Edgar Filing: Alphatec Holdings, Inc.

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2010

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 000-52024

ALPHATEC HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

Delaware

20-2463898

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

5818 El Camino Real

Carlsbad, CA 92008

(Address of principal executive offices, including zip code)

(760) 431-9286

(Registrant’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes ¨ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨ Small reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)

Yes ¨ No x

As of May 7, 2010, there were 87,283,597 shares of the registrant’s common stock outstanding.

ALPHATEC HOLDINGS, INC.

QUARTERLY REPORT ON FORM 10-Q

March 31, 2010

Table of Contents


		Page
PART I – FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited)	3

	Condensed Consolidated Balance Sheets as of March 31, 2010 and December 31, 2009	3

	Condensed Consolidated Statements of Operations for the three months ended March 31, 2010 and 2009	4

	Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2010 and 2009	5

	Notes to Condensed Consolidated Financial Statements	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	35
Item 4.	Controls and Procedures	35

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	37
Item 1A.	Risk Factors	37
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	38
Item 6.	Exhibits	38

SIGNATURES		40

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

ALPHATEC HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(In thousands, except for par value data)


	March 31, 2010			December 31, 2009
Assets
Current assets:
Cash and cash equivalents	$	12,662		$	10,085
Accounts receivable, net		39,268			24,766
Inventories, net		46,702			29,515
Prepaid expenses and other current assets		5,057			3,128
Deferred income tax assets		1,427			128

Total current assets		105,116			67,622
Property and equipment, net		36,116			30,356
Goodwill		172,631			60,113
Intangibles, net		40,822			2,296
Other assets		2,520			1,501

Total assets	$	357,205		$	161,888

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	23,073		$	12,781
Accrued expenses		23,423			16,439
Deferred revenue		1,618			2,135
Other current liabilities		2,864			—
Current portion of long-term debt		10,055			6,724

Total current liabilities		61,033			38,079
Long-term debt, less current portion		26,752			23,631
Other long-term liabilities		3,013			1,008
Deferred income tax liabilities		12,255			738
Redeemable preferred stock, $0.0001 par value; 20,000 authorized at March 31, 2010 and December 31, 2009; 3,319 shares issued and outstanding at both March 31, 2010 and December 31, 2009		23,603			23,603
Commitments and contingencies
Stockholders’ equity:
Common stock, $0.0001 par value; 200,000 authorized at March 31, 2010 and December 31, 2009; 78,062 and 52,558 shares issued and outstanding at Mach 31, 2010 and December 31, 2009, respectively		8			5
Treasury stock, 19 shares		(97	)		—
Additional paid-in capital		335,178			175,021
Accumulated other comprehensive income		1,092			1,263
Accumulated deficit		(106,170	)		(101,460	)

Total Alphatec stockholders’ equity		230,011			74,829
Non-controlling interest		538			—

Total stockholders’ equity		230,549			74,829

Total liabilities and stockholders’ equity	$	357,205		$	161,888

See accompanying notes to unaudited condensed consolidated financial statements.

ALPHATEC HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

(in thousands, except per share amounts)


	Three Months Ended March 31,
	2010			2009
Revenues	$	38,431		$	30,610
Cost of revenues		14,465			10,830

Gross profit		23,966			19,780
Operating expenses:
Research and development		3,687			2,867
In-process research and development		450			1,290
Sales and marketing		13,780			12,784
General and administrative		5,646			5,963
Transaction related expenses		3,152			—
Restructuring expenses		882			—

Total operating expenses		27,597			22,904

Operating loss		(3,631	)		(3,124	)
Other income (expense):
Interest income		5			34
Interest expense		(862	)		(916	)
Other income (expense), net		(110	)		(261	)

Total other income (expense)		(967	)		(1,143	)

Loss before taxes		(4,598	)		(4,267	)
Income tax provision		112			116

Net loss	$	(4,710	)	$	(4,383	)

Net loss per common share:
Basic and diluted	$	(0.09	)	$	(0.09	)

Weighted-average shares used in computing net loss per share:
Basic and diluted		54,153			46,503

See accompanying notes to unaudited condensed consolidated financial statements.

ALPHATEC HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(in thousands)


	Three Months Ended March 31,
	2010			2009
Operating activities:
Net loss	$	(4,710	)	$	(4,383	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		3,562			2,601
Stock-based compensation		981			634
Interest expense related to amortization of debt discount and debt issuance costs		147			150
In-process research and development paid in stock		—			350
Provision for (recoveries from) doubtful accounts		14			(25	)
Provision for excess and obsolete inventory		393			210
Deferred income taxes		35			35
Changes in operating assets and liabilities:
Accounts receivable		(780	)		(5,381	)
Inventories		(3,427	)		(3,189	)
Prepaid expenses and other current assets		(432	)		(629	)
Other assets		(186	)		229
Accounts payable		(407	)		504
Accrued expenses and other		2,826			1,892
Deferred revenues		(517	)		643

Net cash used in operating activities		(2,501	)		(6,359	)
Investing activities:
Cash received in acquisition of Scient’x		1,589			—
Proceeds from sale of Noas investment		—			383
Purchases of property and equipment		(1,145	)		(2,892	)

Net cash provided by (used in) investing activities		444			(2,509	)
Financing activities:
Exercise of stock options		92			—
Net proceeds from issuance of common stock		6,546			—
Borrowings under lines of credit		410			1,940
Repayments under lines of credit		(296	)		(500	)
Principal payments on capital lease obligations		(18	)		(98	)
Principal payments on notes payable		(1,972	)		(498	)

Net cash provided by financing activities		4,762			844

Effect of exchange rate changes on cash and cash equivalents		(128	)		(204	)

Net increase (decrease) in cash and cash equivalents		2,577			(8,228	)
Cash and cash equivalents at beginning of period		10,085			18,315

Cash and cash equivalents at end of period	$	12,662		$	10,087

See accompanying notes to unaudited condensed consolidated financial statements.

ALPHATEC HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS – (continued)

(UNAUDITED)

(in thousands)


	Three Months Ended March 31,
	2010		2009
Supplemental cash flow information:
Cash paid for interest	$	634	$	527
Cash paid for income taxes	$	15	$	152
Purchases of property and equipment in accounts payable	$	4,379	$	3,144
Financing of software and support by software provider	$	872	$	—
Issuance of common stock in acquisition of Scient’x	$	151,639	$	—
Non-cash exercise of warrants	$	540	$	—

See accompanying notes to unaudited condensed consolidated financial statements.

ALPHATEC HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. The Company and Basis of Presentation

The Company

Alphatec Holdings, Inc. (“Alphatec,” “Alphatec Holdings” or the “Company”), through its wholly-owned subsidiary, Alphatec Spine, Inc. (“Alphatec Spine”) is a medical device company that designs, develops, manufactures and markets products for the surgical treatment of spine disorders, with a focus on treating conditions related to the aging spine. Alphatec Holdings’ principal operating activities are conducted through Alphatec Spine and its wholly owned and consolidated subsidiaries, Alphatec Pacific, Inc. (“Alphatec Pacific”), a Japanese corporation and Milverton Limited, a Hong Kong corporation.

On March 26, 2010, the Company completed its acquisition of Scient’x S.A. (“Scient’x”), a global medical device company based in France that designs, develops and manufacturers surgical implants to treat disorders of the spine (See Note 3).

Basis of Presentation

The consolidated financial statements include the accounts of Alphatec and Alphatec Spine and its wholly owned subsidiaries. The results of operations for the three months ended March 31, 2010 do not include the results of Scient’x as the Company has determined that Scient’x’s results of operations for the five days from the acquisition date, March 26, 2010, to the fiscal quarter end are immaterial to the Company’s consolidated results. All intercompany balances and transactions have been eliminated in the condensed consolidated financial statements.

The accompanying condensed balance sheet as of December 31, 2009, which has been derived from audited financial statements, and the unaudited interim condensed consolidated financial statements have been prepared by the Company in accordance with U.S. generally accepted accounting principles (“GAAP”) and the rules and regulations of the Securities and Exchange Commission (“SEC”) related to a quarterly report on Form 10-Q. Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information not misleading. The interim financial statements reflect all adjustments which, in the opinion of management, are necessary for a fair statement of the results for the periods presented. All such adjustments are of a normal and recurring nature. These unaudited consolidated financial statements should be read in conjunction with the audited financial statements included in Alphatec Holdings’ Annual Report on Form 10-K and Amendment No. 1 and No. 2 thereto for the fiscal year ended December 31, 2009, as filed with the SEC on March 2, 2010, April 2, 2010 and April 8, 2010, respectively.

Operating results for the three months ended March 31, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010, or any other future periods. The results of operations for the remainder of 2010 will include the results of operations of Scient’x commencing with the second quarter of 2010.

The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern. A going concern basis of accounting contemplates the recovery of the Company’s assets and the satisfaction of its liabilities in the normal course of business. Based on the Company’s annual operating plan, management believes that its existing cash and cash equivalents of $12.7 million and available credit of $0.2 million at March 31, 2010 and cash of $42.5 million raised in an April 2010 equity offering (See Note 14) will be sufficient to fund its cash requirements through at least March 31, 2011.

On March 26, 2010, the Company completed its acquisition of Scient’x (See Note 3). Subsequent to the closing of the acquisition, the Company became responsible for managing the operations of the combined entities.

In conjunction with the closing of its acquisition with Scient’x, the Company amended its Loan and Security Agreement (the “Credit Facility”) with Silicon Valley Bank and Oxford Finance Corporation (the “Lenders”) that it had entered into in December 2008 (see Note 7). In addition, Scient’x’s existing term loan facility with Oxford Finance Corporation was combined with the Company’s term loan facility. The covenant requirements have been revised under the amended Credit Facility and consist of a combined cash-flow covenant to maintain a minimum fixed charge coverage ratio on a consolidated basis. The minimum fixed charge coverage ratio increases from the second quarter 2010 to the third quarter 2010 and is consistent thereafter. There is also a requirement for the Company to maintain a cash balance with Silicon Valley Bank equal to at least $10 million. The Company expects that it will be in compliance with its covenants throughout 2010. In addition to the minimum fixed charge covenant described above, there are other clauses including subjective clauses that would allow the Lenders to declare the loan immediately due and payable (See Note 7). Upon the occurrence of an event of default under the Amended Credit Facility, the Lenders could elect to declare all amounts outstanding under the Amended Credit Facility to be immediately due and payable and terminate all commitments to extend further credit. If the Lenders were to accelerate the repayment of borrowings under the Amended Credit Facility for any reason, the Company may not have sufficient cash on hand to repay the amounts borrowed under the Amended Credit Facility.

Based on the Company’s plan for combining the operating activities of these two companies, which includes a combined operating plan and cash forecast, management believes that on a combined basis, the Company will have sufficient working capital to fund its cash requirements through March 31, 2011.

2. Summary of Significant Accounting Policies

The Company’s significant accounting policies are described in Note 2 to its audited Consolidated Financial Statements for the fiscal year ended December 31, 2009, included in the Company’s Annual Report on Form 10-K filed with the SEC on March 2, 2010, as amended. These accounting policies have not significantly changed during the three months ended March 31, 2010.

Recent Accounting Pronouncements

In October 2009, the Financial Accounting Standards Board (“FASB”) issued new accounting guidance that requires entities to allocate revenue in an arrangement of the delivered goods and services based on a selling price hierarchy. This guidance eliminates the requirement to establish the fair value of undelivered products and services and instead provides for separate revenue recognition based upon management’s estimate of the selling price for an undelivered item when there is no other prescribed means to determine the fair value of that undelivered item. This new approach is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. The Company does not expect adoption to have a material impact on the Company’s financial position or results of operations.

3. Acquisition of Scient’x

On December 17, 2009, the Company entered into an acquisition agreement to acquire all of the shares of Scient’x, with Scient’x continuing after the acquisition as a wholly-owned subsidiary of Alphatec. The acquisition, which closed on March 26, 2010, is accounted for under the acquisition method of accounting. The effective acquisition date for accounting purposes was the close of business on March 31, 2010, the end of Scient’x’s fiscal first quarter. The Company purchased Scient’x to acquire its product portfolio and technology, its international distribution network and existing customer base and because of the increased scale of the combined entities.

The transaction was structured as an all stock transaction such that 100% of outstanding Scient’x stock was exchanged pursuant to a fixed ratio for 24,000,000 shares of the Company’s common stock. The consideration paid was reduced by a certain number of shares calculated at the closing in exchange for the payment of certain fees and expenses incurred by HealthPointCapital Partners, L.P. and HealthPointCapital Partners II, L.P. (collectively, “HealthPointCapital”), the Company’s and Scient’x’s principal stockholders, in connection with the acquisition. The aggregate number of shares exchanged was 23,730,644 shares of the Company’s common stock.

As required by the acquisition agreement, the holders of both vested and unvested options to purchase shares of Scient’x common stock who were employed by either Scient’x or Alphatec on the closing date were entitled to receive replacement options to purchase shares of Alphatec common stock upon closing of the acquisition (“Replacement Options”), and such optionees were given credit for the vesting of their Scient’x options up to the closing date. $1.0 million has been included in the purchase price to represent the fair value of the Scient’x options attributable to pre-combination service and was estimated using the Black-Scholes option pricing model with market assumptions. Option pricing models require the use of highly subjective market assumptions, including expected stock price volatility, which if changed can materially affect fair value estimates. The assumptions used in estimating the fair value of the Replacement Options include expected volatility of 56.0%, expected term of 6.0 years, and a risk-free interest rate of 2.5%. The difference between the fair value of the replacement options and the amount included in consideration transferred will be recognized as compensation cost in the Company’s post-combination financial statements over the requisite service period.

Based on the closing price of Alphatec’s common stock of $6.39 on March 26, 2010, the fair value of the Replacement Options, and the payable in exchange for reduction in shares, the preliminary estimated total purchase price is as follows (in thousands):


Fair value of Alphatec common stock issued upon closing	$	151,639
Fair value of Scient’x options replaced		1,040
Payable in exchange for reduction in shares to be paid in cash		1,618

Total estimated purchase price	$	154,297

Under the acquisition method of accounting, the total estimated purchase price is allocated to Scient’x’s net tangible and intangible assets based on their preliminary estimated fair values at the date of the completion of the acquisition and such estimates are subject to revision based on the Company’s final determination of valuations associated with net tangible assets, intangible assets, deferred taxes, contingent liabilities, and the non-controlling interest. Consequently, the amounts recorded at March 31, 2010 are subject to change, and the final amounts may differ.

