Alphatec Holdings, Inc. Annual Report 2011

FY2011 Annual Report · Alphatec Holdings, Inc.

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2011 ANNUAL REPORT

Cover photo: Barb West and her daughter
Jenn Smith

“In 1994, my daughter Jenn underwent surgery to
straighten her back from scoliosis when she was
14 years old. Today, she is a vibrant, happy adult
with a family of her own.

“In 2010, after years of multiple injections and
failed conservative procedures to help with my
back pain, I was left with no choice but surgery.
I consider myself very fortunate to have Alphatec
Spine products in my back. It’s nice to have my
life back and feel whole again.

“Today, my daughter and I are both standing tall!”

Barb West

Since our founding in 1990, we have developed a
full line of vertically integrated products focused
on the treatment of spine disorders from birth
forward for spine surgeons and their patients.

Moving forward, we will remain focused on
driving our differentiated, surgeon-inspired
technologies to improve our patients’ quality of
life. Providing quality fusion products, improved
minimally invasive solutions and integrated
biologics products will be fundamental to our
success.

Cervical
Solanas®

Avalon™ Occipital
Fixation System
FiFiFFiFFiFFiFFiFiiiF xxxaxaaxx titittiononoononnnnoonnonnonnnnnnoonnnnnno SSSSSSSSSSSSSSSS S SSSS SSSSSSysysysysysysysyyyyyy teteteteteett mmmmm

Trestle Luxe® Discocerv®1

PCB
Evolution™1

Thoracolumbar
Zodiac®
Deformity
ttttyyyyyyyyyyyyyyyy

Zodiac®

Aspida®
ALIF Plate

Isobar®1
Evolution

SCS®1
System

TTL-IN™1
System

Interbody
Epicage®

Novel® Spinal

Interbody System Spacer System

Alphatec
Solus®

Samarys® RF1

MIS
Illico®

Illico® SE

Illico® Cannulated ARC®/GLIF®

Screws

Aging Spine
OsseoFix®1

OsseoScrew® 1

HeliFix®1

Biologics
AlphaGRAFT AmnioShield®
PrrPrPrrPrrrrPrPPPrrPrPPrrPrroFoFoFoooooooooo ususu eee®®®
ProFuse®

Structural
AlAlAA loloogrgrgrafafafafafafafaftststss/V/V/VVIPIPIP™™
Allografts/VIP™

PureGen™ Cell
AlAllologrgrgg afafftt
Allograft

1 Not available for sa
1 Not available for sale in the U.S.

2011 Alphatec Spine Annual Report

Life is too short to live with chronic back and neck pain and
Barb West’s family knows all about back pain. Barb loves
to golf and until two years ago, chronic lower back pain
crimped her lifestyle. Now she’s back in the game and the
entire Alphatec Spine team is inspired by her story as well
as thousands of others who have been transformed by their
surgeons and Alphatec Spine’s products. Our products help
people get back to their normal routines in life and to again
“stand tall”, as Barb puts it, after overcoming back pain.

Alphatec Spine is in the business of helping spine surgeons
help patients like Barb who have debilitating back and neck
pain. We are in the business of helping patients get back to the
business of life and we have done a good job in this respect.

As a publicly traded company, we are also in the business
of providing our shareholders with a fair return and we
are working hard to improve upon our performance in the
future.

As Alphatec Spine’s former Chairman of the Board of
Directors and newly appointed Chairman and Chief
Executive Ofﬁcer, I am pleased to address the Company’s
shareholders for the ﬁrst time in our 2011 Annual Report.
I want to reﬂect on the lessons we learned in 2011 and share
with you our plans for growth in 2012 and beyond.

Looking back at 2011

In 2011, the spine industry and Alphatec Spine experienced
a number of changes and challenges.

Continuing uncertainty in the global economy coupled
with global reimbursement pressures have led to persistent
healthcare utilization challenges for patients needing access
to certain types of medical care. In turn, this ongoing trend
has affected the medical device industry and speciﬁcally
Alphatec Spine as some patients were and continue to be
redirected to more conservative and non-operative solutions
to resolve their chronic back and neck pain. As a result,
pricing pressure in 2011 remained challenging and industry
analysts believe that revenue growth in the spine market was
s
at best ﬂat by the end of the year.

In spite of these market conditions, we were pleased to report
rt
that our sales were a record $197.7 million for 2011, growing
g
15.2% over 2010. On a pro forma basis, accounting for the
Scient’x acquisition and normalizing for foreign currency
exchange rate beneﬁts in 2011, our growth rate for 2011 was
5.8%. Our ability to grow under difﬁcult market conditions
reﬂects our broad spine product portfolio, which addresses
key treatment modalities for the spine, and an expanding
geographical footprint that markets and sells Alphatec Spine
ee
products in 50 countries globally.

While sales grew in 2011, we continued to work through
operational issues at Alphatec Spine, including right-sizing
our global expense proﬁle and effectively managing our
inventory worldwide. As a consequence, our proﬁtability
lagged behind our expectations. That said, we did meet
our goal of generating positive cash ﬂow for the year from
business operations, excluding additional payments we
made on our working capital line of credit.

Revenues

$171.6

$197.7

$250.0

$200.0

$150.0

$100.0

$50.0

$120.6

$-
$ in Millions

2009

2010

2011

ade substan
e also maade substantial pro

In 2011, we also made substantial progress in strengthening
ogress in s
ogress in strengthening
n 2011
the global business leadership of Alphatec Spine. We brought
on board senior leaders in Regulatory, Clinical Affairs and
Quality, Global Marketing and Operations to complement
leaders in Finance and Human Resources that had joined us
in late 2010.

It was also another year of innovative new product
development at Alphatec Spine. Three new products came
to the market as either a full-market release or a limited
beta release. These included our next-generation anterior
cervical plate, Trestle Luxe, our Avalon occipital ﬁxation
system and our Epicage Interbody system.

In 2011 we expanded our global footprint In Latin America
by completing the acquisition of Cibramed Products
Medicos Ltda, a Brazilian medical device company, from
which we now base our Latin American operations. We also
commenced operations in Australia in the fourth quarter of

2011 Sales by Reporting Segment

2011 Spine Channel Sales

68% US
32% International

80% Core Fusion
20% Growth Channels

MIS, Biologics,
Aging Spine

2011 through a new distribution partner. Our international
strategy remains focused on new markets, especially the
emerging markets in China and Asia Paciﬁc, and Latin
America to strengthen our global diversiﬁcation.
We continue to be very pleased with our performance in
Japan, which consistently delivered strong growth in 2011.

Looking forward to 2012

As challenging as 2011 was, the actions we took to
strengthen Alphatec Spine should position us for a better
year in 2012.

Given the complexities of the spine market today and our
operational needs internally, we have realigned the top
leadership roles at the Company in order to maximize
our business prospects in 2012. Dirk Kuyper, President,
Global Commercial Operations and I, in collaboration
with a strong team of experienced senior leaders across all
functions of our business, will take a “divide and conquer”
approach to unleashing the stakeholder value of Alphatec
Spine. Dirk will focus on the commercial side of our
business, including global marketing and sales strategies,
corporate accounts and medical education, with a clear
focus on driving revenue growth. I will focus on our
initiatives related to global operating excellence, including
innovation and a continuous ﬂow of new products, talent
development, improving our proﬁtability and cash ﬂow
and delivering a world-class customer experience.

With both of us focused on our respective areas, we hope
that this realignment will strengthen Alphatec Spine’s
ability to more effectively navigate a difﬁcult spine market
as we seek to ensure that we meet our proﬁtability and cash
ﬂow goals for the year.

Longer-term, we continue to believe the spine market’s
fundamentals remain strong as the global population ages
and the prevalence of disease states such as obesity, diabetes
and osteoporosis increases. We will continue to address
the current market conditions by controlling what we can;
focusing on innovation to maintain a continuous ﬂow of
new products; improving the productivity of our sales
force; developing our top talent; creating great outcomes for
our patients; expanding our global footprint and reducing
our manufacturing costs and operating expense structure
to drive improving proﬁtability and cash ﬂow.

We look forward to 2012 being Alphatec Spine’s best year
ever. I am conﬁdent we have the right products, strategies
and global team in place to be successful in 2012 and beyond.
With the realignment of Dirk’s and my responsibilities, we are
undertaking a bold new paradigm that we believe will allow
Alphatec Spine to take advantage of the opportunities and
dislocations in the U.S. and global spine markets. You have
our commitment that Alphatec Spine will remain dedicated
to conducting its business ethically and with a sense of
urgency, accountability and excellence.

