 with $11 million in cash, $83 million in receivables and inventory and $44 million in current payables and accrued liabilities. There’s also $114 million in long term debt of which $80 million is now listed as a current liability because of Alphatec’s default status.
Yes, Alphatec is in default. More about that later.
In the stock market, Alphatec has a market value of just $24 million.
How does a company with $185 million in sales have a market cap of $24 million? From a pure equity point of view, Alphatec is the cheapest spinal implant company in the world—by a country mile.
From a bag of problems point of view…not so cheap.
Foster’s Resignation
To be sure, John Foster’s resignation is a seminal event in Alphatec’s history—just as his HealthPoint Capital’s purchase of Alphatec was in 2005.
But, no one should read any more into his resignation than was stated in the public releases. If anything, his departure may open up new avenues for Alphatec or prospective investors in Alphatec to pursue their strategies.
And frankly, the news coming out of Alphatec would be enough to send any board member running for the hills.
Here’s a quick summary of the last 24 months.
- March 15, 2016: “For the quarters ended June 30, 2015, September 30, 2015, and December 31, 2015, we determined that we had material weaknesses in our internal control over financial reporting. Our efforts to comply with Sections 302 and 404 of the Sarbanes-Oxley Act of 2002 and the related regulations regarding our required assessment of our internal control over financial reporting and our independent auditor’s audit of that assessment requires the commitment of significant financial and managerial resources.”
- March 15, 2016: “As of March 14, 2016, the outstanding amount to be paid to Orthotec through January 2024 is $33.7 million. If either acceleration of payments occurs, our business, financial condition and results of operations could be materially and adversely affected.”
- March 15, 2016: “Without modifications to our existing payment obligations or receipt of additional funding, our existing cash and other sources of liquidity may only be sufficient to fund our operations until our Amended Credit Facility with MidCap matures in December 2016, assuming that our creditors continue to waive any breaches under our credit facilities and our debt is not sooner accelerated. These circumstances raise substantial doubt about our ability to continue as a going concern.”
- March 12, 2016: John Foster and Rohit Desai resign from the Board of Directors.
- February 16, 2016: James Flynn, Deerfield Management Company, now owns 9.985% of Alphatec
- December 8, 2015: Alphatec announced that it was out of compliance with its financial covenants and filed the following statement with the SEC:
“On December 8, 2015, the Company determined that it had been out of compliance with one of its financial covenants (the “Covenant”) under its existing amended and restated credit facility (the “MidCap Credit Facility”) with MidCap Financial, LLC (“MidCap”) in June, August, September, October and November of 2015. The Covenant required the Company, on a monthly basis, to meet or exceed a minimum fixed charge coverage ratio. Historically, the Company had made such calculation by excluding any debt repayment related to the MidCap term loans when calculating this fixed charge coverage ratio. On December 8, 2015, after reviewing the MidCap Credit Facility with MidCap, it was determined that such methodology was incorrect, and that any debt repayment related to the MidCap term loans should be included when calculating this fixed charge coverage ratio. When the Company recalculated the fixed charge coverage ratio in accordance with this new methodology, the breaches of the Covenant were discovered. The Company’s non-compliance with the Covenant constitutes an event of default under the MidCap Credit Facility (the “MidCap Covenant Default”). As previously disclosed by the Company, the MidCap Credit Facility matures in August 2016. The Company has alerted MidCap of the Company’s non-compliance with the Covenant, which would allow MidCap, in the absence of a waiver, to require immediate repayment of the approximately $57 million outstanding under the MidCap Credit Facility, which would have a material adverse effect on the Company’s financial condition, operating results and liquidity. MidCap provided waivers of the event of default under the MidCap Credit Facility for each of June, August, September, October and November of 2015.”
- October 30, 2015: James R. Glynn Retires from Board of Directors
- November 25, 2014: California federal judge rules that two Alphatec Spine patents are invalid.
- February 11, 2014: Jury hits Alphatec with $48 million damages award in OrthoTec spat
What Is Alphatec’s Future?
There is an old anecdote that is often applied to managements of distressed companies. It goes something like this.
If a frog is placed in boiling water, it will jump out, but if it is placed in cold water that is slowly heated, it will not perceive the danger until it is too late.
Is Alphatec a boiled frog?
Current CEO James Corbett has no shortage of problems to work through. The company does have the appearance of a firm in crisis. Which, with this experienced management in place, probably translates into a return to basics—like daily cash flow management, incremental changes and a focus on the small wins.
Certainly, the massive write offs for 2015, to a certain extent, clear the decks and help to focus all stakeholders on Alphatec’s #1 issue: Cash Flow.
Additionally, Corbett’s #1 priority is, no doubt, to stabilize his company and find that level of operations where the company can report consistent and reliable profits with decent margins.
And then, possibly, the credible “change story” will emerge.
For now, however, time is chasing this company.
Stay tuned, for sure.