The following table summarizes the preliminary allocation of the purchase price (in thousands) for Scient’x and the estimated useful lives for the acquired intangible assets:


	Useful lives (in years)	Estimated Fair Value
Net tangible assets assumed		$	2,329
Acquired intangibles:
Core technology	10		3,632
Developed technology	8		9,552
In-process technology	Indefinite		1,749
Corporate trademarks	5		1,614
Key product trademarks	9		2,179
Customer-related intangible	15		16,009
Distribution network	10		1,614
Physician education programs	10		3,095
Goodwill			112,524

Total preliminary estimate purchase price allocation		$	154,297

A preliminary estimate of $2.3 million has been allocated to Scient’x net tangible assets assumed and $39.4 million has been allocated to identifiable intangible assets acquired. A value of $112.5 million, representing the difference between the total purchase price and the aggregate fair values assigned to the net tangible and intangible assets acquired, less liabilities assumed, was assigned to goodwill. Alphatec is acquiring Scient’x to expand its product offerings, increase its addressable market, increase the size of its international business, and increase its revenues primarily outside of the U.S. Alphatec also believes that significant cost reduction synergies may be realized when the acquired business is integrated. These are among the factors that contributed to a purchase price for the Scient’x acquisition that resulted in the recognition of goodwill. The amount recorded as acquired intangibles and goodwill is not expected to be deductible for tax purposes.

Inventories were increased by Alphatec to their estimated fair value (“step up”), which represented an amount equivalent to estimated selling prices less distribution related costs and a normative selling profit. Consistent with stock rotation, the inventory step up reverses in the next 14 months and will be included in the Company’s post-combination financial statements. The increase to inventory was offset by a decrease in estimated fair value of redundant inventory based on the highest and best use of a similar market participant.

For the technology related assets, the acquired product families were separated into the following categories: core, developed, and in-process technology. The core, developed, and in-process technology values were determined by estimating the present values of the net cash flows expected to be generated by each category of technology.

Trademarks were segregated into the categories of corporate trademarks and key product trademarks. Trademark values were calculated by estimating the present value of future royalty costs that would be avoided by a market participant due to ownership of the trademarks acquired.

The customer-related intangible includes hospitals and distributors that take title to Scient’x’s products. The customer-related intangible value was determined by estimating the present value of expected future net cash flows derived from such customers.

The distribution network includes U.S.-based distributors that sell Scient’x products to customers on a consignment basis. Intangibles related to the distribution network values were determined by estimating the difference between the present values of expected future net cash flows generated with and without the distribution network in place.

The physician education programs value was determined by estimating the costs to rebuild such a program.

The fair value of the non-controlling interest as of the acquisition date is $0.5 million. The fair value of the non-controlling interest was determined by reviewing the fair value of Scient’x’s Italian subsidiary’s net equity and multiplying such amount by 30%, which represents the ownership interest of the non-controlling party.

Scient’x is subject to legal and regulatory requirements, including but not limited to those related to taxation in each of the jurisdictions in the countries in which it operates. The Company has conducted a preliminary assessment of liabilities arising from these tax matters in each of these jurisdictions, and has recognized provisional amounts in its initial accounting for the acquisition of Scient’x for the identified liabilities. However, the Company is continuing its review of these matters during the measurement period, and if new information obtained about facts and circumstances that existed at the acquisition date identifies adjustments to the liabilities initially recognized, as well as any additional liabilities that existed as the acquisition date, the acquisition accounting will be revised to reflect the resulting adjustments to the provisional tax amounts initially recognized.

The following unaudited pro forma information presents the condensed consolidated results of operations of the Company and Scient’x as if the acquisition had occurred on January 1, 2009 (in thousands, except share data):


	Three Months Ended March 31,
	2010			2009
Revenues	$	49,766		$	41,702
Loss from operations		(755	)		(6,615	)
Net loss		(1,159	)		(6,782	)
Net loss per share, basic and diluted	$	(0.01	)	$	(0.10	)

The pro forma information is not necessarily indicative of what the results of operations actually would have been had the acquisition been completed on the dates indicated. In addition, it does not purport to project the future operating results of the combined entity. The pro forma condensed combined financial information is presented for illustrative purposes only and does not reflect the realization of potential cost savings, revenue synergies or any restructuring costs.

For the three months ended March 31, 2010, the Company incurred transaction costs related to the acquisition of Scient’x of $3.2 million. These costs were expensed as incurred.

For the three months ended March 31, 2010, the Company incurred restructuring charges related to the acquisition of $0.9 million. These costs consist of severance payments and severance-related benefits associated with the termination of certain Scient’x employees based in the United States. The restructuring expenses are due to the consolidation of Scient’x’s U.S. business into our operations in Carlsbad, California.

In future periods, the combined business may incur charges to operations to reflect costs associated with integrating the two businesses that Alphatec cannot reasonably estimate at this time. In addition, the combined business may incur additional charges relating to the transaction in subsequent periods, which could have a material impact on the Company’s financial position or results of operations.

4. Balance Sheet Details

Accounts Receivable

Accounts receivable consist of the following (in thousands):


	March 31, 2010			December 31, 2009
Accounts receivable	$	39,590		$	25,084
Allowance for doubtful accounts		(322	)		(318	)

Accounts receivables, net	$	39,268		$	24,766

Inventories

Inventories consist of the following (in thousands):


	March 31, 2010							December 31, 2009
	Gross		Reserve for excess and obsolete			Net		Gross		Reserve for excess and obsolete			Net
Raw materials	$	3,527	$	—		$	3,527	$	2,866	$	—		$	2,866
Work-in-process		3,016		—			3,016		1,644		—			1,644
Finished goods		49,185		(9,026	)		40,159		33,650		(8,645	)		25,005

Inventories, net	$	55,728	$	(9,026	)	$	46,702	$	38,160	$	(8,645	)	$	29,515

Property and Equipment

Property and equipment consist of the following (in thousands except as indicated):


	Useful lives (in years)	March 31, 2010			December 31, 2009
Surgical instruments	4	$	42,030		$	35,286
Machinery and equipment	7		10,325			9,684
Computer equipment	5		2,608			2,575
Office furniture and equipment	5		3,538			3,128
Leasehold improvements	various		3,352			3,355
Building	39		200			201
Land	n/a		15			15
Construction in progress	n/a		929			368

			62,997			54,612
Less accumulated depreciation and amortization			(26,881	)		(24,256	)

Property and equipment, net		$	36,116		$	30,356

Total depreciation expense was $2.6 million and $1.8 million for the three months ended March 31, 2010 and 2009, respectively.

The Company has assets under capital leases of $3.4 million and $3.1 million at March 31, 2010 and December 31, 2009, respectively. Accumulated depreciation on these assets totaled $2.6 million and $2.5 million at March 31, 2010 and December 31, 2009, respectively. Depreciation expense for these capital leases included in total depreciation expense above was $0.1 million for both the three months ended March 31, 2010 and 2009.

Intangible Assets

Intangible assets consist of the following (in thousands except as indicated):


	Useful lives (in years)	March 31, 2010			December 31, 2009
Developed product technology	5-8	$	23,252		$	13,700
Distribution rights	3		3,708			3,737
Intellectual property	5		1,003			1,004
License agreement	1		350			350
Core technology	15		3,632			—
In-process technology	Indefinite		1,749			—
Trademarks and trade names	5-9		3,793			—
Customer-related	15		16,009			—
Distribution network	10		1,614			—
Physician education programs	10		3,095			—
Supply agreement	10		225			225

			58,430			19,016
Less accumulated amortization			(17,608	)		(16,720	)

Intangible assets, net		$	40,822		$	2,296

Total amortization expense was $0.9 million and $0.8 million for the three months ended March 31, 2010 and 2009, respectively.

The future expected amortization expense related to intangible assets as of March 31, 2010 is as follows (in thousands):


Year Ending December 31,
Remainder of 2010	$	3,111
2011		3,961
2012		3,961
2013		3,916
2014		3,813
Thereafter		20,311

Total future expected amortization expense		39,073
Add: In-process technology		1,749

Total	$	40,822

Accrued Expenses

Accrued expenses consist of the following (in thousands):


	March 31, 2010		December 31, 2009
Legal	$	621	$	273
Restructuring		882		—
Payable in exchange for reduction in shares in connection with Scient’x acquisition, to be paid in cash		1,618		—
Deferred rent		2,220		2,277
Royalties		2,990		2,615
Commissions		4,088		3,072
Payroll and related		4,419		4,185
Other		6,585		4,017

Total accrued expenses	$	23,423	$	16,439

Deferred Revenues

During the three months ended March 31, 2010 and 2009, the Company shipped $1.9 million and $0.9 million, respectively, of product to European distributors in which the terms of such sales included extended payment terms. As a result of offering payment terms greater than the Company’s customary U.S. business terms, and operating in a new market in which the Company has limited prior experience, revenues for purchases by distributors in Europe have been deferred until the earlier of either the date upon which payments are due or until cash is received for such purchases. The balance in deferred revenue relating to European distributors as of March 31, 2010 and December 31, 2009 was $1.1 million and $1.3 million, respectively.

During the three months ended March 31, 2010 and 2009, the Company shipped $0.2 million and $1.0 million, respectively, of product to a U.S. distributor that did not have an extensive credit history. As a result of a lack of extensive credit history, revenues for purchases by this distributor have been deferred until cash is received. The balance in deferred revenue relating to this distributor as of March 31, 2010 and December 31, 2009 was $0.5 million and $0.8 million, respectively.

5. Comprehensive Loss

Comprehensive income (loss) is defined as the change in equity of a business enterprise during a period from transactions and other events, including foreign currency translation adjustments. The following table sets forth the computation of comprehensive loss for the three months ended March 31, 2010 and 2009 (in thousands):


	Three Months Ended March 31,
	2010			2009
Net loss, as reported	$	(4,710	)	$	(4,383	)
Foreign currency translation adjustment		(171	)		(439	)

Comprehensive loss	$	(4,881	)	$	(4,822	)

6. License and Developmental Consulting Agreements

OsseoFix Fracture Reduction System License Agreement

On April 16, 2009, the Company and Stout Medical Group LP (“Stout”) amended the license agreement that the parties had entered into in September 2007 (the “License Amendment”) that provides the Company with a worldwide license to develop and commercialize Stout’s proprietary intellectual property related to a treatment for vertebral compression fractures. The effective date of the License Amendment is March 31, 2009. Under the License Amendment, the timing of the minimum royalty payments has been adjusted and Stout’s ability to terminate the License Amendment was revised. Under the original license agreement, the Company’s minimum royalty obligation began in the year ending December 31, 2009. Pursuant to the License Amendment, the minimum royalty obligation is suspended until a licensed product obtains regulatory approval from the United States Food and Drug Administration (the “FDA”). In addition, under the terms of the License Amendment, Stout has the ability to terminate the License Amendment if the Company is not using commercially reasonably efforts to obtain regulatory approval to market and sell a licensed product; provided that the Company has the right to delay such termination in exchange for making certain payments to Stout. If, during the time period when such payments are made, the Company were to make a regulatory filing for the marketing and sale of a licensed product, such termination will be null and void. Pursuant to the License Amendment, Stout is entitled to retain all up-front payments that had been previously paid to it. The other material terms to the license agreement were not changed in the License Amendment.

Expandable VBR License and Consulting Agreement

On April 15, 2009, the Company and Stout amended and restated the license agreement that the parties had entered into in March 2008 (the “Amended and Restated License Agreement”) that provides the Company with a worldwide license to develop and commercialize Stout’s proprietary intellectual property related to an expandable interbody/vertebral body replacement device. The effective date of the Amended and Restated License Agreement is March 31, 2009. Under the Amended and Restated License Agreement, the timing of the minimum royalty payments has been adjusted and Stout’s ability to terminate the Amended and Restated License Agreement was revised. Under the original license agreement, the Company’s minimum royalty obligation began in the year ending December 31, 2010. Pursuant to the Amended and Restated License Agreement, if the Company is required to initiate a clinical trial to obtain clearance from the FDA for a licensed product, the minimum royalty obligation is suspended until such licensed product obtains regulatory approval. In addition, under the terms of the Amended and Restated License Agreement, Stout has the ability to terminate the Amended and Restated License Agreement if the Company has not filed for regulatory approval to market and sell a licensed product within an allotted time period; provided that the Company has the right to delay such termination in exchange for making certain payments to Stout. If, during the time period when such payments are made, the Company were to make a regulatory filing for the marketing and sale of a licensed product, such termination would be null and void. Pursuant to the Amended and Restated License Agreement, Stout is entitled to retain all up-front payments that had been previously paid to it. The other material terms to the original license agreement were not changed in the Amended and Restated License Agreement.

Additionally, effective March 31, 2009 the Company and Stout amended and restated the developmental consulting agreement that the parties had entered into in March 2008 (the “Amended and Restated Consulting Agreement”) pursuant to which Stout agreed to provide consulting services related to the development of an expandable interbody/vertebral body replacement device. Under the Amended and Restated Consulting Agreement, the timing and amount of consulting fees has been adjusted. Under the original consulting agreement, the Company was obligated to make ten monthly payments of $50,000 to compensate Stout for providing development services. As of the effective date of the Amended and Restated Consulting Agreement, the Company had paid Stout $0.4 million of such consulting fees, and had expensed $0.2 million of such fees. Pursuant to the Amended and Restated Consulting Agreement, Stout returned such $0.4 million to the Company in April 2009. The terms of the Amended and Restated Consulting Agreement call for the Company to pay consulting fees of $20,000 per month for 12 months beginning in July 2009, provided that the agreement is in full force and effect. Pursuant to the Amended and Restated Consulting Agreement, Stout is entitled to retain the 101,944 shares of restricted stock of the Company that the Company had previously issued to Stout. Such restricted stock would become vested upon the attainment of a development milestone. The other material terms to the original consulting agreement were not changed. As the total cash consideration has been reduced to $0.2 million, the Company is recording the remaining amount that had not yet been expensed over the expected development period.