Sincerely,

Dirk Kuyper

Les Cross

President, Global
Commercial Operations

Chairman and Chief
Executive Ofﬁcer

Life Is Too Short to Live with Chronic Back Pain

At Alphatec Spine, we believe patients should not have to
live with chronic back and neck pain. Our products help
patients regain their active lifestyles.

In the U.S., almost everyone will experience back or neck
pain at some point in their life, interfering with work, daily
routines and recreational activities. Low back pain is the
most common cause of job-related disability and a leading
contributor to missed work hours. Back pain treatment
accounts for approximately $50 billion in yearly healthcare
expenditures in the U.S. With the exception of headaches,
back pain is the most common neurological ailment in the
United States. 1

While low back pain usually resolves itself, many patients
develop more severe chronic conditions from overuse,
injury, deformities, tumors and even sedentary life styles.
Additionally, the risk of experiencing low back pain from
disc disease or spinal degeneration increases with age.
Severe, chronic back pain can become so debilitating that
patients often suffer from some level of depression, further
spiraling the patient’s health downward. 1

For some patients, such as Barb West, non-operative
therapy does not resolve the pain and patients are left with
no other choice but spinal surgery to relieve their pain.
That’s where Alphatec Spine’s solutions can help.

What Does Alphatec Spine Stand For?

At Alphatec Spine, our commitment is to deliver product
innovations to better treat spinal disorders. With
the Company’s roots ﬁrmly planted in the design and
manufacturing of innovative medical devices, Alphatec
Spine is rapidly transforming its ideas and surgeon-
inspired insight into sophisticated devices that advance the
standard of care for patients suffering from spinal disorders
and helping them regain their active lifestyles as quickly
as possible. At Alphatec Spine, product development is a
collaborative effort between spine surgeons, our dedicated
employees and our Scientiﬁc Advisory Board. Our
Scientiﬁc Advisory Board is a group of highly experienced
and respected spine surgeons and our collaboration ensures
that our product innovations keep advancing improved
patient care in the operating room.

1 National Institute for Neurological Disorders and Stroke

OsseoFix and OsseoScrew are not approved for sale in the U.S.

Trauma reconstruction using OsseoScrew
and OsseoFix

OsseoFix

Trestle Luxe Anterior
Cervical Plating System

Illico SE

Alphatec Spine also provides state-of-the-art medical
education on a global scale. Our Medical Education
department organizes surgical training programs that
One in ten women under the age of 35 suffers from
are conducted by experienced spine surgeons to advance
debilitating backpain which can lead to chronic depression.
learning and surgical skills for improved patient outcomes.
Training programs focus on the latest innovations in surgical
techniques, such as minimally invasive surgery (MIS), as well
as the Company’s new product innovations. Alphatec Spine’s
medical education training is primarily conducted at its bio-
skills lab in Carlsbad, California and a third-party facility in
Vienna, Austria, as well as other locations around the world.

As one of the few vertically integrated spinal implant
manufacturing companies, Alphatec Spine bridges in-house
product development with the operating room through our
advanced manufacturing group, a specialized cadre of employees
who keep feet ﬁrmly planted in both design engineering and
manufacturing disciplines. In this way, we shorten the product
development cycle by making and testing prototypes for
accelerated time to market. This more effectively serves surgeons
and their patients with the most innovative and highest-quality
spinal implant solutions and instrumentation.

Today, Alphatec Spine offers a broad portfolio of spine
solutions, encompassing virtually every segment of spinal
disorders. Our products include implants and instrumentation for
treating cervical, thoracolumbar, tumor and trauma issues in open
and minimally invasive procedures, both while using biologics
to improve outcomes. We also have cutting edge technologies
for motion preservation and the aging spine, which are not yet
available in the U.S.

At the heart of Alphatec Spine’s value proposition is a dedicated
workforce and culture of urgency, accountability and
performance excellence. These are important traits given the
competitive landscape in the spine market, where innovation and
speed to market are critical to provide leading-edge solutions that
help patients who suffer from debilitating back pain.

Alphatec Spine’s products help people around the world. We are
focused on global commercialization, with our products
currently distributed in over 50 countries. We have a strong
presence throughout the world, with a direct sales force in France,
the United Kingdom, Italy and Japan. Elsewhere in Europe, the
Middle East, Africa, Asia Paciﬁc and Latin America, we utilize our
network of local distributors. Emerging market penetration is key
to Alphatec Spine and remains a focal point of our international
distribution strategy.

At Alphatec Spine, we believe in strengthening communities
through charitable donations and employee volunteerism. We are
proud of the many organizations and programs we have supported
over the years that enrich communities around the world and
advance spine research. We are especially proud to be supporting
the efforts of Project Walk.® Project Walk is an internationally
recognized non-proﬁt organization that exists to provide an
improved quality of life for people with spinal cord injuries
through intense exercise-based recovery programs, education,
support and encouragement.

At Alphatec Spine, we are proud of our employees and proud
of what we stand for; integrity, professionalism, dedication and
caring in everything we do. It is important to us that we are helping
surgeons and other healthcare providers improve the quality of
life of patients who suffer from spinal disorders so they can “stand
tall” and get back to the business of life. Just as Barb West and her
daughter Jenn did.

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

Form 10-K

(Mark One)
È ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2011

‘ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934
For the transition period from

Commission file number: 000-52024

ALPHATEC HOLDINGS, INC.

(Exact Name of Registrant as Specified in its Charter)

Delaware
(State or Other Jurisdiction of
Incorporation or Organization)
5818 El Camino Real, Carlsbad,
California
(Address of Principal Executive Offices)

20-2463898
(I.R.S. Employer
Identification No.)

92008
(Zip Code)

(760) 431-9286
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Exchange Act: None

Title of Each Class

Name of Each Exchange on Which Registered

Common Stock, par value $0.0001 per share

The NASDAQ Global Select Market

Securities registered pursuant to Section 12(g) of the Act:

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities

Act. Yes ‘ No È

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the

Act. Yes ‘ No È

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 È 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 during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files). Yes È No ‘

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ‘

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer,

or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting
company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ‘
Non-accelerated filer ‘ (Do not check if a smaller reporting company)
Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities

Accelerated filer È
Smaller reporting company ‘

Exchange Act of 1934). Yes ‘ No È

The aggregate market value of the registrant’s common stock held by non-affiliates of the registrant (without
admitting that any person whose shares are not included in such calculation is an affiliate) based on the last reported sale
price of the common stock on June 30, 2011 was approximately $192.0 million.

The number of outstanding shares of the registrant’s common stock, par value $0.0001 per share, as of February 29,

2012 was 89,592,795.

DOCUMENTS INCORPORATED BY REFERENCE

The following documents (or parts thereof) are incorporated by reference into the following parts of this Form 10-K:

Certain information required in Part III of this Annual Report on Form 10-K is incorporated from the Registrant’s Proxy
Statement for the 2012 Annual Meeting of Stockholders.

ALPHATEC HOLDINGS, INC.

FORM 10-K—ANNUAL REPORT
For the Fiscal Year Ended December 31, 2011

Table of Contents

PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.

PART II
Item 5.

Item 6.
Item 7.

Item 7A.
Item 8.
Item 9.

Item 9A.
Item 9B.

PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.

PART IV
Item 15.

Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Removed and Reserved . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer

Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Management’s Discussion and Analysis of Financial Condition and Results of

Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Changes in and Disagreements with Accountants on Accounting and Financial

Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Security Ownership of Certain Beneficial Owners and Management . . . . . . . . . . . . . . . . . . .
Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . .
Principal Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Page

1
19
44
44
44
46

47
48

49
69
69

69
69
72

73
73
73
73
73

Exhibits, Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

[THIS PAGE INTENTIONALLY LEFT BLANK]

Item 1.

Business

PART I

We are a Delaware corporation. We were incorporated in March 2005. Our principal executive office is
located at 5818 El Camino Real, Carlsbad, California 92008. In this Annual Report on Form 10-K, the terms
“we,” “us,” “our,” “Alphatec Holdings” and “Alphatec” mean Alphatec Holdings, Inc. and our subsidiaries.
“Alphatec Spine” refers to our wholly-owned operating subsidiary Alphatec Spine, Inc. and “Scient’x” refers to
our wholly-owned operating subsidiary, Scient’x S.A.S., and its subsidiaries.

Our Internet address is www.alphatecspine.com. By referring to our website, we do not incorporate the
website or any portion of the website by reference into this Annual Report. We are not including the information
contained on our website as a part of, or incorporating it by reference into, this Annual Report on Form 10-K.
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all
amendments to those reports, are available to you free of charge through the Investor Relations section of our
website as soon as reasonably practicable after such materials have been electronically filed with, or furnished to,
the Securities and Exchange Commission.

