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July 14, 2022 - SHORT ALPHATEC ($ATEC)
Alphatec Holdings, Inc. (“ATEC” or the “Company”) is a medical technology company focused on surgical treatments for spinal disorders. ATEC generates revenues from surgeons using ATEC products in spine surgery procedures.
Since Patrick Miles’ regime change in 2017, ATEC’s purported 65+% revenue growth has vastly exceeded the growth rates of other spine competitors, including Medtronic PLC (NYSE: MDT), Johnson & Johnson (NYSE: JNJ), Stryker Corp. (NYSE: SYK), Zimmer Biomet Holdings Inc. (NYSE: ZBH), NuVasive, Inc. (Nasdaq: NUVA, “NuVasive”), among others.
ATEC attributed its standout performance to a strategic network of third party “independent distributors” responsible for 97% and 92% of total U.S. sales in ’21 and ’20, respectively.
However, evidence shows that ATEC employees and ATEC shareholders were used to secretly operate undisclosed related party distributors since 2017.
In our view, ATEC failed to disclose these related party dealings because of the impact it has on its reported revenues and inventories. We think that ATEC insiders colluded with undisclosed related party distributors to artificially inflate ATEC’s reported revenues and took advantage by selling ATEC stock at artificially inflated prices.
Fake sales resulted in fake costs of goods sold which are reflected as fake inventories on ATEC’s balance sheet.
Since 2018, ATEC’s reported cash outflows due to changes in net inventory levels consistently exceeded changes in net inventory balances on its balance sheet. In aggregate, we calculated a difference of US$ 31 million used to reconcile fake cash receipts.
Since 2017, ATEC shuffled through three (3) different auditors, including a CFO departure that coincided with an auditor change and a FDA product recall.
For revenues generated by independent distributors, court filings and distributor testimonies revealed that ATEC paid “top of the industry” commission rates including “bounty commission” and other undisclosed benefits to entice non-related party distributors to sell ATEC products.
U.S Food and Drug Administration (“FDA”) filings revealed that ATEC failed to disclose a major FDA product recall in 2Q’21, highlighting the extent to which ATEC insiders concealed the weaknesses of ATEC’s product offerings.
ATEC’s low quality sales required significantly higher payouts to distributors which resulted in significantly higher SG&A expenses as a percentage of revenue (94% in ’21, 98% in 1Q’22).
Historically, the more revenues ATEC generated, the more operating losses ATEC generated. With a net debt balance of US$ 177 million as of 1Q’22, we are short ATEC and think its stock is going lower…
Table of Contents:
1. AT LEAST FOUR (4) UNDISCLOSED RELATED PARTY DISTRIBUTORS … p. 2
2. UNDISCLOSED FDA PRODUCT RECALLS INDICATE ISSUES WITH TECHNOLOGY … p. 9
3. COURT FILINGS REVEALED CERTAIN DISTRIBUTOR SALES DOWN SINCE 2018 … p. 11
4. CFO CHANGE & AUDITOR SHUFFLE … p. 13
5. CMO LUIS PIMENTA SOLD 99.9% OF HIS ATEC SHARES … p. 14
6. RED FLAGS: CASH OUTFLOWS, OBSOLETE INVENTORY BALANCE, NET DEBT … p. 15