OsseoScrew License Agreement

In December 2007, the Company entered into an exclusive license agreement, (the “OsseoScrew License Agreement”), with Progressive Spinal Technologies LLC (“PST”), which provides the Company with an exclusive worldwide license to develop and commercialize PST’s proprietary intellectual property related to an expanding pedicle screw with increased pull-out strength. The financial terms of the OsseoScrew License Agreement include: (i) a cash payment payable following the execution of the agreement; (ii) development and sales milestone payments in cash and the Company’s common stock that began to be achieved and paid in 2008; and (iii) a royalty payment based on net sales of licensed products with minimum annual royalties beginning in 2009. The Company recorded a charge for in process research and development expense (“IPR&D”) of $2.0 million in the fourth quarter of 2007 for the initial payment, as the technological feasibility associated with the IPR&D since the final prototype of the device had not been established and no alternative future use exists. The agreement includes milestone payments of $3.6 million consisting of cash and its

common stock upon the completion of the biomechanical testing. Furthermore, the agreement includes milestone payments of $2.5 million consisting of cash and the Company’s common stock upon market launch. During the second quarter of 2009, the Company successfully completed one of its development milestones and recorded an IPR&D charge totaling $3.6 million, which consisted of a cash payment of $1.8 million and the issuance of $1.8 million of shares of the Company’s common stock. The amounts were expensed as the technological feasibility associated with the IPR&D had not been established since the final prototype of the device had not been completed, and no alternative future use exists. The total number of shares of common stock, which were issued on July 15, 2009, was 567,821.

In December 2009, the Company and PST amended the OsseoScrew License Agreement (the “OsseoScrew License Amendment”). Under the OsseoScrew License Amendment, the terms relating to the payment of a $0.5 million development milestone payment were modified. The Company recorded a charge for IPR&D of $0.5 million in the fourth quarter of 2009 upon completion of a development milestone, as the technological feasibility associated with the IPR&D since the final prototype of the device had not been established and no alternative future use exists. The timing of the royalty payments based on net sales of licensed products has been amended and minimum annual royalties begin in 2010 instead of 2009.

Assignment Agreement with Spine Vision, S.A.

In January 2009, the Company entered into an assignment agreement (the “Patent and Technology Assignment Agreement”) with Spine Vision, S.A (“Spine Vision”) that assigns to the Company all rights, title and interests to certain patents and technology of Spine Vision that relate to a stand-alone locking interbody device. The financial terms of the Patent and Technology Assignment Agreement include: (i) an initial payment of $0.5 million; and (ii) a royalty payment based on the net sales of any product that contains the assigned intellectual property. During the first quarter of 2009, the Company recorded an IPR&D charge of $0.5 million for the initial payment, as the technological feasibility associated with the IPR&D had not been established since the final prototype of the device had not been completed, and no alternative future use exists.

License Agreement with Helix Point, LLC

In February 2009, the Company entered into a License Agreement (the “Helifuse/Helifix License Agreement”) with Helix Point, LLC (“Helix Point”) that provides the Company with a worldwide exclusive license (excluding the People’s Republic of China) to develop and commercialize Helix Point’s proprietary intellectual property related to a device for the treatment of spinal stenosis. The financial terms of the Helifuse/Helifix License Agreement include: (i) a cash payment of $0.2 million payable following the execution of the Helifuse/Helifix License Agreement; (ii) the issuance of $0.4 million of shares of the Company’s common stock following the execution of the Helifuse/Helifix License Agreement; (iii) development and sales milestone payments in cash and the Company’s common stock that could begin to be achieved and paid in 2010; and (iv) a royalty payment based on net sales of licensed products, with minimum annual royalties beginning in the year after the first commercial sale of a licensed product. During the first quarter of 2009, the Company recorded an IPR&D charge of $0.6 million for the initial cash and stock payment, as the technological feasibility associated with the IPR&D had not been established since the final prototype of the device had not been completed, and no alternative future use exists.

License Agreement with International Spinal Innovations, LLC

In June 2009, the Company entered into a Cross License Agreement (the “ISI License Agreement”) with International Spinal Innovations, LLC (“ISI”) that provides the Company with a worldwide license to develop and commercialize ISI’s proprietary intellectual property related to a stand-alone anterior lumbar interbody fusion device. The financial terms of the ISI License Agreement include: (i) the issuance of 260,000 shares of the Company’s common stock following the execution of the ISI License Agreement; (ii) sales milestone payments in cash that could begin to be achieved and paid in 2011; and (iii) a royalty payment based on net sales of licensed products with minimum annual royalties beginning in the year after the first commercial sale of a licensed product. During the second quarter of 2009, the Company recorded an IPR&D charge of $0.9 million for the stock issuance on June 30, 2009, as the technological feasibility associated with the IPR&D had not been established since the final prototype of the device had not been completed, and no alternative future use exists.

Supply Agreement with ETEX Corporation

In October 2009, Alphatec Spine entered into a supply and distribution agreement (the “ETEX Agreement”) with ETEX Corporation, (“ETEX”), that provides Alphatec Spine with the rights to market and sell ETEX’s EquivaBone and CarriGen products in the U.S and Europe, excluding Spain. The financial terms of the ETEX Agreement include: (i) minimum purchase commitments during the first, second and third year following execution of the agreement of $2.3 million, $3.4 million and $4.5 million, respectively.

Distribution Agreement with Parcell Spine, LLC

In January 2010, the Company entered into an exclusive distribution agreement (the “Parcell Agreement”) with Parcell Spine, LLC, (“Parcell Spine”), that provides Alphatec with an exclusive right to distribute Parcell Spine’s proprietary adult stem cells for the treatment of spinal disorders. The financial terms of the Parcell Agreement include: (i) a cash payment of $0.5 million payable following the execution of the Parcell Agreement; (ii) a milestone payment consisting of $1.0 million in cash and the issuance of $1.0 million of shares of the Company’s common stock following the successful completion of the pre-clinical study; and (iii) sales milestone payments in cash and the Company’s common stock. During the three months ended March 31, 2010, the Company recorded an IPR&D charge of $0.5 million for the initial cash payment.

7. Debt and Other Financing Activities

Subscription Agreements for Sale of Common Stock

On February 9, 2010, the Company entered into subscription agreements with a group of purchasers for the sale of an aggregate of 1,592,011 shares of the Company’s common stock at a purchase price of $4.1457 per share, for gross proceeds of approximately $6.6 million (the “Offering”). The net proceeds to the Company from the Offering, after deducting expenses, were approximately $6.5 million. The Offering was made pursuant to a registration statement on Form S-3 and closed on February 12, 2010.

Filing of Registration Statement

On February 12, 2010, the Company filed a registration statement on Form S-3 with the SEC pursuant to which the Company may offer and sell shares of its common stock and preferred stock, various series of debt securities, and warrants, either individually or in units, with a total value of up to $100,000,000 at prices and on terms to be determined by market conditions at the time of offering. In addition, under such registration statement, HealthpointCapital has registered for resale up to an aggregate of 20,031,646 shares of the Company’s common stock. The registration statement was declared effective by the SEC on April 9, 2010.

Loan and Security Agreement

In December 2008, the Company entered into the Credit Facility with the Lenders consisting of a $15.0 million term loan and a $15.0 million working capital line of credit. The term loan carries a fixed interest rate of 11.25% with interest payments due monthly, and principal repayments commencing in October 2009. Thereafter, the Company is required to repay the principal plus interest in 30 equal monthly installments, ending in April 2012. A finance charge of $0.8 million is due in April 2012. The working capital line of credit carries a variable interest rate equal to the prime rate plus either 2.5% or 2.0%, depending on our financial performance. Interest only payments are due monthly and the principal is due at maturity in April 2012.

On March 26, 2010, the Company amended its Credit Facility (the “Amended Credit Facility”) with the Lenders. The working capital line of credit has been increased by $10 million, to $25 million. In addition, the Company combined the previously existing term loan facility provided by Oxford Finance Corporation to Scient’x with the Company’s existing term loan facility. Commencing in the second quarter 2010, the amended term loan will collectively not exceed $19.5 million.

Alphatec’s term loan interest rate was amended to a fixed rate of 12.0%. Alphatec is required to repay the principal plus interest in 25 equal monthly installments, ending in April 2012. In connection with the amendment, the existing finance charge of $0.8 million has been increased by $0.2 million to $1.0 million. The finance charge is being accrued to interest expense through April 2012, when it is due and payable. The Company will pay a prepayment penalty if the loan is repaid prior to maturity. The balance of Alphatec’s term loan as of March 31, 2010 was $12.4 million, net of the debt discount.

In May 2009, Scient’x had entered into a term loan facility with Oxford Finance Corporation for $7.5 million. This term loan has been included under the Amended Credit Facility. Scient’x’s term loan carries a fixed interest rate of 12.42%. Scient’x is required to repay the principal plus interest in 36 equal monthly installments, ending in June 2012. In connection with the Amended Credit Facility, the Scient’x term loan finance charge has been increased to $0.5 million. The finance charge will be accrued to interest expense through June 2012, when it is due and payable. The collateral granted to Oxford under the original term loan facility will remain in full effect, amended as necessary to accommodate the acquisition of Scient’x and to conform to the terms of the Amended Credit Facility. Scient’x’s previously existing financial covenant to maintain a minimum level of revenues has been eliminated under the Amended Credit Facility. The balance of Scient’x’s term loan as of March 31, 2010 was $6.8 million.

The working capital line of credit interest rate was amended to equal the prime rate plus 4.50%, with a floor rate of 8.50%. The repayment terms under the working capital line of credit were not amended. Interest-only payments are due monthly and the principal is due at maturity in April 2012. As of March 31, 2010, the Company has $0.2 million remaining available to be drawn under the working capital line of credit based on its eligible borrowing base.

The funds from the credit facility are intended to serve as a source of working capital for ongoing operations and working capital needs. In connection with the amendment, the Company paid debt issuance costs and other transaction fees totaling $0.8 million. Included in debt issuance costs was a facility fee of $0.4 million and a line of credit commitment fee of $0.1 million. The debt issuance costs were capitalized and are being amortized over the remaining term of the loan using the effective interest method.

To secure the repayment of any amounts borrowed under the Amended Credit Facility, the Company granted to the Lenders a first priority security interest in all of its assets, other than its owned and licensed intellectual property assets. The Company also agreed not to pledge or otherwise encumber its intellectual property assets without the consent of the Lenders. Additionally, the Lenders received a pledge on a portion of the Scient’x shares owned by the Company.

Commencing in the second quarter of 2010, the Company (including Scient’x) is also required to maintain compliance with a minimum fixed charge coverage ratio defined as Adjusted EBITDA (a non-GAAP term defined as net income (loss) excluding the effects of interest, taxes, depreciation, amortization, stock-based compensation costs and other non-recurring income or expense items, such as IPR&D expense, acquisition-related restructuring expense and transaction related expenses) divided by total debt service. The Company is also required to maintain a cash balance with Silicon Valley Bank equal to at least $10 million.

The Lenders have the right to declare the loan immediately due and payable in an event of default under the Amended Credit Facility, which includes, among other things, the failure to make payments when due, breaches of representations, warranties or covenants, the occurrence of certain insolvency events, the occurrence of a non-appealable legal judgment against the Company that is not satisfied within ten days, or the occurrence of an event which, in the opinion of the Lenders, could have a material adverse effect on the Company.

In connection with the original Credit Facility, the Company had issued warrants to the Lenders to purchase an aggregate of 476,190 shares of the Company’s common stock. The warrants were immediately exercisable, can be exercised through a cashless exercise, have an exercise price of $1.89 per share and have a ten year term. The Company recorded the value of the warrants of $0.9 million as a debt discount. The value of the warrants was determined on the date of grant using the Black-Scholes valuation method with the following assumptions: risk free interest rate of 2.67%, volatility of 60.9%, a ten year term and no dividend yield. In March 2010, one of the Lenders exercised all of its warrants pursuant to the cashless exercise provision of its agreement (See Note 10). The other Lender had previously exercised all of its warrants in September 2009.

During the three months ended March 31, 2010 and 2009, the Company repaid $0.3 million and $0.5 million, respectively, and drew an additional $0.4 million and $1.9 million, respectively, on the working capital line of credit. The balance of the line of credit as of March 31, 2010 was $14.8 million. The balance of the combined term loans was $19.2 million, net of the debt discount. The Company’s amortization of the debt discount and debt issuance costs and accretion of the finance charge, which is recorded as a non-cash interest expense, totaled $0.2 million and $0.3 million for the three months ended March 31, 2010 and 2009, respectively. Interest expense for Alphatec’s term loan and working capital line of credit, excluding debt discount and debt issuance cost amortization and accretion of the additional finance charge, totaled $0.6 million for both the three months ended March 31, 2010 and 2009.

Other Debt Agreements

In September 2008, Alphatec Pacific paid $0.8 million on its Resona Bank line of credit and replaced the line of credit with $0.6 million of term debt with Resona Bank, which is payable over 30 months with a 3.75% interest rate. Alphatec Pacific has additional notes payable to Japanese banks and a bond payable, bearing interest at rates ranging from 1.5% to 6.5% and maturity dates through January 2014 that are collateralized by substantially all of the assets of Alphatec Pacific and Japan Ortho Medical, a subsidiary of Alphatec Pacific. As of March 31, 2010, the balance of the notes and the bond totaled $0.9 million.

The Company and Scient’x have various capital lease arrangements. The leases bear interest at rates ranging from 4.5% to 7.4%, are generally due in monthly principal and interest installments, are collateralized by the related equipment, and have various maturity dates through January 2014. As of March 31, 2010, the balance of these capital leases totaled $0.5 million.

The Company has a note payable with Microsoft, Inc. for the purchase of software licenses, bearing interest at a rate of 2.7% and a maturity date of February 2011. The balance of this note as of March 31, 2010 was $0.1 million.

The Company has three financing agreements totaling $1.0 million for the payment of premiums on various insurance policies. These financing arrangements bear interest ranging from 0.0% to 5.2% and are payable through June 2010. The balance of all such financing agreements as of March 31, 2010 totaled $0.3 million.

In February 2010, the Company executed a note payable with Oracle for the purchase of software and the related support totaling $0.9 million. The loan bears interest at 5.3% and has maturity date of February 2013. An initial payment of $0.1 million was made in February 2012. Payments of principal and interest are due every three months. The balance of this note as of March 31, 2010 was $0.8 million.

Scient’x has a conditional interest free loan with OSEO Anvar, a French government agency that provides research and development financing to French companies. At the loan’s inception, an imputed interest rate of 4% was used to calculate the present value of the loan. Scient’x complied with the loan conditions and was therefore granted the contractual repayment terms which consisted of annual repayments in March of each year. Scient’x repaid $0.1 million in March 2010. The balance of this loan as of March 31, 2010 was $0.1 million.