Overview

We are a medical technology company focused on the design, development, manufacturing and marketing

Strategy

Our strategy is to be the world’s 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 treating patients who suffer from poor bone density, vertebral compression fractures, adult
deformity or scoliosis, degenerative disc disease, and spinal stenosis. To further differentiate our solutions, we
have incorporated minimally invasive access techniques and biologics-based solutions into our portfolio to
improve patient outcomes. 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 are a critical component of the product development process. Accordingly, we view our
relationship with the surgeon community as an integral component of our strategy.

The key elements of our strategy are:

• Provide a Full Range of Spine Disorder Products and Continually Expand our Product Offerings. We offer
a full range of spinal devices and surgical instruments used to treat spine disorders. We believe that this
comprehensive approach enables us to maximize our revenue for each procedure by fulfilling a greater

portion of a surgeon’s spine product needs. We intend to continue to enhance our product offerings by
developing technologies that we can market through our sales organization to our established surgeon base
and surgeons not yet using our products.

• Focus on Underserved and Rapidly Growing Segments of the Market. We are focused on creating solutions
to address the rapidly growing elderly demographic and the unique issues facing such patients. We will
focus on less invasive implants and techniques, and solutions for adult onset deformities, vertebral
compression fractures, stenosis and issues related to patients with poor bone quality, each of which
represents a large underserved market segment. We believe that our strategic focus in underserved and
rapidly growing areas will offer us increased revenue and deeper market penetration.

• Enhance U.S. Sales and Marketing Efforts. Our products are sold in the U.S. through a network of over 115

independent distributors, which we believe employ approximately 275 sales representatives. We also
employ 30 direct sales representatives and sales management employees and executives. We continually
seek to increase the number and quality of our independent distributors, direct sales representatives, sales
management employees and executives.

• Develop Innovative Products and Solutions in Conjunction with Surgeons. One of our core competencies is
our ability to develop and commercialize creative spinal implants and instruments that incorporate concepts
and feedback from surgeons. We collaborate with surgeons to help us to enhance our current products and
develop innovative new technologies. We believe that our short-term and long-term product pipeline will
offer us increased revenue opportunities by addressing a wider range of spine disorders, and improving
patient outcomes.

• Grow our International Business. As the result of our acquisition of Scient’x, which transaction closed in
March 2010, we now have an established global platform from which we can grow internationally. In
addition to our previously existing subsidiaries in Japan and Hong Kong, as a result of the Scient’x
acquisition we added a direct sales force in each of France, Italy and the U.K., and independent distributors
in Europe, South America, the Middle East, Africa, Asia and Latin America. We plan to continue expanding
our distribution network and product offerings throughout the world.

Spine Anatomy

The human spine is the core of the human skeleton and provides important structural support while

remaining flexible to allow movement. The human spine is a column of 33 bones that protects the spinal cord and
enables people to stand upright. Each bony segment of the spine is referred to as a vertebra (two or more are
called vertebrae). The spine has five regions containing groups of similar bones, listed from top to bottom: seven
cervical vertebrae in the neck, 12 thoracic vertebrae in the mid-back (each attached to a rib), five lumbar
vertebrae in the lower back, five sacral vertebrae fused together to form one bone in the hip region, and four
coccygeal bones fused together that form the tailbone. At the front of each vertebra is a block of bone called the
vertebral body. The vertebral body consists of an inner core of soft cancellous bone, surrounded by a thin outer
layer of hard cortical bone. Vertebrae are stacked on top of each other and enable people to sit and stand upright.
Vertebrae in the cervical, thoracic and lumbar regions are separated from each other and cushioned by a rubbery
soft tissue called the intervertebral disc. Segments of bone that extend outward at the back of each cervical,
thoracic and lumbar vertebral body surround and protect the spinal cord and its nerve roots. These bones, known
as the posterior spinous processes, can be felt along the middle of a person’s back.

Disorders Affecting the Spine

There are four major categories of spine disorders: degenerative conditions, deformities, trauma-based
disorders and tumors. While our product offering addresses all four categories of spine disorders, the majority of
our business is concentrated on products used in the treatment of degenerative and deformity conditions. These
conditions can result in instability and pressure on the nerve roots as they exit the spinal column, causing back
pain and potentially pain in the arms or legs.

Some of the most common degenerative conditions and deformities affecting the spine are as follows:

• Degenerative disc disease is a common medical condition affecting the cervical, thoracic and lumbar

regions of the spine and refers to the degeneration of the disc from aging and repetitive stresses, resulting in
a loss of flexibility, elasticity and shock-absorbing properties. As degenerative disc disease progresses, the
space between the vertebrae narrows, or the disc can bulge or rupture, which can pinch the nerves exiting
the spine and result in back pain, leg pain, numbness and loss of motor function. This back pain can be
overwhelming for patients as the resulting pain can have significant physical, psychological and financial
implications.

• A Vertebral compression fracture, or VCF, occurs when a vertebra in the spinal column fractures or

collapses. Vertebral compression fractures have multiple acute and chronic consequences, including back
pain, loss of back function and diminished quality of life. Chronic consequences of a VCF can also result in
pulmonary and gastric dysfunction, as well as depression. Deformity resulting from a VCF worsens these
problems and can increase the risk of another fracture, which can further exacerbate complications from the
initial VCF, including an increase in the loss of mobility and ultimately increased mortality.

•

Spinal stenosis is a narrowing of the spinal canal, which places pressure on the spinal cord. If the stenosis is
located on the lower part of the spinal cord it is called lumbar spinal stenosis. Stenosis in the upper part of
the spinal cord is called cervical spinal stenosis. While spinal stenosis can be found in any part of the spine,
the lumbar and cervical areas are the most commonly affected. Some patients are born with this narrowing,
but most often spinal stenosis is seen in patients over the age of 50. In these patients, stenosis is the gradual
result of aging and wear and tear on the spine during everyday activities.

Spondylolisthesis occurs when one vertebra slips forward in relation to an adjacent vertebra, usually in the
lumbar spine. The symptoms that accompany spondylolisthesis include pain in the lower back and legs, and
muscle spasms and weakness. Spondylolisthesis can be congenital or develop later in life. The disorder may
result from physical stresses to the spine, intense physical activity, and general wear and tear.

The Alphatec Solution

Our principal product offering includes a wide variety of spinal implant products and systems comprised of

components such as spine screws and rods, spinal spacers, plates, and various biologics offerings. In addition,
outside of the U.S. we sell solutions for treating vertebral compression fractures and spinal stenosis. Certain of
our biologics offerings are used as an alternative to synthetic products while others complement our synthetic
products by promoting fusion.

The chart below illustrates our broad portfolio of currently marketed spine systems and our systems under
development by market segment. Certain systems and products are described in greater detail below the chart.
Items marked with an asterisk are not available for sale in the U.S.

Current Products:

Market Segment

Cervical and Cervico-thoracic

Thoracolumbar Fixation

Spinal Spacers

Minimally Invasive Surgery (MIS)

Aging Spine

Biologics

Key Products

Trestle Anterior Cervical Plate
Trestle Luxe Anterior Cervical Plate
Solanas Posterior Cervico/Thoracic Fixation System
Avalon Occipital Plate
DiscoCerv Artificial Disc*
PCB Evolution*

Zodiac Degenerative Fixation System
Zodiac Deformity Fixation System with Smart Set
TTL IN Fixation System
Xenon Fixation System
Isobar Evolution Dynamic Rod*
Aspida Anterior Lumbar Interbody Plate System
TTL-D Fixation System*
Hemi Fixation System

Novel Spinal Spacers
Alphatec Solus Locking ALIF Spacer
Samarys*/Samarys RF*
TeCorp*

Illico MIS System
GLIF/ARC Portal Access System
OsseoScrew MIS System*
Epicage TLIF System

OsseoFix Spinal Fracture Reduction System*
OsseoFix+ Vertebroplasty System
OsseoScrew Spinal Fixation System*
HeliFix Interspinous Spacer System*

AlphaGraft Structural Allograft Spacers
AlphaGraft Demineralized Bone Matrix
PureGen Osteoprogenitor Cell Allograft
AlphaGraft ProFuse Demineralized Bone Scaffolds
AmnioShield Amniotic Membrane
AlphaGUARD Anterior Vessel Guard

Products in Development (None of the following products are currently available for sale):

Market Segment

Key Products

Cervical and Cervico-thoracic

Preview Anterior Cervical Plate

Thoracolumbar

MIS

Aging Spine

Next-Generation Degenerative and Deformity Fixation
Systems

Raptor Facet Fixation System

OsseoFix Next-Generation Implant

Cervical and Cervico-Thoracic Products

Trestle Luxe Anterior Cervical Plate System

Our Trestle Luxe Anterior Cervical Plate System has a large window that enables the surgeon to have
improved graft site and end plate visualization; which is designed to allow for better placement of the plate. The
Trestle Luxe Anterior Cervical Plate System also has a low-profile design, which we believe is among the lowest
in the spine market. Low-profile cervical plates are intended to reduce the irritation of the tissue adjacent to the
plate following surgery. Other key features of the Trestle Luxe Anterior Cervical Plate system include a self-
retaining screw-locking mechanism that is designed to ensure quick and easy locking of the plate and a flush
profile after the screws are inserted.