Principal payments on debt are as follows as of March 31, 2010 (in thousands):


Year Ending December 31,
Remainder of 2010	$	7,398
2011		10,102
2012		20,644
2013		49
2014		4
Thereafter		—

Total		38,197
Less: finance charge being accrued to interest expense through April 2012, and debt discount		(1,898	)
Add: capital lease principal payments		508

Total		36,807
Less: current portion of long-term debt		(10,055	)

Long-term debt, net of current portion	$	26,752

8. Commitments and Contingencies

Leases

The Company and Scient’x lease certain equipment under capital leases which expire on various dates through 2013. The Company and Scient’x also lease their buildings and certain equipment and vehicles under operating leases which expire on various dates through 2017. Future minimum annual lease payments under such leases are as follows (in thousands):


Year Ending December 31,	Operating		Capital
Remainder of 2010	$	2,699	$	140
2011		3,252		176
2012		2,746		175
2013		2,637		48
2014		2,163		—
Thereafter		3,492		—

	$	16,989		539

Less: amount representing interest				(31	)

Present value of minimum lease payments				508
Current portion of capital leases				(160	)

Capital leases, less current portion			$	348

Rent expense under operating leases for the three months ended March 31, 2010 and 2009 was $0.6 million and $0.8 million, respectively.

Litigation

In February 2010, a complaint was filed in the U.S. District Court for the Central District of California, by Cross Medical Products, LLC (“Cross”) alleging that the Company breached a patent license agreement with Cross by failing to make certain royalty payments allegedly due under the agreement. Cross is seeking payment of prior royalties allegedly due from the Company’s sales of polyaxial pedicle screws and an order from the court regarding payment of future royalties by the Company. While the Company denied the allegations in its answer to the complaint and believes that the plaintiff’s allegations are without merit, the outcome of the litigation cannot be predicted at this time and any outcome in favor of Cross could have a significant adverse effect on the Company’s financial condition and results of operations.

Eurosurgical by a California court. At the same time, a federal court declared Eurosurgical liable to Orthotec for $30 million. In 2006, Eurosurgical’s European assets were ultimately acquired by Surgiview, SAS (“Surgiview”) in a sale approved by a French court. Pursuant to this sale, Surgiview became a subsidiary of Scient’x in 2006. Orthotec attempted to recover on Eurosurgical’s obligations in California and federal courts by filing a motion in a California court to add Surgiview to the judgment against Eurosurgical on theories including successor liability and fraudulent conveyance. In February 2007, the California court dismissed Orthotec’s motion, indicating that Orthotec had not carried its burden of proof to establish successor liability. Orthotec chose to not proceed with a further hearing in June 2007. After the acquisition of Scient’x by HealthpointCapital in 2007, Orthotec sued Scient’x, Surgiview, HealthpointCapital and certain Scient’x directors in the California and New York state and federal courts. In April 2009, the California court dismissed this matter on jurisdictional grounds, and Orthotec has appealed such dismissal. In November 2009, the New York state court dismissed Orthotec’s claims with respect to the other defendants based on collateral estoppel. Orthotec has commenced an appeal of the New York ruling. While the Company believes that the plaintiff’s allegations are without merit, the outcome of the litigation cannot be predicted at this time and any outcome in favor of Orthotec could have a significant adverse effect on the Company’s financial condition and results of operations.

In 2004, Scient’x’s U.S. subsidiary entered into a distribution agreement with DAK Surgical, Inc., an independent distributor (“DAK Surgical”), for the distribution of Scient’x’s products in certain defined sales areas. In September 2007, shortly after the termination of its distribution contract, DAK Surgical filed a lawsuit against Scient’x in which it alleges, among other things, that it is entitled to a change of control payment pursuant to the terminated distribution contract. While the Company believes that the plaintiff’s allegations are without merit, the outcome of the litigation cannot be predicted at this time and any outcome in favor of DAK Surgical could have a significant adverse effect on the Company’s financial condition and results of operations.

In August 2009, a complaint filed under the qui tam provisions of the United States Federal False Claims Act (“the FCA”) that had been filed by private parties against Scient’x’s U.S. subsidiary was unsealed by the United States District Court for the Middle District of Florida (Hudak v. Scient’x USA, Inc., et al. (Civil Action No. 6:08-cv-1556-Orl-22DAB, U.S. District Court, W.D. Florida). The complaint alleged violations of the FCA arising from allegations that Scient’x engaged in improper activities related to consulting payments to surgeon customers. Under the FCA, the United States Department of Justice, Civil Division (“the DOJ”) had a certain period of time in which to decide whether to intervene and conduct the action against Scient’x, or to decline to intervene and allow the private plaintiffs to proceed with the case. In August 2009, the DOJ filed a notice informing the court that it was declining to intervene in the case. In December 2009, the private plaintiffs who filed the action moved the court to dismiss the matter without prejudice, the Attorney General consented to such dismissal and the matter was dismissed without prejudice. Despite the dismissal of this matter, the DOJ is continuing its review of the facts alleged by the original plaintiffs in this matter. To date, neither Scient’x nor the Company has been subpoenaed by any governmental agency in connection with this review. The Company believes that Scient’x’s business practices were in compliance with the FCA and intends to vigorously defend itself with respect to the allegations contained in the qui tam complaint, however, the outcome of the matter cannot be predicted at this time and any adverse outcome could have a significant adverse effect on the Company’s financial condition and results of operations.

The Company is and may become involved in various other legal proceedings arising from its business activities. While management does not believe the ultimate disposition of these matters to have a material adverse impact on the Company’s consolidated results of operations, cash flows or financial position; litigation is inherently unpredictable, and depending on the nature and timing of these proceedings, an unfavorable resolution could materially affect the Company’s future consolidated results of operations, cash flows or financial position in a particular period.

Royalties

The Company has entered into various intellectual property agreements requiring the payment of royalties based on the sale of products that utilize such intellectual property. These royalties primarily relate to products sold by Alphatec Spine and are calculated either as a percentage of net sales or in one instance on a per-unit sold basis. Royalties are included on the accompanying consolidated statement of operations as a component of cost of revenues.

9. Net Loss Per Share

Basic earnings per share (“EPS”) is calculated by dividing the net income or loss available to common stockholders by the weighted average number of common shares outstanding for the period, without consideration for common stock equivalents. Diluted EPS is computed by dividing the net income available to common stockholders by the weighted average number of common shares outstanding for the period and the weighted average number of dilutive common stock equivalents outstanding for the period determined using the treasury-stock method. For purposes of this calculation, common stock subject to repurchase by the Company and options are considered to be common stock equivalents and are only included in the calculation of diluted earnings per share when their effect is dilutive. (In thousands, except per share data):


	Three Months Ended March 31,
	2010			2009
Numerator:
Net loss	$	(4,710	)	$	(4,383	)

Denominator:
Weighted average common shares outstanding		54,734			47,436
Weighted average unvested common shares subject to repurchase		(581	)		(933	)

Weighted average common shares outstanding - basic		54,153			46,503
Effect of dilutive securities:
Options, warrants and restricted share awards		—			—

Weighted average common shares outstanding - diluted		54,153			46,503

Net loss per common share:
Basic and diluted	$	(0.09	)	$	(0.09	)

The weighted-average anti-dilutive securities not included in diluted net loss per share were as follows (in thousands):


	Three Months Ended March 31,
	2010	2009
Options to purchase common stock	1,793	2,539
Warrants to purchase common stock	222	476
Unvested restricted share awards	581	933

Total	2,596	3,948

10. Stock-Based Compensation and Other Equity Transactions

The Company accounts for stock-based compensation under provisions that require that share-based payment transactions with employees be recognized in the financial statements based on their fair value and recognized as compensation expense over the vesting period. The amount of expense recognized during the period is affected by subjective assumptions, including: estimates of the Company’s future volatility, the expected term for its stock options, the number of options expected to ultimately vest, and the timing of vesting for the Company’s share-based awards.

The Company accounts for stock option grants to non-employees in accordance with provisions that require that the fair value of these instruments be recognized as an expense over the period in which the related services are rendered.

Share-based compensation expense of awards with performance conditions is recognized over the period from the date the performance condition is determined to be probable of occurring through the time the applicable condition is met. Determining the likelihood and timing of achieving performance conditions is a subjective judgment made by management which may affect the amount and timing of expense related to these share-based awards. Share-based compensation is adjusted to reflect the value of options which ultimately vest as such amounts become known in future periods.

Valuation of Stock Option Awards

The assumptions used to compute the share-based compensation costs for the stock options granted during the three months ended March 31, 2010 and 2009 are as follows:


	Three Months Ended March 31,
	2010		2009
*Employee Stock Options*
Risk-free interest rate	2.80	%	2.00	%
Expected dividend yield	—	%	—	%
Weighted average expected life (years)	6.2		6.2
Volatility	56	%	58	%

The assumed dividend yield was based on the Company’s expectation of not paying dividends in the foreseeable future.

Compensation Costs

The compensation cost that has been included in the Company’s condensed consolidated statements of operations for all stock-based compensation arrangements is detailed as follows (in thousands, except per share amounts):


	Three Months Ended March 31,
	2010			2009
Cost of revenues	$	57		$	52
Research and development		349			64
Sales and marketing		199			171
General and administrative		376			347

Total	$	981		$	634

Effect on basic and diluted net loss per share	$	(0.02	)	$	(0.01	)

Stock Options

A summary of the Company’s stock option activity under its Amended and Restated 2005 Employee, Director and Consultant Stock Plan (the “2005 Plan”) and related information is as follows (in thousands, except as indicated and per share data):


	Shares		Weighted average exercise price		Weighted average remaining contractual term (in years)	Aggregate intrinsic value
Outstanding at December 31, 2009	2,957		$	3.94	8.28	$	4,120
Granted year to date	842		$	6.31	—		—
Exercised year to date	(22	)	$	4.18	—		—
Forfeited year to date	(27	)	$	4.31	—		—

Outstanding at March 31, 2010	3,750		$	4.47	8.59	$	7,157

Options vested and expected to vest at March 31, 2010	3,124		$	4.51	8.59	$	5,835

Options vested and exercisable at March 31, 2010	1,036		$	4.23	7.92	$	2,227

In connection with the acquisition of Scient’x, the holders of both vested and unvested options to purchase shares of Scient’x common stock who were employed by either Scient’x or Alphatec on the closing date were entitled to receive replacement options to purchase shares of Alphatec common stock upon closing of the acquisition, and such optionees were given credit for the vesting of their Scient’x options up to the closing date. The Company calculated the fair value of the Scient’x options attributable to pre-combination service using the Black-Scholes option pricing model with market assumptions. The fair value of the replacement options that was associated with pre-combination service was included in consideration transferred in the acquisition. The difference between the fair value of the replacement options and the amount included in consideration transferred will be recognized as compensation cost in the Company’s post-combination financial statements over the requisite service period. The Company granted 754,838 options, with an exercise price of $6.39, to purchase shares of Alphatec common stock to Scient’x optionees.

The weighted-average grant-date fair value of stock options granted during the three months ended March 31, 2010 and 2009 was $6.31 and $1.62, respectively. The aggregate intrinsic value of options at March 31, 2010 is based on the Company’s closing stock price on that date of $6.37 per share.

As of March 31, 2010, there was $5.1 million of unrecognized compensation expense for stock options and awards which is expected to be recognized on a straight-line basis over a weighted average period of approximately 2.5 years. The total intrinsic value of options exercised was $0.1 million for the three months ended March 31, 2010. There were no option exercises during the three months ended March 31, 2009.

In January 2010, the Company’s Board of Directors agreed to increase the number of shares reserved for issuance under the 2005 Plan by 1,000,000 shares. At March 31, 2010, approximately 1,689,000 shares of common stock remained available for issuance under the 2005 Plan.

Restricted Stock Awards

The following table summarizes information about the restricted stock awards activity (in thousands, except as indicated and per share data):


	Shares		Weighted average grant date fair value		Weighted average remaining recognition period (in years)	Aggregate intrinsic value
Outstanding at December 31, 2009	520		$	5.90	1.29	$	3,068
Awarded year to date	—		$	—
Released year to date	(43	)	$	3.72
Forfeited year to date	(1	)	$	9.19

Outstanding at March 31, 2010	476		$	6.09	1.15	$	2,901

The table above does not include the 101,944 shares of restricted stock granted to Stout in March 2008. There were no restricted awards granted during the three months ended March 31, 2010 and 2009.

Warrants

In December 2008, the Company issued warrants to the Lenders in the Credit Facility to purchase an aggregate of 476,190 shares of the Company’s common stock with an exercise price of $1.89 per share. The warrants were immediately exercisable, could be exercised through a cashless exercise and had a ten-year term. The Company recorded the value of the warrants of $0.9 million as a debt discount. The value of the warrants was determined on the grant date using the Black-Scholes valuation method with the following assumptions: risk free interest rates of 2.67%, volatility of 60.9%, a ten year term and no dividends yield.

In March 2010, one of the Lenders to the Credit Facility exercised all of its warrants pursuant to the cashless exercise provision of its warrant agreement resulting in the Company issuing 196,161 shares of its common stock to the Lender. The net value of the shares issued was $1.2 million. Following this exercise, there were no outstanding warrants to purchase shares of the Company’s common stock.

Treasury Stock

On August 31, 2009, pursuant to the settlement documents with the claimant surgeons in the Brodke litigation, the Company issued 114,766 shares of its common stock, valued at a price per share of $4.35, to the claimant surgeons. The resale of such shares was not covered by a registration statement. As required by the settlement agreement, six months after the issuance, the value of such stock ($0.5 million) was measured against the then-current value of the Company’s common stock on such date. The Company performed the measurement calculation on February 28, 2010 using a per share price of the Company’s common stock of $5.20, which resulted in the forfeiture of 18,612 shares by the claimant surgeons. The Company recorded the fair value of the forfeited shares of $0.1 million as treasury stock. The Company also reviews the fair value of the $0.5 million equity issuance on a quarterly basis to determine if additional accounting is warranted based on a fluctuation in the Company’s stock price. As of March 31, 2010, the Company recorded a fair value adjustment of $0.1 million to increase litigation expense.

11. Income Taxes

To calculate its interim tax provision, at the end of each interim period the Company estimates the annual effective tax rate and applies that to its ordinary quarterly earnings. In addition, the effect of changes in enacted tax laws or rates or tax status is recognized in the interim period in which the change occurs. The computation of the annual estimated effective tax rate at each interim period requires certain estimates and significant judgment including, but not limited to, the expected operating income for the year, projections of the proportion of income earned and taxed in foreign jurisdictions, permanent and temporary differences between book and tax amounts, and the likelihood of recovering deferred tax assets generated in the current year. The accounting estimates used to compute the provision for income taxes may change as new events occur, additional information is obtained or as the tax environment changes.

The Company recognizes interest and penalties related to uncertain tax positions as a component of the income tax provision. The Company’s unrecognized tax benefits increased $1.1 million during the three months ended March 31, 2010. The increase in unrecognized tax benefits during the three months ended March 31, 2010 was primarily related to uncertain tax positions of the acquired Scient’x operations. The unrecognized tax benefits at March 31, 2010 were $3.3 million. It is reasonably possible that $0.3 million of the Company’s unrecognized tax benefits could be recognized within the next 12 months.

The U.S. income tax expense consists primarily of state income taxes and the tax effect of changes in deferred tax liabilities associated with tax deductible goodwill. The foreign income tax expense consists primarily of Japanese provincial and city income taxes.

12. Segment and Geographical Information

Operating segments are defined as components of an enterprise for which separate financial information is available and evaluated regularly by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company operates in one reportable business segment.

During the three months ended March 31, 2010 and 2009, the Company operated in three geographic locations, the U.S., Asia and Europe. Revenues, attributed to the geographic location of the customer, were as follows (in thousands):


	Three Months Ended March 31,
	2010		2009
United States	$	28,436	$	23,813
Asia		6,096		5,830
Europe		3,899		967

Total consolidated revenues	$	38,431	$	30,610

Total assets by region were as follows (in thousands):


	March 31, 2009		December 31, 2009
United States	$	186,816	$	148,735
Asia		11,993		13,082
Europe		158,396		71

Total consolidated assets	$	357,205	$	161,888

13. Related Party Transactions

In connection with the acquisition of Scient’x and pursuant to the terms of the share purchase agreement, the consideration paid for 100% of the shares of Scient’x was fixed at 24,000,000 shares of the Company’s common stock, reduced by a certain number of shares calculated at the closing in exchange for the payment of certain fees and expenses incurred by HealthpointCapital. The aggregate purchase price paid to acquire 100% of the shares of Scient’x was 23,730,644 shares of the Company’s common stock. The Company will pay fees and expenses incurred by HealthpointCapital of $1.6 million. HealthpointCapital and its affiliates held approximately 94.8% of the issued and outstanding shares of Scient’x prior to the acquisition. HealthpointCapital received shares of the Company’s common stock in connection with the acquisition proportional to its ownership interest in Scient’x.

For the three months ended March 31, 2010 and 2009, the Company incurred costs of $0 and $0.1 million, respectively, to Foster Management Company and HealthpointCapital, LLC for travel expenses, including the use of Foster Management Company’s airplane. Foster Management Company is an entity owned by John H. Foster, a member of the Company’s board of directors. John H. Foster is a significant equity holder of HealthpointCapital, LLC, an affiliate of HealthpointCapital Partners, L.P. and Healthpoint Capital Partners II, L.P., which are the Company’s principal stockholders.

Dr. Stephen H. Hochschuler serves as a director of the Company’s and Alphatec Spine’s board of directors and Chairman of Alphatec Spine’s Scientific Advisory Board. The Company, Alphatec Spine and Dr. Hochschuler entered a written consulting agreement on October 13, 2006 (the “Consulting Agreement”). Pursuant to the Consulting Agreement, Dr. Hochschuler is required to provide advisory services related to the spinal implant industry and the Company’s research and development strategies. For the three months ended March 31, 2010 and 2009, the Company incurred costs of $0.1 million in each period, for advisory services provided by Dr. Hochschuler.

14. Subsequent Events

Public Offering of Common Stock

In April 2010, the Company completed a public offering of an aggregate of 18,400,000 shares (16,000,000 primary shares and 2,400,000 shares sold pursuant to the exercise of an over allotment option granted to the underwriters) of its common stock, par value $0.0001 per share (the “Offering”). The shares were sold at an offering price of $5.00 per share, less underwriting commissions and discounts. Of the shares of common stock sold in the Offering, 9,200,000 shares were sold by the Company and 9,200,000 were sold by HealthpointCapital Partners, L.P (the “Selling Stockholder”). The Offering closed on April 21, 2010. The net proceeds to the Company were approximately $42.5 million after deducting underwriting discounts and commissions and estimated expenses payable by the Company. The Company did not receive any proceeds from the sale of shares of common stock by the Selling Stockholder.

The Offering was made pursuant to a prospective supplement dated April 16, 2010 and the Company’s existing shelf registration statement on Form S-3, which was initially filed with the SEC on February 12, 2010 and declared effective by the SEC on April 9, 2010.

Consolidation of Scient’x’s U.S. Operations

As a result of the acquisition of Scient’x, the Company elected to consolidate Scient’x’s U.S. operations, close the U.S. facility and move its U.S. operations to the Company’s corporate location in Carlsbad, California. This consolidation was completed by April 30, 2010. All of the Scient’x U.S. employees were notified of the closure of the Scient’x U.S. operations and provided documentation related to their employment, resulting in a reduction in workforce. The Company accrued $0.9 million in restructuring costs relating to a reduction in workforce in March 2010. The Company expects to incur approximately $0.4 million of expenses related to the consolidation of Scient’x’s U.S. operations in the second quarter of 2010.

Sale of IMC Co.

In connection with the Company’s strategy to focus on the sale of spinal implants in Japan, Alphatec Pacific entered into an agreement to sell its wholly owned subsidiary, IMC Co., to a third party in April 2010. The Company determined that IMC Co. was a non-strategic asset given that it is a distribution company that primarily sells general orthopedic trauma products in a limited geographic market. In exchange for all of the shares of IMC Co., the purchaser agreed to pay $0.6 million. The purchaser will pay the Company in installments, of which $0.3 million will be paid in the second quarter of 2010 and the remaining amount paid thereafter in three annual installments. During the three months ended March 31, 2010, IMC Co. contributed revenues of $3.1 million, gross margin of 12.5% and net loss ($0.1 million) to the Company’s results of operations. The impact of this transaction on the Company’s consolidated results of operations was previously contemplated in the Company’s 2010 performance objectives and financial guidance.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Our management’s discussion and analysis of our financial condition and results of operations include the identification of certain trends and other statements that may predict or anticipate future business or financial results that are subject to important factors, such as those set forth in Item 1A “Risk Factors” in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ending December 31, 2009, as amended, as well as any updates to those risk factors filed from time to time in our Quarterly Reports on Form 10-Q or Current Reports on Form 8-K.

Overview

We are a medical technology company focused on the design, development, manufacturing and marketing of products for the surgical treatment of spine disorders, with a focus on products that treat conditions that affect the aging spine. We have a comprehensive product portfolio and pipeline that address the cervical, thoracolumbar and intervertebral regions of the spine and covers a variety of major spinal disorders and procedures such as vertebral compression fracture, disorders related to poor bone quality, spinal stenosis and minimally invasive access techniques. On March 26, 2010, we completed the acquisition of Scient’x S.A., or Scient’x, a global medical device company based in France that designs, develops and manufacturers surgical implants to treat disorders of the spine. Scient’x distributes products through its direct sales force in France, Italy and the U.K. and distributes products through independent distributors in more than 45 additional countries. Our principal product offerings are focused on the global market for orthopedic spinal disorder solution products, which is estimated to be more than $8.5 billion in revenue in 2009 and is expected to grow between 10%-12% over the next year. Our “surgeons’ culture” emphasizes collaboration with spinal surgeons to conceptualize, design and co-develop a broad range of products. We have a state-of-the-art, in-house manufacturing facility that provides us with a unique competitive advantage, and enables us to rapidly deliver solutions to meet surgeons’ and patients’ critical needs. Our products and systems are made of titanium, titanium alloy, stainless steel, cobalt chrome, ceramic and a strong, heat resistant, radiolucent, biocompatible plastic called polyetheretherketone, or PEEK. We also sell products made of allograft, precision-milled and processed human bone that surgeons can use in place of metal and synthetic materials. We also sell bone-grafting products that are comprised of both tissue-based and synthetic materials. To further differentiate our solutions, we have incorporated minimally invasive access techniques, and biologic solutions into our portfolio to improve patient outcomes. We believe that our products and systems have enhanced features and benefits that make them attractive to surgeons and that our broad portfolio of products and systems provide a comprehensive solution for the safe and successful surgical treatment of spine disorders. Our goal is to be the leading independent full-line spine company, with a focus on solutions for the aging spine. The aging spine has unique characteristics and our aging spine solutions are targeted at providing superior efficacy in dealing with patients who suffer from poor bone density, vertebral compression fractures, adult deformity or scoliosis, degenerative disc disease, and spinal stenosis. We believe that we have developed a strong product platform for consistent and measured growth and intend to leverage this platform by, among other things, providing unmatched service to, and taking scientific direction from, surgeons. In addition to bringing innovative products to market, we understand that surgeons make the ultimate decision as to whether our products are used in a surgical procedure. Accordingly, we view our relationship with the surgeon community as an integral component of our strategy.

In connection with our acquisition of Scient’x, the consideration paid was fixed at 24,000,000 shares of our common stock, reduced by a certain number of shares calculated at the closing in exchange for the payment of certain fees and expenses incurred by HealthPointCapital Partners, L.P. and HealthPointCapital Partners II, L.P., collectively referred to herein as HealthPointCapital, our and Scient’x’s principal stockholders. The aggregate purchase price paid to acquire 100% of the shares of Scient’x was 23,730,644 shares of our common stock. We will pay fees and expenses incurred by HealthpointCapital of $1.6 million. HealthpointCapital and its affiliates held approximately 94.8% of the issued and outstanding shares of Scient’x prior to the acquisition. HealthpointCapital received shares of our common stock in connection with the acquisition proportional to its ownership interest in Scient’x.

In 2007, as part of our strategy to focus on disorders affecting the aging spine, we began entering into license agreements with third parties that we believe will enable us to rapidly develop and commercialize unique products for the treatment of spinal disorders that disproportionately affect the aging population. Through March 31, 2010, we have licensed or acquired approximately 53 patent and patent applications from third parties. A discussion of our material license agreements may be found in “Item 1—Business-Intellectual Property” included in our Annual Report on Form 10-K for the year ending December 31, 2009, as amended, as well as in our subsequent Quarterly Reports on Form 10-Q or Current Reports on Form 8-K.

Although our products generally are purchased by hospitals and surgical centers, orders are typically placed at the request of surgeons who then use our products in a surgical procedure. During the three and nine months ended March 31, 2010 and 2009, no single surgeon, hospital or surgical center represented greater than 10% of our consolidated revenues. Additionally, we sell a broad array of products, which diminishes our reliance on any single product or spine disorder.

To assist us in evaluating our product development strategy, we regularly monitor long-term technology trends in the spinal implant industry. Additionally, we consider the information obtained from discussions with the surgeon community and our Scientific Advisory Board in connection with the demand for our products, including potential new product launches. We also use this information to help determine our competitive position in the spinal implant industry and the capacity requirements of our manufacturing facility.

Revenue and Expense Components

The following is a description of the primary components of our revenues and expenses:

Revenues. We derive our revenues primarily from the sale of spinal surgery implants used in the treatment of spine disorders. Spinal implant products include spine screws and complementary products, vertebral body replacement devices, plates, products to treat vertebral compression fractures and bone grafting materials. Our revenues are generated by our direct sales force and independent distributors. Our products are requested directly by surgeons and shipped and billed to hospitals or surgical centers. In Japan, where orthopedic trauma surgeons also perform spine surgeries, we have sold and expect to continue to sell orthopedic trauma products in order to introduce our spine products to Japanese surgeons. In Europe and Latin America, where we began sales in the second half of 2008, we use independent distributors that purchase our products and market them to their surgeon customers. As a result of offering payment terms greater than our customary U.S. business terms and operating in a new market in which we have limited prior experience, revenues for sales to our European and Latin American distributors have been deferred until the sooner of when payments become due or cash is received.

Cost of revenues. Cost of revenues consists of direct product costs, royalties, depreciation of our surgical instruments, and the amortization of purchased intangibles. We manufacture substantially all of the non-allograft implants that we sell. Our product costs consist primarily of direct labor, manufacturing overhead, and raw materials and components. Allograft product costs include the cost of procurement and processing of human tissue. We incur royalties related to technology we license from others and products developed in part by surgeons with whom we collaborate in the product development process. Amortization of purchased intangibles consists of amortization of developed product technology.

Research and development. Research and development expense consists of costs associated with the design, development, testing, and enhancement of our products. Research and development costs also include salaries and related employee benefits, research-related overhead expenses, fees paid to external service providers, and costs associated with our Scientific Advisory Board and Executive Surgeon Panels.

In-process research and development. IPR&D consists of acquired research and development assets that were not technologically feasible on the date we acquired such technology, provided that such technology did not have any alternative future use at that date. At the time of acquisition, we expect all acquired IPR&D will reach technological feasibility, but there can be no assurance that commercial viability of a product will be achieved. The nature of the efforts to develop the acquired technologies into commercially viable products consists principally of planning, designing, and obtaining regulatory clearances. The risks associated with achieving commercialization include, but are not limited to, delays or failures during the development process, delays or failures to obtain regulatory clearances, and delays or failures due to intellectual property rights of third parties.

Sales and marketing. Sales and marketing expense consists primarily of salaries and related employee benefits, sales commissions and support costs, professional service fees, travel, medical education, trade show and marketing costs.

General and administrative. General and administrative expense consists primarily of salaries and related employee benefits, professional service fees and legal expenses.

Transaction related expenses. Transaction related expenses consists of legal, accounting and financial advisory fees associated with the acquisition of Scient’x.

Restructuring expenses. Restructuring expenses consists of costs associated with exit or disposal activities related to the acquisition of Scient’x.

Total other income (expense). Total other income (expense) includes interest income, interest expense, gains and losses from foreign currency exchanges and other non-operating gains and losses.

Income tax expense. Income tax expense consists primarily of state and foreign income taxes and the tax effect of changes in deferred tax liabilities associated with tax goodwill.

Critical Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. On an on-going basis, we evaluate our estimates and assumptions, including those related to revenue recognition, allowances for accounts receivable, inventories, goodwill and intangible assets, stock-based compensation and income taxes. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumption conditions.

Critical accounting policies are those that, in management’s view, are most important in the portrayal of our financial condition and results of operations. Management believes there have been no material changes during the three months ended March 31, 2010 to the critical accounting policies discussed in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of our Annual Report on Form 10-K for the year ended December 31, 2009, as amended.

Results of Operations

The table below sets forth certain statements of operations data expressed as a percentage of revenues for the periods indicated. Our historical results are not necessarily indicative of the operating results that may be expected in the future.