Solanas Posterior Cervico/Thoracic Fixation System and Avalon Occipital Plate

Our Solanas Posterior Cervico/Thoracic Fixation System consists of rods, polyaxial screws, hooks, and
connectors that provide a solution for posterior cervico/thoracic fusion procedures. We also designed the Solanas
Posterior Cervico/Thoracic System to be used in combination with our existing Zodiac Degenrative Fixation
System and our Avalon Occipital Plate, thereby providing surgeons with a solution for occipito-cervico-thoracic
fixation. The Avalon Occipital Plate has a unique buttress design for optimal bone graft placement and superior
fusion, including three points of plate rotation and translation, which is designed to ease the placement of the
plate.

Thoracolumbar Fixation Products

Zodiac Degenerative Fixation System

Our Zodiac Degenerative Fixation System is a comprehensive spinal system that offers a wide variety of
polyaxial pedicle screws, connectors and advanced instruments. We believe our Zodiac Degenerative Fixation
System offers surgeons one of the lowest profiles, or the height that the screw sits above the plane of the rod after
insertion, among polyaxial screws currently on the market. This low profile reduces the amount of internal
disruption of tissue adjacent to the pedicle and is intended to speed the healing cycle. Our Zodiac Degenerative
Fixation System has a unique set-screw closure mechanism that helps to ensure that the assembly is easily
constructed during surgery. It also has pre-cut and pre-contoured rods that are available in several sizes, which
allow surgeons to customize each construct depending on the patient’s needs. Our Zodiac Degenerative Fixation
System is designed to be used in connection with our Novel Spinal Spacers and our AlphaGraft Structural
Allograft Spacers.

Zodiac Deformity Fixation System with Smart Set

Our Zodiac Smart Set Deformity Fixation System is a comprehensive system of instrumentation and
implants designed to enable the surgeon to address patient-specific spinal deformity procedures. Our Zodiac
Smart Set is designed to be used in conjunction with the Zodiac Deformity Fixation System, as well as many of
our other products, including our Zodiac Degenerative Fixation System, our Novel Spinal Spacers and our
AlphaGraft Structural Allograft Spacers. Our Zodiac Smart Set has several components that are frequently used
in deformity surgeries, such as fixed and uniplanar screws, rods in multiple alloys, hooks, connectors and
deformity specific instrumentation.

Aspida Anterior Lumbar Interbody Fusion, or ALIF, Plate System

Our Aspida ALIF Plate System is designed to be used in conjunction with a spacer, and is intended to offer
comparable stabilization to pedicle screw and rod systems. Our Aspida ALIF Plate System is designed to provide
surgeons with the option of performing a single anterior procedure without having the need for a complementary
posterior procedure. The Aspida ALIF Plate System is designed to be anatomically shaped and have a low
profile, which is intended to minimize the risk of irritation or damage to the adjacent tissue.

Spinal Spacers

Novel PEEK and Titanium Spinal Spacers

Our family of Novel spacers addresses the surgical need to accommodate varying patient anatomies,
surgical approaches and composite material options. We offer multiple unique implant designs, each of which is
available in numerous shapes and heights. Certain of our Novel spacers are made of titanium and others are made
of a strong, heat resistant, radiolucent, biocompatible plastic called polyetheretherketone, or PEEK. Our Novel
PEEK spinal spacers have been approved for use in both the lumbar and cervical regions of the spine. A PEEK
spacer is not visible during a magnetic resonance imaging, which allows the surgeon to better assess the progress
of the healing process following surgery. Novel spacers and their accompanying instrumentation are designed to
be inserted from several planes of the body to accommodate surgeons’ needs. Novel spacers feature sizable
central openings that help accommodate the placement of bone grafting material inside and around the spacer,
which we believe promotes fusion. A ridge pattern on the top and bottom of our Novel spacers helps prevent
movement after placement and enhances the stability of the overall construct.

Alphatec Solus Locking ALIF Spacer

Our Alphatec Solus locking spinal spacer is a zero-profile PEEK and titanium device offering four points of

fixation for improved stability. Alphatec Solus features a one-step insertion and deployment feature and is used
in ALIF procedures. We believe that Alphatec Solus’ locking mechanism is a substantial upgrade over similar
products currently on the market.

Minimally Invasive Surgery, or MIS Products

Illico Minimally Invasive Surgery System

The Illico Minimally Invasive Surgery System is a cannulated pedicle screw and rod system that is designed
to be inserted via a minimally invasive surgical procedure. Access to the spine is gained through a small incision.
The surgeon is then able to see the surgical site by using a small canal through which implants are inserted into
the patient with a minimum amount of disruption to the surrounding tissue. We believe that the Illico System
limits trauma to the tissue surrounding the location of the surgery, which is designed to enable patients to recover
faster.

Guided Lumbar Interbody Fusion, or GLIF and ARC Portal Access System

Our GLIF technique, used in conjunction with our ARC Portal Access System, is a unique access system

that is designed to allow surgeons to perform a minimally invasive procedure from multiple surgical planes
without the need for a second incision or repositioning of the patient. The GLIF technique is intended to reduce
the length of the procedure, reduce trauma to the patient and reduce the post-surgery recovery period.

Aging Spine

OsseoFix Spinal Fracture Reduction System

Our OsseoFix system provides a solution for VCF indications. The OsseoFix implant is an expandable

titanium cage that is designed to be implanted in a minimally invasive manner into a vertebral body to treat a
VCF. The OsseoFix system is designed to provide the surgeon with control over the placement and expansion of
the device as the fracture is treated. In addition, the OsseoFix system is designed to use less PMMAbone cement
than current standards of care and may overcome one of the primary complications of kyphoplasty and
vertebroplasty, which is the potential risk of extravasation of PMMA bone cement into the spinal canal or venous
system. In early 2012, the Company filed an Investigational Device Exemption with the U.S. FDA to begin a
clinical study of the OsseoFix System. The OsseoFix System is available for sale in the European Union.

OsseoScrew Spinal Fixation System

The OsseoScrew Spinal Fixation is an innovative pedicle screw system that is designed to provide a solution

for patients who have poor bone density. The OsseoScrew is designed to be implanted into the pedicle and then
expanded after implementation to achieve increased screw fixation in bone with poor density. We believe that the
OsseoScrew Spinal Fixation System will help us reach our goal of providing solutions targeted at serving the
needs of the spine surgeon and the aging spinal segment of the marketplace. The OsseoScrew System is not
available for sale in the U.S. The OsseoScrew Spinal Fixation System is available for sale in the European Union.

Helifix Interspinous Spacer System

Our Helifix Interspinous Spacer System is designed to be inserted in a minimally invasive manner into a

patient’s spinous process to treat lumbar spinal stenosis. Helifix is a non-fusion interspinous device designed to
provide relief from lumbar spinal stenosis by widening the spinal canal and decompressing the level of the
compressed nerve, providing flexion in the posterior elements. The Helifix Interspinous Spacer System is not
available for sale in the U.S. The Helifix Interspinous Spacer System is available for sale in the European Union.

Biologics

AlphaGraft Structural Allograft Spacers

We offer a broad portfolio of allograft spacers available in a wide range of shapes and sizes, each with

corresponding instrumentation, which are intended for use in the cervical, thoracic, and lumbar regions of the
spine. In addition, many of our allograft spacers are packaged in our VIP packaging system. VIP is a packaging
and fluid delivery system that allows for fast and efficient infusion of the surgeon’s choice of hydration fluid.
The VIP system provides rapid and uniform hydration reducing the brittleness of the graft and reducing the
length of a surgical procedure.