	Three Months Ended March 31,
	2010		2009
Revenues	100.0	%	100.0	%
Cost of revenues	37.6		35.4

Gross profit	62.4		64.6
Operating expenses:
Research and development	9.6		9.4
In-process research and development	1.2		4.2
Sales and marketing	35.9		41.7
General and administrative	14.7		19.5
Transaction related expenses	8.2		—
Restructuring expenses	2.3		—

Total operating expenses	71.9		74.8

Operating loss	(9.5	)	(10.2	)

Other income (expense):
Interest income	0.0		0.1
Interest expense	(2.2	)	(3.0	)
Other income (expense), net	(0.3	)	(0.8	)

Total other income (expense)	(2.5	)	(3.7	)

Loss before taxes	(12.0	)	(13.9	)
Income tax provision	0.3		0.4

Net loss	(12.3	)%	(14.3	)%

Three Months Ended March 31, 2010 Compared to the Three Months Ended March 31, 2009

Revenues. Revenues were $38.4 million for the three months ended March 31, 2010 compared to $30.6 million for the three months ended March 31, 2009, representing an increase of $7.8 million, or 25.6%. U.S. revenues increased $4.6 million, or 19.4%, primarily due to increased sales of our Zodiac, Illico, Novel and Trestle product lines. In addition, Asia revenues increased $0.3 million, or 4.6%, due to both sales volume, ($0.1 million), and the favorable affect of foreign currency exchange rates. We recognized revenue of $3.9 million for European revenue during the three months ended March 31, 2010 compared to $1.0 million for the three months ended March 31, 2009. The increase in European revenues is primarily due to our expanded distribution network and increased sales in our Zodiac, Illico and OsseoFix product lines.

Cost of revenues. Cost of revenues was $14.5 million for the three months ended March 31, 2010 compared to $10.8 million for the three months ended March 31, 2009, representing an increase of $3.7 million, or 33.6%. The increase was primarily due to $2.7 million in product costs associated with the increased sales volume, increased depreciation costs of $0.7 million based on a larger installed surgical instruments asset base, higher amortization expenses of $0.1 million related to new intangible assets and increased royalty payments of $0.2 million associated with the increased sales volume.

Gross profit. Gross profit was $24.0 million for the three months ended March 31, 2010 compared to $19.8 million for the three months ended March 31, 2009, representing an increase of $4.2 million, or 21.2%. Gross margin of 62.4% of revenues for the three months ended March 31, 2010 decreased 2.2 percentage points from the three months ended March 31, 2009 of 64.6%.

Gross profit in the U.S. was 69.9% for the three months ended March 31, 2010 compared to 70.8% for the three months ended March 31, 2009. The decrease of 0.9 percentage points was primarily due to increased depreciation expense (1.2 percentage points), increased excess and obsolete reserves as our inventory balances grow to support increased sales volume (0.7 percentage points) and modest U.S. hospital price erosion which was offset by improving manufacturing efficiencies (0.1 percentage points). These decreases were partially offset by reduced royalty expenses (1.1 percentage points).

Gross profit in Asia was 35.3% for the three months ended March 31, 2010 compared to 43.3% for the three months ended March 31, 2009. The decrease of 8.0 percentage points was primarily due to unfavorable mix of lower margin non-spine product revenues.

Gross profit in Europe was 50.0% for the three months ended March 31, 2010 compared to 40.5% for the three months ended March 31, 2009. The increase of 9.5 percentage points was primarily due to favorable product mix with broader product offerings to our expanding distribution network.

Research and development. Research and development expense was $3.7 million for the three months ended March 31, 2010 compared to $2.9 million for the three months ended March 31, 2009, representing an increase of $0.8 million, or 28.6%. The increase was primarily related to increased compensation related expenses.

In-process research and development. In-process research and development expense was $0.5 million for the three months ended March 31, 2010 compared to $1.3 million for the three months ended March 31, 2009. In the three months ended March 31, 2010, we incurred expenses of $0.5 million related to our acquisition of technology related to stem cells. In the three months ended March 31, 2009, we incurred costs related to our acquisition of technology related to a stand-alone interbody device of $0.5 million, $0.6 million related to our acquisition of technology related to a device for the treatment of spinal stenosis ($0.25 million in cash and $0.35 million in stock (174,129 shares)), and $0.2 million combined for three smaller in-process research and development collaborations with third parties.

Sales and marketing. Sales and marketing expense was $13.8 million for the three months ended March 31, 2010 compared to $12.8 million for the three months ended March 31, 2009, representing an increase of $1.0 million, or 7.8%. The increase was primarily due to higher commission expense of $0.2 million due to the higher U.S. sales volume and an increase of $0.8 million in various sales and marketing expenses.

General and administrative. General and administrative expense was $5.6 million for the three months ended March 31, 2010 compared to $6.0 million for the three months ended March 31, 2009, representing a decrease of $0.4 million, or 5.3%. The decrease was primarily related to a reduction of outside patent fees and legal fees.

Transaction-related expenses. Transaction-related expense was $3.2 million for the three months ended March 31, 2010 compared to $0 for the three months ended March 31, 2009, representing an increase of $3.2 million, or 100%. The transaction-related expenses were for legal, accounting and financial advisory fees associated with the acquisition of Scient’x, which closed on March 26, 2010.

Restructuring expenses. Restructuring expense was $0.9 million for the three months ended March 31, 2010 compared to $0 for the three months ended March 31, 2009, representing an increase of $0.9 million, or 100%. The restructuring expenses were due to severance expenses incurred in connection with the consolidation of Scient’x’s U.S. operations.

Interest Expense. Interest expense was $0.9 million for the three months ended March 31, 2010 compared to $0.9 million for the three months ended March 31, 2009, representing no change. Interest expense in both periods consisted primarily of interest expense for our loan agreement and line of credit with Silicon Valley Bank and Oxford Finance Corporation.

Other income (expense), net. Other income (expense), net was ($0.1) million for the three months ended March 31, 2010 compared to ($0.3) million for the three months ended March 31, 2009, representing an increase in income of $0.2 million. The increase was due to greater foreign currency exchange gains realized in the three months ended March 31, 2010 as compared to the three months ended March 31, 2009.

Income tax. Income tax expense was $0.1 million for the three months ended March 31, 2010 compared to $0.1 million for the three months ended March 31, 2009, representing no change. The U.S. income tax expense consists primarily of state income taxes and the tax effect of changes in deferred tax liabilities associated with tax deductible goodwill. The foreign income tax expense consists primarily of Japanese provincial and city income taxes.

Non-GAAP Financial Measures

We utilize certain financial measures that are not calculated based on Generally Accepted Accounting Principles, or GAAP. Certain of these financial measures are considered “non-GAAP” financial measures within the meaning of Item 10 of Regulation S-K promulgated by the SEC. We believe that non-GAAP financial measures reflect an additional way of viewing aspects of our operations that, when viewed with the GAAP results, provide a more complete understanding of our results of operations and the factors and trends affecting our business. These non-GAAP financial measures are also used by our management to evaluate financial results and to plan and forecast future periods. However, non-GAAP financial measures should be considered as a supplement to, and not as a substitute for, or superior to, the corresponding measures calculated in accordance with GAAP. Non-GAAP financial measures used by us may differ from the non-GAAP measures used by other companies, including our competitors.

Adjusted EBITDA represents net income (loss) excluding the effects of interest, taxes, depreciation, amortization, stock-based compensation and other non-recurring income or expense items, such as in-process research and development expense and acquisition related transaction and restructuring expenses. We believe that the most directly comparable GAAP financial measure to adjusted EBITDA is net income (loss). Adjusted EBITDA has limitations. Therefore, adjusted EBITDA should not be considered either in isolation or as a substitute for analysis of our results as reported under GAAP. Furthermore, adjusted EBITDA should not be considered as an alternative to operating income (loss) or net income (loss) as a measure of operating performance or to net cash provided by operating, investing or financing activities, or as a measure of our ability to meet cash needs.

The following is a reconciliation of adjusted EBITDA to the most comparable GAAP measure, net loss, for the three months ended March 31, 2010 and 2009 (in thousands):


	Three Months Ended March 31,
	2010			2009
Net loss	$	(4,710	)	$	(4,383	)
Stock-based compensation		981			634
Depreciation		2,642			1,822
Amortization of intangible assets		920			779
In-process research and development		450			1,290
Interest expense, net		857			882
Income tax expense		112			116
Other (income) expense, net		110			261
Transaction related expenses		3,152			—
Restructuring expenses		882			—

Adjusted EBITDA	$	5,396		$	1,401

Non-GAAP earnings (loss) represents net income (loss) excluding the effects of in-process research and development expenses and acquisition related transaction and restructuring expenses. Management does not consider these expenses when it makes certain evaluations of the operations of the Company. We believe that the most directly comparable GAAP financial measure to non-GAAP earnings (loss) is net income (loss).

The following is a reconciliation of non-GAAP net loss to the most comparable GAAP measure, net loss, for the three months ended March 31, 2010 and 2009 (in thousands):


	Three Months Ended March 31,
	2010			2009
Net loss	$	(4,710	)	$	(4,383	)
In-process research and development		450			1,290
Transaction related expenses		3,152			—
Restructuring expenses		882			—

Non-GAAP net loss	$	(226	)	$	(3,093	)

The following is a reconciliation of non-GAAP net loss per share to the most comparable GAAP measure, net loss per common share, for the three months ended March 31, 2010 and 2009 (in thousands):


	Three Months Ended March 31,
	2010			2009
Net loss per common share-basic and diluted	$	(0.09	)	$	(0.09	)
In-process research and development		0.01			0.03
Transaction related expenses		0.06			—
Restructuring expenses		0.02			—

Non-GAAP net loss per common share-basic and diluted	$	0.00		$	(0.06	)

Pro Forma Information

The following unaudited pro forma information presents the condensed consolidated results of operations of us and Scient’x as if the acquisition had occurred on January 1, 2009 (in thousands, except gross margin and share data):


	Three Months Ended March 31,
	2010			2009
Pro Forma Combined:
Revenues	$	49,766		$	41,702
Loss from operations		(755	)		(6,615	)
Net loss		(1,159	)		(6,782	)
Net loss per share, basic and diluted	$	(0.01	)	$	(0.10	)
Gross margin		59.8	%		57.5	%
Pro Forma Adjusted EBITDA	$	5,987		$	(465	)

The following is a reconciliation of pro forma adjusted EBITDA to pro forma net loss, for the three months ended March 31, 2010 and 2009 (in thousands):


	Three Months Ended March 31,
	2010			2009
Pro Forma net loss	$	(1,159	)	$	(6,782	)
Pro Forma Combined:
Stock-based compensation		1,084			737
Depreciation		3,012			2,117
Amortization of intangible assets		1,760			1,570
In-process research and development		450			1,290
Interest expense, net		1,040			935
Income tax expense (benefit)		40			(584	)
Other (income) expense, net		(702	)		(206	)
Inventory step-up		436			436
Non-controlling interest		26			22

Pro Forma Adjusted EBITDA	$	5,987		$	(465	)

Liquidity and Capital Resources

At March 31, 2010, our principal sources of liquidity consisted of cash and cash equivalents of $12.7 million, accounts receivable, net of $39.3 million, and remaining amounts available under our credit facility of $0.2 million. We believe such amounts and cash raised in an April 2010 equity offering (see “Subsequent Events that Impact Liquidity” below) will be sufficient to fund our projected operating requirements through at least March 31, 2011, including the acquisition of Scient’x as discussed below.

In March 2010, we amended our Loan and Security Agreement with Silicon Valley Bank and Oxford Finance Corporation, or, the Lenders, that we had entered in December 2008 (See “Credit Facility and Other Debt” below). In conjunction with the Credit Facility, we were required to maintain compliance with quarterly financial covenants, which included a minimum level of revenues and a minimum level of adjusted EBITDA. The covenant requirements have been revised and under the amended Credit Facility consist of a cash-flow covenant to maintain a minimum fixed charge coverage ratio. The minimum fixed charge coverage ratio increases from the second quarter 2010 to the third quarter 2010 and is consistent thereafter. There is also a requirement for us to maintain a cash balance with Silicon Valley Bank equal to at least $10 million. We expect that we will be in compliance with our covenants throughout 2010. In addition to the minimum fixed charge covenant described above, there are other clauses including subjective clauses that would allow the Lenders to declare the loan immediately due and payable. Upon the occurrence of an event of default under the Amended Credit Facility, the Lenders could elect to declare all amounts outstanding under the Amended Credit Facility to be immediately due and payable and terminate all commitments to extend further credit. If the Lenders were to accelerate the repayment of borrowings under the Amended Credit Facility for any reason, we may not have sufficient cash on hand to repay the amounts borrowed under the Amended Credit Facility.

On March 26, 2010, we completed our acquisition of Scient’x. Subsequent to the closing of the acquisition, we became responsible for managing the operations of the combined entities. Based on the Company’s plan for combining the operating activities of these two companies, which includes a combined operating plan and cash forecast, management believes that on a combined basis, we will have sufficient working capital to fund our cash requirements through March 31, 2011.

We will need to invest in working capital and capitalized surgical instruments in order to support our revenue projections through 2011. Should we not be able to achieve our revenue forecast and cash consumption starts to exceed forecasted consumption, management will need to adjust our investment in surgical instruments and manage our inventory to the decreased sales volumes. If we do not make these adjustments in a timely manner, there could be an adverse impact on our financial resources.

Historically, our principal sources of cash have included customer payments from the sale of our products, proceeds from the issuance of common and preferred stock and proceeds from the issuance of debt. Our principal uses of cash have included cash used in operations, acquisitions of businesses and intellectual property rights, payments relating to purchases of property and equipment and repayments of borrowings. We expect that our principal uses of cash in the future will be for operations, working capital, capital expenditures, and potential acquisitions. We expect that, as our revenues grow, our sales and marketing and research and development expenses will continue to grow and, as a result, we will need to generate significant net revenues to achieve profitability.

On February 9, 2010, we entered into subscription agreements with a group of purchasers for the sale of an aggregate of 1,592,011 shares of our common stock at a purchase price of $4.1457 per share, for gross proceeds of approximately $6.6 million. The net proceeds to us from the offering, after deducting expenses, were approximately $6.5 million. The offering closed on February 12, 2010.

On February 12, 2010, we filed a registration statement on Form S-3 with the SEC pursuant to which we may offer and sell shares of our common stock and preferred stock, various series of debt securities, and warrants, either individually or in units, with a total value of up to $100,000,000 at prices and on terms to be determined by market conditions at the time of offering. In addition, under such registration statement, HealthpointCapital has registered for resale up to an aggregate of 20,031,646 shares of our common stock. The registration statement was declared effective by the SEC on April 9, 2010. (See “Subsequent Events that Impact Liquidity” below).

A substantial portion of our available cash funds is in business accounts with reputable financial institutions. However, our deposits, at times, may exceed federally insured limits. The capital markets have recently been highly volatile and there has been a lack of liquidity for certain financial instruments, especially those with exposure to mortgage-backed securities and auction rate securities. This lack of liquidity has made it difficult for the fair value of these types of instruments to be determined. We did not hold any marketable securities as of March 31, 2010.

As a result of recent volatility in the capital markets, the cost and availability of credit has been and may continue to be adversely affected by illiquid credit markets and wider credit spreads. Concern about the stability of the markets generally and the strength of counterparties specifically has led many lenders and institutional investors to reduce, and in some cases, cease to provide funding to borrowers. Continued turbulence in the U.S. and international markets and economies may adversely affect our ability to obtain additional financing on terms acceptable to us, or at all. If these market conditions continue, they may limit our ability to timely replace maturing liabilities and to access the capital markets to meet liquidity needs.

Subsequent Events that Impact Liquidity

In April 2010, we completed a public offering of an aggregate of 18,400,000 shares (16,000,000 primary shares and 2,400,000 shares sold pursuant to the exercise of an over allotment option granted to the underwriters) of our common stock, also referred to as the Offering. The shares were sold at an offering price of $5.00 per share, less underwriting commissions and discounts. Of the shares of common stock sold in the Offering, 9,200,000 shares were sold by us and 9,200,000 were sold by HealthpointCapital Partners, L.P. The Offering closed on April 21, 2010. The net proceeds to us were approximately $42.5 million after deducting underwriting discounts and commissions and estimated expenses payable by us. We did not receive any proceeds from the sale of shares of common stock by HealthpointCapital Partners, L.P.

Operating Activities

We used net cash of $2.5 million in operating activities for the three months ended March 31, 2010. During this period, net cash used in operating activities primarily consisted of a net loss of $4.7 million and a decrease in working capital and other assets of $2.9 million, which were partially offset by $5.1 million of non-cash costs including amortization, depreciation, deferred income taxes, stock-based compensation, provision for excess and obsolete inventory, and interest expense related to amortization of debt discount and issue costs. The decrease in working capital and other assets of $2.9 million consisted of increases in accounts receivable of $0.8 million, increases in inventory of $3.4 million in support of the higher sales volume, increases in prepaid expenses and other assets of $0.6 million and decreases in accounts payable and deferred revenues of $0.9 million, partially offset by increases in accrued expenses and other liabilities of $2.8 million.

Investing activities

We generated net cash of $0.4 million from investing activities for the three months ended March 31, 2010 primarily from the cash received of $1.6 million from our acquisition of Scient’x which was partially offset by the purchase of $1.2 million in surgical instruments, computer equipment, leasehold improvements and manufacturing equipment.

Financing activities

We generated net cash of $4.8 million from financing activities for the three months ended March 31, 2010. In February 2010 we entered into subscription agreements to sell shares of our common stock. Net proceeds from such sale totaled $6.5 million. Net proceeds from borrowings under our line of credit totaled $0.4 million and we generated cash of $0.1 million from the exercise of stock options. We made payments on our line of credit and made other principal payments on notes payable and capital lease obligations totaling $2.2 million.

Credit Facility and Other Debt

In December 2008, we entered into a Loan and Security Agreement, or the Credit Facility, with Silicon Valley Bank and Oxford Finance Corporation, or the Lenders, consisting of a $15.0 million term loan and a $15.0 million working capital line of credit. The term loan carries a fixed interest rate of 11.25% with interest payments due monthly, and principal repayments commencing in October 2009. Thereafter, the Company is required to repay the principal plus interest in 30 equal monthly installments, ending in April 2012. A finance charge of $0.8 million is due in April 2012. The working capital line of credit carries a variable interest rate equal to the prime rate plus either 2.5% or 2.0%, depending on our financial performance. Interest only payments are due monthly and the principal is due at maturity in April 2012.

On March 26, 2010, we amended our Credit Facility, or the Amended Credit Facility, with the Lenders. The working capital line of credit has been increased by $10 million, to $25 million. In addition, we combined the previously existing term loan facility provided by Oxford Finance Corporation to Scient’x with our existing term loan facility. Commencing in the second quarter 2010, the amended term loan will collectively not exceed $19.5 million.

Our term loan interest rate was amended to a fixed rate of 12.0%. We are required to repay the principal plus interest in 25 equal monthly installments, ending in April 2012. In connection with the amendment, the existing finance charge of $0.8 million has been increased by $0.2 million to $1.0 million. The finance charge is being accrued to interest expense through April 2012, when it is due and payable. We will pay a prepayment penalty if the loan is repaid prior to maturity. The balance of our term loan as of March 31, 2010 was $12.4 million, net of the debt discount.

The working capital line of credit interest rate was amended to equal the prime rate plus 4.50%, with a floor rate of 8.50%. The repayment terms under the working capital line of credit were not amended. Interest-only payments are due monthly and the principal is due at maturity in April 2012. As of March 31, 2010, we had $0.2 million remaining available to be drawn under the working capital line of credit based on our eligible borrowing base.

The funds from the credit facility are intended to serve as a source of working capital for ongoing operations and working capital needs. In connection with the amendment, we paid debt issuance costs and other transaction fees totaling $0.8 million. Included in debt issuance costs was a facility fee of $0.4 million and a line of credit commitment fee of $0.1 million. The debt issuance costs were capitalized and are being amortized over the remaining term of the loan using the effective interest method.

To secure the repayment of any amounts borrowed under the Amended Credit Facility, we granted to the Lenders a first priority security interest in all of its assets, other than its owned and licensed intellectual property assets. We also agreed not to pledge or otherwise encumber our intellectual property assets without the consent of the Lenders. Additionally, the Lenders received a pledge on a portion of the Scient’x shares owned by us.

Commencing in the second quarter of 2010, we (including Scient’x) are also required to maintain compliance with a minimum fixed charge coverage ratio defined as Adjusted EBITDA (a non-GAAP term defined as net income (loss) excluding the effects of interest, taxes, depreciation, amortization, stock-based compensation costs and other non-recurring income or expense items, such as IPR&D expense, acquisition-related restructuring expense and transaction related expenses) divided by total debt service. We are also required to maintain a cash balance with Silicon Valley Bank equal to at least $10 million.

In connection with the original Credit Facility, we had issued warrants to the Lenders to purchase an aggregate of 476,190 shares of our common stock. The warrants were immediately exercisable, can be exercised through a cashless exercise, have an exercise price of $1.89 per share and have a ten year term. We recorded the value of the warrants of $0.9 million as a debt discount. In March 2010, one of the Lenders exercised all of its warrants pursuant to the cashless exercise provision of its agreement. The other Lender had previously exercised all of its warrants in September 2009 (See Note 10).

During the three months ended March 31, 2010 and 2009, we repaid $0.3 million and $0.5 million, respectively, and drew an additional $0.4 million and $1.9 million, respectively, on the working capital line of credit. The balance of the line of credit as of March 31, 2010 was $14.8 million. The balance on the combined term loans was $19.2 million, net of the debt discount. Amortization of the debt discount and debt issuance costs and accretion of the finance charge, which is recorded as a non-cash interest expense, totaled $0.2 million and $0.3 million for the three months ended March 31, 2010 and 2009, respectively. Interest expense for our term loan and our working capital line of credit, excluding debt discount and debt issuance cost amortization and accretion of the additional finance charge, totaled $0.6 million for both the three months ended March 31, 2010 and 2009.

In September 2008, Alphatec Pacific paid $0.8 million on its Resona Bank line of credit and replaced the line of credit with $0.6 million term debt with Resona Bank, which is payable over 30 months with a 3.75% interest rate. Alphatec Pacific has additional notes payable to Japanese banks and a bond payable, bearing interest at rates ranging from 1.5% to 6.5% and maturity dates through January 2014 which are collateralized by substantially all of the assets of Alphatec Pacific and Japan Ortho Medical. As of March 31, 2010, the balance of the notes and the bond totaled $0.9 million.

We and Scient’x have various capital lease arrangements. The leases bear interest at rates ranging from 4.5% to 7.4%, are generally due in monthly principal and interest installments, are collateralized by the related equipment, and have various maturity dates through January 2014. As of March 31, 2010, the balance of these capital leases totaled $0.5 million.

We have a note payable with Microsoft, Inc. for the purchase of software licenses, bearing interest at a rate of 2.7% and a maturity date of February 2011. The balance of this note as of March 31, 2010 was $0.1 million.

We have three financing agreements totaling $1.0 million for the payment of premiums on various insurance policies. These financing arrangements bear interest ranging from 0.0% to 5.2% and are payable through June 2010. The balance of all such financing agreements as of March 31, 2010 totaled $0.3 million.

In February 2010, we executed a note payable with Oracle for the purchase of software and the related support totaling $0.9 million. The loan bears interest at 5.3% and has maturity date of February 2013. An initial payment of $0.1 million was made in February 2012. Payments of principal and interest are due every three months. The balance of this note as of March 31, 2010 was $0.8 million.

Contractual Obligations and Commercial Commitments

Total contractual obligations and commercial commitments as of March 31, 2010 are summarized in the following table (in thousands):


	Payment Due by Year
	Total		2010 (9 months)		2011		2012		2013		2014		Thereafter
Line of credit with SVB/Oxford	$	14,849	$	—	$	—	$	14,849	$	—	$	—	$	—
Alphatec term loan with SVB/Oxford		12,782		4,244		6,274		2,264		—		—		—
Scient’x term loan with SVB/Oxford		6,838		2,076		3,084		1,678		—		—		—
Term loan finance charges		1,518		—		—		1,518		—		—		—
Notes payable to Microsoft		148		133		15		—		—		—		—
Notes payable to Oracle		785		241		338		206		—		—		—
Notes payable for insurance premiums		255		255		—		—		—		—		—
Notes and bond payable to Japanese banks		921		462		289		117		49		4		—
Scient’x notes payable with French government agency		101		—		101		—		—		—		—
Capital lease obligations		508		133		165		165		45		—		—
Operating lease obligations		16,989		2,699		3,252		2,746		2,637		2,163		3,492
Guaranteed minimum royalty obligations		1,488		638		600		250		—		—		—
New product development milestones (1)		4,300		1,800		—		2,500		—		—		—

Total	$	61,482	$	12,681	$	14,118	$	26,293	$	2,731	$	2,167	$	3,492

(1)	This commitment represents payments in cash, and is subject to attaining certain development milestones such as FDA approval, product design and functionality testing requirements, which we believe are reasonably likely to be achieved in 2010 through 2012.

Real Property Leases

During the first quarter of fiscal year 2008, we entered into a lease agreement and sublease agreement in order to consolidate the use and occupation of our five existing premises into two adjacent facilities.

In February 2008, we entered into a sublease agreement, or the Sublease, for 76,693 square feet of office, engineering, and research and development space, or Building 1. The Sublease term commenced May 2008 and ends on January 31, 2016. We are obligated under the Sublease to pay base rent and certain operating costs and taxes for Building 1. Monthly base rent payable by us was approximately $80,500 during the first year of the Sublease, increasing annually at a fixed annual rate of 2.5% to approximately $93,500 per month in the final year of the Sublease. Our rent was abated for months one through seven of the Sublease. Under the Sublease, we were required to provide the sublessor with a security deposit in the amount of approximately $93,500. Building 1 consolidated all corporate, marketing, finance, administrative, and research and development activities into one building.

In March 2008, we entered into a lease agreement, or the Lease, for 73,480 square feet of office, engineering, research and development and warehouse and distribution space, or Building 2. The Lease term commenced on December 1, 2008 and ends on January 31, 2017. We are obligated under the Lease to pay base rent and certain operating costs and taxes for Building 2. The monthly base rent payable for Building 2 was approximately $73,500 during the first year of the Lease, increasing annually at a fixed annual rate of 3.0% to approximately $93,000 per month in the final year of the Lease. Our rent was abated for the months two through eight of the term of the Lease in the amount of $38,480. Under the Lease, we were required to provide the lessor with a security deposit in the amount of $293,200, consisting of cash and/or one or more letters of credit. Following our achievement of certain financial milestones, the lessor is obligated to return a portion of the security deposit to us. The lessor provided a tenant improvement allowance of $1.1 million to assist with the configuration of the facility to meet our business needs. We consolidated all manufacturing, distribution and warehousing activities into Building 2 in April 2009.

Scient’x has two leased office locations and a manufacturing and distribution warehouse in France and one leased office location which includes warehouse space, in the U.S. The leased facilities range in size from 2,500 to 21,900 square feet. The leases expire on various dates through December 2013. Scient’x also maintains sales offices in Singapore, Dubai, Milan, Argentina and the United Kingdom.

Stock-based Compensation

Stock-based compensation has been classified as follows in the accompanying condensed consolidated statements of operations (in thousands, except per share data):


	Three Months Ended March 31,
	2010			2009
Cost of revenues	$	57		$	52
Research and development		349			64
Sales and marketing		199			171
General and administrative		376			347

Total	$	981		$	634

Effect on basic and diluted net loss per share	$	(0.02	)	$	(0.01	)

Recent Accounting Pronouncements

In October 2009, the Financial Accounting Standards Board issued new accounting guidance that requires entities to allocate revenue in an arrangement of the delivered goods and services based on a selling price hierarchy. This guidance eliminates the requirement to establish the fair value of undelivered products and services and instead provides for separate revenue recognition based upon management’s estimate of the selling price for an undelivered item when there is no other prescribed means to determine the fair value of that undelivered item. This new approach is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. We do not expect adoption to have a material impact on our financial position or results of operations.