PureGen Osteoprogenitor Cell Allograft

Our PureGen Osteoprogenitor Cell Allograft is a unique adult stem cell that supplements the body’s own
cells and helps to stabilize the repair site allowing the healing process to advance naturally and efficiently. There
is a significant clinical need to improve fusion rates, especially in patients with impaired wound healing due to
age, obesity, diabetes, smoking, anti-inflammatory meds, and other factors. PureGen is a safe and natural
alternative to autograft, and other expensive fusion options.

AlphaGraft ProFuse Demineralized Bone Scaffold

Our AlphaGraft ProFuse Bone Scaffold consists of a sponge-like demineralized bone matrix that has been

pre-cut into sizes to fit within a spinal spacer. The AlphaGraft ProFuse product provides a natural scaffold
derived entirely of bone that can be placed into a void within a spinal spacer or on top of a spinal spacer. The
sponge-like qualities of the scaffold allow a surgeon to compress the scaffold and place it into a small space.
Following placement, the scaffold expands for maximum contact between the spinal spacer and the endplate of
the vertebral body and is designed to promote fusion. The AlphaGraft ProFuse scaffold comes pre-packaged in
our proprietary VIP vacuum infusion packaging system.

Amnioshield Amniotic Tissue Barrier

Our Amnioshield Amniotic Tissue Barrier is an allograft for spinal surgical barrier applications. The

composite amniotic membrane reduces inflammation and enhances healing at the surgical site, reduces scar
tissue formation and provides an excellent dissection plane.

Alphagraft Demineralized Bone Matrix

Our Alphagraft Demineralized Bone Matrix consists of demineralized human tissue that is mixed with a

bioabsorbable carrier and used in surgery for bone grafting.

Sales and Marketing

Our U.S. sales force consists of over 115 independent distributors, which we believe employ approximately

275 agents dedicated to selling our products in the U.S., and 30 direct sales representatives and sales
management employees and executives. In general, in the U.S., although surgeons in the U.S. make the ultimate
decision to use our products, we bill hospitals for the products that are used and pay commissions to our
independent distributors and direct sales agents based on payments received from hospitals. In general, outside of
the U.S. we sell products directly to distributors, and the distributors resell the products to hospitals. We
compensate our sales management employees and sales executives through salaries and incentive bonuses based
on performance measures. We select our sales force based on their expertise in selling spinal devices, reputation
within the surgeon community, geographical coverage and established sales network. Increasingly, we
contractually require our distributors to exclusively sell our products both within and outside of their allocated
sales territory. We offer sales and product training to each of our independent distributors and direct sales
representatives. We market our products at various industry conferences, organized surgical training courses, and
in industry trade journals and periodicals. We plan on expanding our global sales coverage through the use of
additional distributors and direct sales representatives in order to support continued adoption of our products by
new surgeons and increased use of our products by surgeons who currently use our products.

In France, Italy and the U.K. we have a direct sales force consisting of approximately 20 direct sales
representatives, and in the rest of Europe we have approximately 50 independent distributors. We have 15 direct
sales representatives in Japan and 11 independent distributors in the rest of Asia. In Latin America and South
America we conduct our sales and marketing activities through our subsidiary, Cibramed Products Medicos
Ltda., which we plan to rename Alphatec Spine do Brazil. Currently, we have 5 sales and marketing employees
in Latin America and South America, and 12 independent distributors selling our products in Latin America and
South America.

In the markets in which we have a direct sales force, we bill the hospitals for the products that are used. In
markets that use independent distributors, we sell our products to the distributor, and the distributor resells the
products to the hospital. We plan to continue expanding our direct sales and distribution network and product
offerings throughout the world. Similar to our sales and marketing activities in the U.S., outside of the U.S. we
market our products at various international industry conferences, organized surgical training courses, and in
industry trade journals and periodicals. In addition, we host several international educational conferences,
including the International Spine Research and Innovation and Argos and Sisyphean Spinal Society meetings, in
the United States, Europe, Asia and Latin America and South America.

Surgeon Training and Education

We devote significant resources to train and educate surgeons in the proper use of our implants,

instrumentation, and surgical access technologies. We believe that one of the most effective ways to introduce
and build market demand for our products is by training and educating spine surgeons, independent distributors,
and direct sales representatives in the benefits and use of our products. We believe that surgeons, independent
distributors, and direct sales representatives will become exposed to the merits and distinguishing features of our
products through our training and education programs, and in doing so, will increase the use and promotion of
our products.

Research and Development

Our research and development department has extensive experience in developing products to treat spine
pathologies. Our research and development department works closely with our Scientific Advisory Board and
surgeon collaborators to design products that are intended to improve patient care, simplify surgical techniques
and reduce overall costs. We are focusing our research and development efforts in two major strategic areas.
First, we focus on continually enhancing and upgrading our current product portfolio and supplementing it with
new products where appropriate. Second, we devote significant resources to developing complementary products
and unique technologies to create new solutions to address spinal pathologies that affect the aging spine. Our
goal is to become the market leader in providing solutions for the aging spine by developing products that have
superior efficacy for patients who suffer from conditions that disproportionally affect the aging spine, such as
poor bone density, VCFs, adult deformity or scoliosis, degenerative disc disease and spinal stenosis. We also
plan to continue development programs initiated by Scient’x for developing and commercializing semi-rigid
technologies for dynamic fusion, cervical disc arthroplasty and minimally invasive access techniques. In order to
further promote this strategy, we are focused on converting these research and development programs into
commercially viable products that incorporate minimally invasive access techniques and biologics solutions to
improve patient outcomes across all of our product lines.

Manufacture and Supply

We conduct a large portion of our manufacturing operations at our facilities in Carlsbad, California,

although we also manufacture products at our facility in Beaurains, France. We manufacture a significant amount
of our non-biologic implants in-house. Certain of our implants and a significant amount of our instrumentation
are purchased from third parties. We believe that the in-house production of our implants maximizes efficiency,
reduces product development time, simplifies production scheduling, reduces inventory backlogs and is more
responsive to the changing needs of surgeons. Our facilities include distinct areas dedicated to the machinery,
tooling, quality control, cleaning and labeling of our products. Additionally, we have an advanced manufacturing
group that includes design engineering and manufacturing personnel. The advanced manufacturing group is
dedicated to providing rapid prototyping and innovative custom instrumentation for our research and
development programs and our surgeon customers.

We devote significant time and attention to ensure that all of our products are safe, effective, adhere to all
applicable regulations and are of the highest quality. An established and comprehensive quality system drives our
focus from the initial translation of surgeon needs into design specifications through an exhaustive series of
quality control checks that are performed through the purchasing, production, and packaging of our products. We
record the complete production history for every product, ensuring full traceability from the raw material stage
through the delivery of the product into the marketplace.

Following the receipt of products or product components that we receive from third parties, we conduct
inspection, quality control, packaging and labeling, as needed, at our manufacturing facilities. The raw materials
used in the manufacture of our products are principally titanium, titanium alloys, stainless steel, cobalt chrome,
ceramic, allograft and PEEK. Invibio is one of a limited number of companies that is currently approved in the
U.S. to distribute PEEK for use in implantable devices.

With the exception of PEEK and allograft-based products, none of our raw material requirements is limited

to any significant extent by critical supply. We are subject to the risk that Invibio will fail to supply PEEK in
adequate amounts for our needs on a timely basis. In addition, because our biologics products are processed from
human tissue, maintaining a steady supply can sometimes be challenging. See “Item 1A—Risk Factors.” Our
manufacturing operations and those of the third-party manufacturers we use are subject to extensive regulation
by the FDA or similar entities outside of the U.S. under its quality systems regulations, or QSRs, and other
applicable device-related good manufacturing practices, or GMPs, or tissue-related tissue practices, or GTPs, and
applicable local regulations. With respect to biologics products, we are FDA-registered and licensed in the states
of California, New York and Florida, the only states that currently require licenses. Our facility and the facilities

of the third-party manufacturers we use are subject to periodic unannounced inspections by regulatory
authorities, and may undergo compliance inspections conducted by the FDA and corresponding state and foreign
agencies. The FDA inspected our Carlsbad, California facilities in February 2010 and non-compliance items
were cited on an FDA Form 483 that we received following the inspection. On June 24, 2010 we received a
Warning Letter from the Irvine District office of the FDA. The Warning Letter related specifically to
non-conformances in quality systems previously identified in the Form 483 that was issued following the
February inspection. We have responded to the Warning Letter and completed corrective actions that we believe
fully address the observations. Subsequent to a follow-up audit of our Carlsbad, California facility in December
2010, the FDA issued a close-out letter dated September 28, 2011 in which the FDA stated that the Company has
resolved all the deficiencies contained in the Warning Letter.