Forward Looking Statements

This Quarterly Report on Form 10-Q contain or incorporate a number of forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act, including but not limited to, statements regarding:

•

our estimates regarding anticipated operating losses, future revenue, expenses, capital requirements, and liquidity, including our anticipated revenue growth and cost savings following our acquisition of Scient’x;

•

our ability to market, commercialize and achieve market acceptance of any of our products or any product candidates that we are developing or may develop in the future;

•

our ability to realize benefits from our acquisition of Scient’x;

•

our ability to successfully integrate Scient’x’s business;

•

our ability to successfully achieve and maintain regulatory clearance or approval for our products in applicable jurisdictions;

•

our estimates of market sizes and anticipated uses of our products, including without limitation the market size of the aging spine market and our ability to successfully penetrate such market;

•

our business strategy and our underlying assumptions about market data, demographic trends, reimbursement trends, pricing trends, and trends relating to customer collections;

•

trends related to the treatment of spine disorders, including without limitation the aging spine market;

•

our ability to control our costs, achieve profitability, and the potential need to raise additional funding;

•

our ability to maintain an adequate sales network for our products, including to attract and retain independent distributors;

•

our ability to enhance our U.S. and international sales networks and product penetration;

•

our ability to attract and retain a qualified management team, as well as other qualified personnel and advisors;

•

our ability to enter into licensing and business combination agreements with third parties and to successfully integrate the acquired technology and/or businesses;

•

our management team’s ability to accommodate growth and manage a larger organization;

•

our ability to protect our intellectual property, and to not infringe upon the intellectual property of third parties;

•

our ability to meet the financial covenants under our credit facilities;

•

our ability to conclude that we have effective disclosure controls and procedures;

•

our ability to establish the industry standard in clinical and legal compliance and corporate governance programs;

•

the effects of the loss of key personnel;

•

potential liability resulting from litigation;

•

potential liability resulting from a governmental review of our or Scient’x’s business practices; and

•

other factors discussed elsewhere in this Form 10-Q or any document incorporated by reference herein or therein.

Any or all of our forward-looking statements in this Quarterly Report may turn out to be inaccurate. They can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties. Many factors mentioned in our discussion in this Quarterly Report will be important in determining future results. Consequently, no forward-looking statement can be guaranteed. Actual future results may vary materially.

We also provide a cautionary discussion of risks and uncertainties under “Risk Factors” in Item 1A of this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2009, as amended, as well as any updates to those risk factors filed from time to time in our Quarterly Reports on Form 10-Q or Current Reports on Form 8-K. These are factors that we think could cause our actual results to differ materially from expected results. Other factors besides those listed there could also adversely affect us.

Without limiting the foregoing, the words “believes,” “anticipates,” “plans,” “expects” and similar expressions are intended to identify forward-looking statements. There are a number of factors that could cause actual events or results to differ materially from those indicated by such forward-looking statements, many of which are beyond our control, including the factors referenced in or set forth under “Item 1A—Risk Factors.” In addition, the forward-looking statements contained herein represent our estimate only as of the date of this filing and should not be relied upon as representing our estimate as of any subsequent date. While we may elect to update these forward-looking statements at some point in the future, we specifically disclaim any obligation to do so to reflect actual results, changes in assumptions or changes in other factors affecting such forward-looking statements.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

Our borrowings under our line of credit expose us to market risk related to changes in interest rates. As of March 31, 2010, our outstanding floating rate indebtedness totaled $14.8 million. The primary base interest rate is the U.S. federal prime rate. Assuming the outstanding balance on our floating rate indebtedness remains constant over a year, a 100 basis point increase in the interest rate would decrease pre-tax income and cash flow by approximately $0.1 million. Other outstanding debt consists of fixed rate instruments, including the term loan and capital leases.

Foreign Currency Risk

While a majority of our business is denominated in U.S. dollars, we maintain operations in foreign countries, primarily Japan and Europe, that require payments in the local currency. Fluctuations in the rate of exchange between the U.S. dollar and certain other currencies may affect our results of operations and period-to-period comparisons of our operating results. For example, if the value of the U.S. dollar were to increase relative to the Japanese Yen, then our reported revenues would decrease when we convert the Japanese Yen into U.S. dollars. We do not currently engage in hedging or similar transactions to reduce these risks. However, the currency exposure in our foreign currency revenues is mitigated because expenses of our foreign subsidiaries are payable in foreign currencies. We do not believe we have a material exposure to foreign currency rate fluctuations at this time.

Commodity Price Risk

We purchase raw materials that are processed from commodities, such as titanium and stainless steel. These purchases expose us to fluctuations in commodity prices. Given the historical volatility of certain commodity prices, this exposure can impact our product costs. However, because our raw material prices comprise a small portion of our cost of revenues, we have not experienced any material impact on our results of operations from changes in commodity prices. A 10% change in commodity prices would not have a material impact on our results of operations for the three months ended March 31, 2010.

Item 4.

Controls and Procedures

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports pursuant to the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in SEC Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were: (1) designed to ensure that material information relating to us is made known to our Chief Executive Officer and Chief Financial Officer by others within our company, particularly during the period in which this report was being prepared and (2) effective, to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act, is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms.

Changes in Internal Control over Financial Reporting

There has been no change in our internal controls over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

(a) Evaluation of Disclosure Controls and Procedures. Our principal executive officer and principal financial and accounting officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this Quarterly Report on Form 10-Q, have concluded that, based on such evaluation, our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

(b) Changes in Internal Controls. There were no changes in our internal control over financial reporting, identified in connection with the evaluation of such internal control that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

In February 2010, a complaint was filed in the U.S. District Court for the Central District of California, by Cross Medical Products, LLC, or Cross, alleging that we breached a patent license agreement with Cross by failing to make certain royalty payments allegedly due under the agreement. Cross is seeking payment of prior royalties allegedly due from our sales of polyaxial pedicle screws and an order from the court regarding payment of future royalties by the Company. While we denied the allegations in our answer to the complaint and believe that the plaintiff’s allegations are without merit, the outcome of the litigation cannot be predicted at this time and any outcome in favor of Cross could have a significant adverse effect on our financial condition and results of operations.

In 2002, Eurosurgical, a French company in the business of sales and marketing of spinal implants, entered into a distribution agreement for the United States, Mexico, Canada, India and Australia with Orthotec, LLC, a California company, or Orthotec. In 2004, Orthotec sued Eurosurgical in connection with an intellectual property dispute and a $9 million judgment was entered against Eurosurgical by a California court. At the same time, a federal court declared Eurosurgical liable to Orthotec for $30 million. In 2006, Eurosurgical’s European assets were ultimately acquired by Surgiview, SAS, or Surgiview, in a sale approved by a French court. Pursuant to this sale, Surgiview became a subsidiary of Scient’x in 2006. Orthotec attempted to recover on Eurosurgical’s obligations in California and federal courts by filing a motion in a California court to add Surgiview to the judgment against Eurosurgical on theories including successor liability and fraudulent conveyance. In February 2007, the California court dismissed Orthotec’s motion, indicating that Orthotec had not carried its burden of proof to establish successor liability. Orthotec chose to not proceed with a further hearing in June 2007. After the acquisition of Scient’x by HealthpointCapital in 2007, Orthotec sued Scient’x, Surgiview, HealthpointCapital and certain Scient’x directors in the California and New York state and federal courts. In April 2009, the California court dismissed this matter on jurisdictional grounds, and Orthotec has appealed such dismissal. In November 2009, the New York state court dismissed Orthotec’s claims with respect to the other defendants based on collateral estoppel. Orthotec has commenced an appeal of the New York ruling. While we believe that the plaintiff’s allegations are without merit, the outcome of the litigation cannot be predicted at this time and any outcome in favor of Orthotec could have a significant adverse effect on our financial condition and results of operations.

In 2004, Scient’x’s U.S. subsidiary entered into a distribution agreement with DAK Surgical, Inc., an independent distributor, or, DAK Surgical, for the distribution of Scient’x’s products in certain defined sales areas. In September 2007, shortly after the termination of its distribution contract, DAK Surgical filed a lawsuit against Scient’x in which it alleges, among other things, that it is entitled to a change of control payment pursuant to the terminated distribution contract. While the Company believes that the plaintiff’s allegations are without merit, the outcome of the litigation cannot be predicted at this time and any outcome in favor of DAK Surgical could have a significant adverse effect on our financial condition and results of operations.

In August 2009, a complaint filed under the qui tam provisions of the United States Federal False Claims Act, or the FCA, that had been filed by private parties against Scient’x’s U.S. subsidiary was unsealed by the United States District Court for the Middle District of Florida (Hudak v. Scient’x USA, Inc., et al. (Civil Action No. 6:08-cv-1556-Orl-22DAB, U.S. District Court, W.D. Florida). The complaint alleged violations of the FCA arising from allegations that Scient’x engaged in improper activities related to consulting payments to surgeon customers. Under the FCA, the United States Department of Justice, Civil Division, or DOJ, had a certain period of time in which to decide whether to intervene and conduct the action against Scient’x, or to decline to intervene and allow the private plaintiffs to proceed with the case. In August 2009, the DOJ filed a notice informing the court that it was declining to intervene in the case. In December 2009, the private plaintiffs who filed the action moved the court to dismiss the matter without prejudice, the Attorney General consented to such dismissal and the matter was dismissed without prejudice. Despite the dismissal of this matter, the DOJ is continuing its review of the facts alleged by the original plaintiffs in this matter. To date, neither we nor Scient’x have been subpoenaed by any governmental agency in connection with this review. We believe that Scient’x’s business practices were in compliance with the FCA and intend to vigorously defend ourself with respect to the allegations contained in the qui tam complaint, however, the outcome of the matter cannot be predicted at this time and any adverse outcome could have a significant adverse effect on our financial condition and results of operations.

Item 1A.

Risk Factors

There have been no material changes to the risk factors described under Item 1A of Part I of our Annual Report on Form 10-K for the fiscal year ended December 31, 2009, as amended, other than the risk factor set forth below. If any of the risks set forth herein or therein actually occurs, our business, financial condition or results of operations would likely suffer, possibly materially. In that case, the trading price of our common stock could fall.

The adoption of healthcare reform legislation in the United States could have an adverse effect on our business, financial condition or results of operations.

In March 2010, healthcare reform legislation was enacted in the United States. This legislation includes provisions that will impose a 2.3% excise tax on the sale of most medical devices in the United States, including our spinal implant products and systems, starting in 2013. The medical devices excise tax will increase our cost of doing business, and could have a significant impact on our results of operations. If the cost of this tax is not offset by increased demand for our products, other cost reductions or price increases, we could experience lower margins and profitability and our business, financial condition and results of operations could be materially and adversely affected.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Unregistered Sales of Equity Securities

Pursuant to the Credit Facility with SVB and Oxford entered into in December 2008, SVB received a warrant to purchase 190,476 shares of our common stock at $1.89 per share, exercisable for a term of 10 years and Oxford received a warrant to purchase 285,714 shares of our common stock at $1.89 per share, exercisable for a term of 10 years. In March 2010, Oxford exercised all of its warrants pursuant to the cashless exercise provision of its warrant agreement resulting in the issuance of 196,161 shares of our common stock to Oxford. The net value of the shares issued was $1.2 million. Following this exercise, there were no outstanding warrants to purchase shares of the Company’s common stock.

These issuances of securities were made in reliance on an exemption from the registration provisions of the Securities Act set forth in Rule 506 of Regulation D promulgated thereunder and/or Section 4(2) of the Securities Act. The recipients of securities in each such transaction represented their intention to acquire the securities for investment only and not with a view to or for sale in connection with any distribution thereof and appropriate legends were affixed to the share certificates and other instruments issued in such transactions. The sales of these securities were made without general solicitation or advertising.

Issuer Purchases of Equity Securities

Under the terms of our Amended and Restated 2005 Employee, Director and Consultant Stock Plan, or the 2005 Plan, we may award shares of restricted stock to our employees, directors and consultants. These shares of restricted stock are subject to a lapsing right of repurchase by us. We may exercise this right of repurchase in the event that a restricted stock recipient’s employment, directorship or consulting relationship with us terminates prior to the end of the vesting period. If we exercise this right, we are required to repay the purchase price paid by or on behalf of the recipient for the repurchased restricted shares. Repurchased shares are returned to the 2005 Plan and are available for future awards under the terms of the 2005 Plan. Shares repurchased during the three months ended March 31, 2010 were as follows:


Month/Year	Total Number of Shares Purchased (1)	Average Price Paid per Share		Total Number of Shares Purchased as part of Publicly Announced Plans or Programs	Maximum Number of Shares that may Yet be Purchased Under Plans or Programs
January 2010	725	$	0.0005	—	—
February 2010	—	$	—	—	—
March 2010	—	$	—	—	—

(1)

Not included in the table above are 17,266 forfeited and retired shares in connection with the payment of minimum statutory withholding taxes due upon the vesting of certain stock awards or the exercise of certain stock options. In lieu of making a cash payment with respect to such withholding taxes, the holders of such stock forfeited a number of shares at the then current fair market value to pay such taxes.

Item 6.

Exhibits


10.1		Amended and Restated Loan and Security Agreement, dated as of March 26, 2010 by and among Silicon Valley Bank, Oxford Finance Corporation, Alphatec Holdings, Inc. and Alphatec Spine, Inc.

10.2		Loan and Security Agreement, dated as of May 29, 2009, between Oxford Finance Corporation and Scient’x USA, Inc.

10.3		Second Amendment to Loan and Security Agreement, dated as of March 26, 2010, between Oxford Finance Corporation and Scient’x USA, Inc.

10.4*		Employment Agreement, effective March 26, 2010, by and among Alphatec Holdings, Inc., Alphatec Spine, Inc, and Oliver Burckhardt

10.5		Unconditional Guaranty, dated as of March 26, 2010 by Alphatec Spine, Inc. in favor of Oxford Finance Corporation

10.6		Unconditional Guaranty, dated as of March 26, 2010 by Alphatec Holdings, Inc. in favor of Oxford Finance Corporation


31.1		Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32		Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*	Management contract or compensatory plan or arrangement.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


ALPHATEC HOLDINGS, INC.

By:		/s/ Dirk Kuyper
		Dirk Kuyper President and Chief Executive Officer (principal executive officer)

By:		/s/ Peter C. Wulff
		Peter C. Wulff Chief Financial Officer, Vice President and Treasurer (principal financial and accounting officer)

Date: May 10, 2010

Exhibit Index


10.1		Amended and Restated Loan and Security Agreement, dated as of March 26, 2010 by and among Silicon Valley Bank, Oxford Finance Corporation, Alphatec Holdings, Inc. and Alphatec Spine, Inc.

10.2		Loan and Security Agreement, dated as of May 29, 2009, between Oxford Finance Corporation and Scient’x USA, Inc.

10.3		Second Amendment to Loan and Security Agreement, dated as of March 26, 2010, between Oxford Finance Corporation and Scient’x USA, Inc.

10.4*		Employment Agreement, effective March 26, 2010, by and among Alphatec Holdings, Inc., Alphatec Spine, Inc, and Oliver Burckhardt

10.5		Unconditional Guaranty, dated as of March 26, 2010 by Alphatec Spine, Inc. in favor of Oxford Finance Corporation

10.6		Unconditional Guaranty, dated as of March 26, 2010 by Alphatec Holdings, Inc. in favor of Oxford Finance Corporation

31.1		Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32		Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

*	Management contract or compensatory plan or arrangement.