Competition

Although we believe that our current broad product portfolio and development pipeline is differentiated and

has numerous competitive advantages, the spinal implant industry is highly competitive, subject to rapid
technological change, and significantly affected by new product introductions. We believe that the principal
competitive factors in our market include:

•

improved outcomes for spine pathology procedures;

ease of use and reliability;

effective sales, marketing and distribution;

technical leadership and superiority;

surgeon services, such as training and education;

responsiveness and ability to develop unique products that addresses the needs of surgeons;

• manufacturing capabilities;

•

acceptance by spine surgeons;

product price and qualification for reimbursement; and

speed to market.

Our currently marketed products are, and any future products we commercialize will be, subject to intense

competition and we are aware of several companies that compete in our current and future product areas. We
believe that our most significant competitors are Medtronic Sofamor Danek, DePuy Spine, Stryker, Biomet,
NuVasive, Zimmer, Synthes, Orthofix, Globus, and others, many of which have substantially greater financial
resources than we do. In addition, these companies may have more established distribution networks, entrenched
relationships with physicians, and greater experience in developing, launching, marketing, distributing and
selling spinal implant products.

Our competitors include providers of non-operative therapies for spine disorder conditions. While these

non-operative treatments are considered to be an alternative to surgery, surgery is used in the event that
non-operative treatments are unsuccessful. We do not believe that, to date, these non-operative treatments have
caused a material reduction in the demand for surgical treatment of spinal disorders.

Intellectual Property

We rely on a combination of patent, trademark, copyright, trade secret and other intellectual property laws,

nondisclosure agreements, proprietary information ownership agreements and other measures to protect our
intellectual property rights. We believe that in order to have a competitive advantage, we must develop, maintain
and enforce the proprietary aspects of our technologies. We require our employees, consultants, co-developers,

distributors and advisors to execute agreements governing the ownership of proprietary information and use and
disclosure of confidential information in connection with their relationship with us. In general, these agreements
require these people and entities to agree to disclose and assign to us all inventions that were conceived on our
behalf or which relate to our property or business and to keep our confidential information confidential and only
use such confidential information in connection with our business.

Despite any measures taken to protect our intellectual property, unauthorized parties may attempt to copy

aspects of our products or to obtain and use information that we regard as proprietary. In addition, our
competitors may independently develop similar technologies. Further, as described in “Item 3—Legal
Proceedings,” others may attempt to obtain royalties based on the net sales of our products, which may impact
our revenues. We may lose market share to our competitors if we fail to protect our intellectual property rights.

Patents

As of December 31, 2011, we owned 58 issued U.S. patents, 31 pending U.S. patent applications and
341 issued or pending foreign patents. We own multiple patents relating to unique aspects and improvements for
several of our products. We do not believe that the expiration of any single patent is likely to significantly affect
our intellectual property position.

The medical device industry is characterized by the existence of a large number of patents and frequent
litigation based on allegations of patent infringement. Patent litigation can involve complex factual and legal
questions and its outcome is uncertain. Any claim relating to infringement of patents that is successfully asserted
against us may require us to pay substantial damages (including treble damages if our infringement is found to be
willful) or may require us to remove our infringing product from the market. Even if we were to prevail, any
litigation could be costly and time-consuming and would divert the attention of our management and key
personnel from our business operations. Our success will also depend in part on our not infringing patents issued
to others, including our competitors and potential competitors. If our products are found to infringe the patents of
others, our development, manufacture and sale of such potential products could be severely restricted or
prohibited. In addition, our competitors may independently develop similar technologies. We may lose market
share to our competitors if we fail to protect our intellectual property rights.

As the number of entrants into our market increases, the possibility of a patent infringement claim against us
grows. While we make an effort to ensure that our products do not infringe other parties’ patents and proprietary
rights, our products and methods may be covered by U.S. or foreign patents held by our competitors. In addition,
our competitors may assert that future products we may manufacture or market infringes their patents.

If we are accused of patent infringement, we may be required to obtain licenses to patents or proprietary

rights of others in order to continue to commercialize our products. However, we may not be able to obtain any
licenses required under any patents or proprietary rights of third parties on acceptable terms, or at all. Even if we
were able to obtain rights to the third party’s intellectual property, these rights may be non-exclusive, thereby
giving our competitors access to the same intellectual property. Ultimately, we may be unable to commercialize
some of our potential products or may have to cease some of our business operations as a result of patent
infringement claims, which could severely harm our business financial condition and results of operations.

Trademarks

As of December 31, 2011, we owned these registered US marks: Adonys, Aging Spine Center design/logo,
Aladyn, Alpha symbol design/logo, Alphagraft, Alphagraft Duofuse, Alphagraft Nanoblast, Alphagraft Profuse,
Alphatec, Alphatec Spine, Inc. logo, Alphatec Spine design/logo, Amnioshield, Antelys, ARC, Aspida, Aurys,
Biofill, Bone’x, Calisto, Cerviplaque, Chorus, Claris, Corelys, Corlok, Cortek, C design, Cortek design/logo,
Deltaloc, Discocerv, Dovetome, Dynoss, Dynamic-TTL Rod, Easys, Electra, Elfix, Ellys, Helifix, Illico,

Inspiration, Isobar, Isobar Duo, Isobar Evolution, Isobar Hemispherical Screw, Isobar LP, Isobar SL, Isobar
TTC, Isobar TTL, Isobar U-Screw, Majorys, MX System, Novel, Openview, Oria, OsseoFix, OsseoFix+,
Osseoscrew, Pach, Pantheon, Preview, Samarys, Scient’x, Solanas, Solo, Solutions for the Aging Spine, Stella,
Tamarack, Trestle, Tribeca, X, Xenon, and Zodiac.

License and Supply Agreements

As part of our product development strategy, we enter into agreements with third parties that enable us to

develop, commercialize and/or distribute products for the treatment of spinal disorders that are based upon
technology owned by such third parties.

License Agreement with Vertebration, Inc.

In March 2011, we entered into a License Agreement, or, the Vertebration Agreement with Vertebration,
Inc., or, Vertebration that provides us with an exclusive license to develop and commercialize Vertebration’s
proprietary licensed technology related to its Xycor implant and related instrumentation. The Xycor implant has
received 510(k) approval for marketing by the FDA. The financial terms of the Vertebration License Agreement
include: (i) a cash payment of $0.5 million following the execution of the Vertebration License Agreement, of
which $0.1 million will be credited against amounts payable to Vertebration at a future date and $0.1 million will
be repaid by Vertebration in March 2014; (ii) additional cash payments totaling $0.2 million which were paid and
expensed in 2011; (iii) development and sales milestone payments in cash that could begin to be achieved and
paid in 2012; and (iv) payments consisting of either: (a) a royalty based on net sales of licensed products or (b) a
payment of percentage of our gross margin, with the type of payment dependent on the manner in which the
product was sold, with minimum annual payments beginning in the year after the first commercial sale of a
licensed product. During the first quarter of 2011, we recorded an intangible asset of $0.4 million following the
execution of the Vertebration License Agreement. We are amortizing this asset over seven years, the estimated
life of the Xycor product.

Our additional key agreements are described in Note 5 to our consolidated financial statements under Part

II, Item 8—Financial Statements and Supplementary Data.

Government Regulation

Our products are subject to extensive regulation by the FDA and other U.S. federal and state regulatory

bodies and comparable authorities in other countries. To ensure that medical products distributed domestically
and internationally are safe and effective for their intended use, FDA and comparable authorities in other
countries have imposed regulations that govern, among other things, the following activities that we or our
partners perform and will continue to perform:

•

product design and development;

product testing;

product manufacturing;

product labeling;

product storage;

premarket clearance or approval;

advertising and promotion;

product marketing, sales and distribution; and

post-market surveillance, including reporting deaths or serious injuries related to products and certain
product malfunctions.

FDA’s Premarket Clearance and Approval Requirements

Unless an exemption applies, each medical device we wish to commercially distribute in the U.S. will
require either prior 510(k) clearance or approval of a premarket approval application, or PMA. The information
that must be submitted to the FDA in order to obtain clearance or approval to market a new medical device varies
depending on how the medical device is classified by the FDA. Medical devices are classified into one of three
classes on the basis of the intended use of the device, the indications for use and on controls deemed by the FDA
to be necessary to reasonably ensure their safety and effectiveness. Class I devices, which are those that have the
lowest level or risk associated with them, are subject to general controls, Class II devices are subject to general
controls and special controls, including performance standards, and Class III devices, which have the highest
level of risk associated with them, are subject to general controls and premarket approval. Most Class I devices
and many Class II devices are exempt from the 510(k) requirement, although the manufacturers will still be
subject to registration, listing, labeling and GMP requirements. Class III devices are subject to those
requirements, too, but also require and PMA approval. A new medical device for which there is no substantially
equivalent device is automatically designated a Class III device. Depending on the nature of the new device, the
manufacturer may ask the FDA to make a risk-based determination of the new device and reclassify it in Class I
or Class II. This process is referred to as the de novo process. If the FDA agrees, the new device will be
reassigned to the appropriate other class. If it does not agree, the manufacturer will have to submit a PMA. Our
current commercial products are Class II devices marketed under FDA 510(k) premarket clearance. Both
premarket clearance and premarket approval applications are subject to the payment of user fees, paid at the time
of submission for FDA review.

510(k) Clearance Pathway

To obtain 510(k) clearance, we must submit a premarket notification demonstrating that the proposed device

is substantially equivalent to a device legally marketed in the U.S. for which a PMA was not required. The
FDA’s goal is to review and act on each 510(k) within 90 days of submission, but it may take longer based on
requests for additional information by the FDA. Most 510(k)s do not require supporting data from clinical trials,
but the FDA may request such data.

After a device receives 510(k) clearance, any modification that could significantly affect its safety or
effectiveness, or that would constitute a new or major change in its intended use, will require a new 510(k)
clearance or, depending on the modification, require premarket approval. The FDA requires each manufacturer to
determine whether the proposed change requires submission of a 510(k), or a premarket approval, but the FDA
can review any such decision and can disagree with a manufacturer’s determination. If the FDA disagrees with a
manufacturer’s determination, the FDA can require the manufacturer to cease marketing and/or recall the
modified device until 510(k) clearance or premarket approval is obtained. If the FDA requires us to seek 510(k)
clearance or premarket approval for any modifications to a previously cleared product, we may be required to
cease marketing or recall the modified device until we obtain this clearance or approval. Also, in these
circumstances, we may be subject to significant regulatory fines or penalties. We have made and plan to continue
to make additional product enhancements to our products, and we will consider on a case-by-case basis whether a
new 510(k) or PMA is necessary.

Premarket Approval Pathway

A premarket approval application must be submitted if the device cannot be cleared through the 510(k)
process. The premarket approval application process is generally more complex, costly and time consuming than
the 510(k) process. A premarket approval application must be supported by extensive data including, but not
limited to, technical, preclinical, clinical trials, manufacturing and labeling to demonstrate to the FDA’s
satisfaction the safety and effectiveness of the device for its intended use.

After a premarket approval application is sufficiently complete, the FDA will accept the application and
begin an in-depth review of the submitted information. By statute, the FDA has 180 days to review the “accepted

application,” although, generally, review of the application can take between one and three years. During this
review period, the FDA may request additional information or clarification of information already provided. Also
during the review period, an advisory panel of experts from outside the FDA may be convened to review and
evaluate the application and provide recommendations to the FDA as to the approvability of the device. In
addition, the FDA will conduct a preapproval inspection of the manufacturing facility to ensure compliance with
quality system regulations. New premarket approval applications or premarket approval application supplements
are required prior to marketing for product modifications that affect the safety and efficacy of the device.
Premarket approval supplements often require submission of the same type of information as a premarket
approval application, except that the supplement is limited to information needed to support any changes from
the device covered by the original premarket approval application, and may not require clinical data or the
convening of an advisory panel. We were not required to submit a PMA for any of our currently marketed
products, but devices in development may require a PMA.

Clinical Trials

Clinical trials are usually required to support a PMA and are sometimes required for a 510(k). In the U.S., if

the device is determined to present a “significant risk,” the manufacturer may not begin a clinical trial until it
submits an investigational device exemption, or IDE, application and obtains approval of the IDE from the FDA.
The IDE application must be supported by appropriate data, such as animal and laboratory testing results,
showing that it is safe to test the device in humans and that the testing protocol is scientifically sound. These
clinical trials are also subject to the review, approval and oversight of an institutional review board, or IRB, at
each clinical trial site. The clinical trials must be conducted in accordance with FDA’s IDE regulations and
international regulations concerning human subject protection. A clinical trial may be suspended by FDA, the
sponsor or the IRB at any time for various reasons, including a belief that the risks to the study participants
outweigh the benefits of participation in the study. Even if a study is completed, the results of a clinical trial may
not demonstrate the safety and efficacy of a device, or may be equivocal or otherwise not be sufficient to obtain
approval of a device.

Pervasive and Continuing FDA Regulation

After a device is placed on the market, numerous FDA and other regulatory requirements continue to apply.

These include:

•

quality system regulations, which require manufacturers, including third-party contract manufacturers, to
follow stringent design, testing, control, documentation, record maintenance and other quality assurance
controls, during all aspects of the manufacturing process and to maintain and investigate complaints;

labeling regulations, and FDA prohibitions against the promotion of products for uncleared or unapproved
“off-label” uses;

• medical device reporting obligations, which require that manufacturers submit reports to the FDA of

adverse events; and

•

other post-market surveillance requirements, which apply when necessary to protect the public health or to
provide additional safety and effectiveness data for the device.

Failure to comply with applicable regulatory requirements can result in enforcement action by the FDA,

which may include any of the following sanctions:

• warning letters;

•

fines, injunctions, and civil penalties;

recall or seizure of our products;

operating restrictions, partial suspension or total shutdown of production;

•

refusal to grant 510(k) clearance or PMA approvals of new products; and

criminal prosecution.

To ensure compliance with regulatory requirements, medical device manufacturers are subject to market

surveillance and manufacturers and their third-party manufacturers are subject to periodic announced and
unannounced inspection by the FDA. In January 2011, we received a Warning Letter from the FDA relating to
post-market surveillance study protocol for certain of our dynamic fusion rods. As a result of this Warning
Letter, in 2011 we stopped the distribution of this product.

In June of 2011 the FDA sent an untitled letter to the manufacturer of our PureGen product, Parcell

Laboratories, LLC regarding the regulatory status of the product. In the letter, the FDA raised questions in
connection with Parcell’s position that the PureGen product is within the classification of human cell, tissue, and
cellular or tissue-based products regulated solely under Section 361 of 21 C.F.R. Part 1271. Parcell responded to
the FDA’s letter in July of 2011 with more complete information of the function of PureGen and how the product
meets all of the criteria for being marketed under Section 361. In addition, in January 2012 both Parcell and we
filed a joint appeal of the FDA’s classification of the PureGen product.

International Device Regulations

International sales of medical devices are subject to foreign government regulations, which vary

substantially from country to country. The time required to obtain approval by a foreign country may be longer
or shorter than that required for FDA approval, and the requirements may differ.

Japan

In Japan, certain medical devices classified as “highly controlled” must be approved prior to importation

and commercial sale by the Ministry of Health, Labour and Welfare, or MHLW, pursuant to the Japanese
Pharmaceutical Affairs Law. Manufacturers of medical devices outside of Japan which do not operate through a
Japanese entity are required to appoint a contractually bound authorized representative to directly submit an
application for device approval to the MHLW. The MHLW evaluates each device for safety and efficacy and
may require that the product be tested in Japanese laboratories. After a device is approved for importation and
commercial sale in Japan, the MHLW continues to monitor sales of approved products for compliance. Failure to
comply with applicable regulatory requirements can result in enforcement action by the MHLW, including
administrative inspections and recommendations; recall or seizure of products; operating restrictions, including
partial suspension or total shut down of marketing activity in Japan; withdrawal of product approvals; and
criminal prosecution by a public prosecutor, including criminal fines and/or imprisonment.

Our devices fall into the “highly controlled” medical device category. Currently, MHLW review times for
our device applications range from one year if clinical data is not required, to up to two years if clinical data is
required. The review times for our products are expected to be reduced to six months and one year, respectively,
and we expect application fees to be reduced as new approval screening standards are established by the MHLW,
which has delegated responsibility for these review functions to the Japanese Pharmaceuticals and Medical
Devices Agency, for various medical device categories. Currently, the MHLW is working with trade
organizations such as AdvaMed, and MHLW may adopt similar standards.

European Union

The European Union, which consists of 27 of the countries in Europe, has adopted numerous directives and

standards regulating the design, manufacture, clinical trials, labeling, and adverse event reporting for medical
devices. Other countries, such as Switzerland, have voluntarily adopted laws and regulations that mirror those of
the European Union with respect to medical devices. Devices that comply with the requirements of a relevant
directive will be entitled to bear CE conformity marking and, accordingly, can be commercially distributed

throughout the member states of the European Union, and other countries that comply with or mirror these
directives. The method of assessing conformity varies depending on the type and class of the product, but
normally involves a combination of self-assessment by the manufacturer and a third-party assessment by a
“Notified Body,” an independent and neutral institution appointed to conduct conformity assessment. This third-
party assessment consists of an audit of the manufacturer’s quality system and technical review and testing of the
manufacturer’s product. An assessment by a Notified Body in one country within the European Union is required
in order for a manufacturer to commercially distribute the product throughout the European Union. In addition,
compliance with voluntary harmonized standards including ISO 13845 issued by the International Organization
for Standards establishes the presumption of conformity with the essential requirements for a CE mark. In
October 2007, we were certified by Intertek Semko, a Notified Body, under the European Union Medical Device
Directive allowing the CE conformity marking to be applied.

Environmental Matters

Our facilities and operations are subject to extensive federal, state, and local environmental and

occupational health and safety laws and regulations. These laws and regulations govern, among other things, air
emissions; wastewater discharges; the generation, storage, handling, use and transportation of hazardous
materials; the handling and disposal of hazardous wastes; the cleanup of contamination; and the health and safety
of our employees. Under such laws and regulations, we are required to obtain permits from governmental
authorities for some of our operations. If we violate or fail to comply with these laws, regulations or permits, we
could be fined or otherwise sanctioned by regulators. We could also be held responsible for costs and damages
arising from any contamination at our past or present facilities or at third-party waste disposal sites. We cannot
completely eliminate the risk of contamination or injury resulting from hazardous materials, and we may incur
material liability as a result of any contamination or injury.

Compliance with Fraud and Abuse Laws and Other Applicable Statutes

We are subject to various federal and state laws pertaining to healthcare fraud and abuse, including anti-

kickback laws, physician self-referral laws, false claims laws, criminal health care fraud laws, and foreign
corrupt practice laws. Violations of these laws are punishable by criminal and/or civil sanctions, including, in
some instances, fines, imprisonment and, within the United States, exclusion from participation in government
healthcare programs, including Medicare, Medicaid and Veterans Administration health programs. These laws
are administered by, among others, the U.S. Department of Justice, the Office of Inspector General of the
Department of Health and Human Services and state attorneys general. Many of these agencies have increased
their enforcement activities with respect to medical device manufacturers in recent years.

The Medicare and Medicaid Patient Protection Act of 1987, as amended, or Anti-Kickback statute, prohibits

persons from knowingly and willfully soliciting, offering, receiving or providing remuneration, directly or
indirectly, in exchange for or to induce either the referral of an individual, or the furnishing, arranging for or
recommending a good or service, for which payment may be made in whole or part under federal healthcare
programs, such as the Medicare and Medicaid programs. The Anti-Kickback Statute is broad and prohibits many
arrangements and practices that are lawful in businesses outside of the healthcare industry. For example, the
definition of “remuneration” has been broadly interpreted to include anything of value, including, gifts,
discounts, the furnishing of supplies or equipment, credit arrangements, payments of cash, waivers of payments,
ownership interests and providing anything at less than its fair market value. In addition, in March 2010, the U.S.
Congress adopted and President Obama signed into law the Patient Protection and Affordable Health Care Act,
which, as amended by the Health Care and Education Reconciliation Act, is referred to as PPACA. PPACA,
among other things, amends the intent requirement of the federal Anti-Kickback Statute. A person or entity no
longer needs to have actual knowledge of this statute or specific intent to violate it. In addition, PPACA provides
that the government may assert that a claim including items or services resulting from a violation of the Anti-
Kickback Statute constitutes a false or fraudulent claim for purposes of the federal False Claims Act.

In implementing the Anti-Kickback Statute, the Office of Inspector General, or OIG, has issued a series of

regulations, known as the safe harbors, which began in July 1991. These safe harbors set forth provisions that, in
circumstances where all the applicable requirements are met, will assure healthcare providers and other parties
that they will not be prosecuted under the Anti-Kickback Statute. The failure of a transaction or arrangement to
fit precisely within one or more safe harbors does not necessarily mean that it is illegal or that prosecution will be
pursued. However, conduct and business arrangements that do not fully satisfy all requirements of an applicable
safe harbor may result in increased scrutiny by government enforcement authorities such as the OIG. Penalties
for violations of the Anti-Kickback Statute include criminal penalties and civil sanctions such as fines,
imprisonment and possible exclusion from Medicare, Medicaid and other federal healthcare programs. Many
states have anti-kickback laws that are similar to the federal law, including penalties, fines, sanctions for
violations, and exclusions from state or commercial programs.

The federal ban on physician self-referrals, commonly known as the Stark Law, prohibits, subject to certain

exceptions, physician referrals of Medicare and Medicaid patients to an entity providing certain “designated
health services” if the physician or an immediate family member of the physician has any financial relationship
with the entity. Penalties for violating the Stark Law include fines, civil monetary penalties and possible
exclusion from federal healthcare programs. In addition to the Stark Law, many states have their own self-
referral laws. Often, these laws closely follow the language of the federal law, although they do not always have
the same scope, exceptions or safe harbors.

We have entered into various agreements with certain surgeons that perform services for us, including some

who make clinical decisions to use our products. Some of our referring surgeons own our stock, which they
either purchased in an arms’ length transaction on terms identical to those offered to non-surgeons or received
from us as fair market value consideration for services performed. In addition, physician-owned distribution
companies have increasingly become involved in the sale and distribution of medical devices, including the
products for the surgical treatment of spine disorders. In many cases, these distribution companies enter into
arrangements with hospitals that bill Medicare or Medicaid for the furnishing of medical services, and the
physician-owners are among the physicians who refer patients to the hospitals for surgery. While we believe that
our current operations comply with applicable fraud and abuse laws and do not believe that we are subject to any
arrangements that violate any such laws, we are not aware of all of the financial arrangements of the physician-
owned distribution companies with which we contract. All arrangements we have that involve surgeons, sales
agents or distributors have all been structured with the intention of complying with all applicable fraud and abuse
laws, including the anti-kickback statute, Stark Law and similar state anti-referral laws.

The federal False Claims Act prohibits persons from knowingly filing or causing to be filed a false or

fraudulent claim to, or the knowing use of false statements to obtain payment from, the federal government.
Private suits filed under the False Claims Act, known as qui tam actions, can be brought by individuals on behalf
of the government. These individuals, sometimes known as “relators” or, more commonly, as “whistleblowers,”
may share in any amounts paid by the entity to the government in fines or settlement. The number of filings of
qui tam actions has increased significantly in recent years, causing more healthcare companies to have to defend
a False Claim Act action. If an entity is determined to have violated the federal False Claims Act, it may be
required to pay up to three times the actual damages sustained by the government, plus civil penalties of between
$5,500 to $11,000 for each separate false claim and may be subject to exclusion from Medicare, Medicaid and
other federal healthcare programs. Various states have also enacted similar laws modeled after the federal False
Claims Act which apply to items and services reimbursed under Medicaid and other state programs, or, in several
states, apply regardless of the payor.

The Health Insurance Portability and Accountability Act, or HIPAA, created two new federal crimes:
healthcare fraud and false statements relating to healthcare matters. The healthcare fraud statute prohibits
knowingly and willfully executing a scheme to defraud any healthcare benefit program, including private payors.
Under recent changes in PPACA, the intent requirement of the healthcare fraud statute is lowered such that a
person or entity no longer needs to have actual knowledge of this statute or specific intent to violate it. A

violation of this statute is a felony and may result in fines, imprisonment or possible exclusion from Medicare,
Medicaid and other federal healthcare programs. The false statements statute prohibits knowingly and willfully
falsifying, concealing or covering up a material fact or making any materially false, fictitious or fraudulent
statement in connection with the delivery of or payment for healthcare benefits, items, or services. A violation of
this statute is a felony and in similar sanctions.

PPACA also includes various provisions designed to strengthen significantly fraud and abuse enforcement
in addition to those changes discussed above. Among these additional provisions include increased funding for
enforcement efforts and new “sunshine” provisions to require reporting and disclosures of any “transfer of value”
made or distributed to prescribers and other health care providers. There are various state laws and initiatives that
require device manufacturers to disclose to the appropriate regulatory agency certain payments or other transfers
of value made to physicians, with the risk of fines for any violation of such requirements. Massachusetts has one
of the most stringent of these laws, and the District of Columbia and Vermont passed such laws in 2008 and
2009, respectively.

We may also be exposed to liabilities under the U.S. Foreign Corrupt Practices Act, or FCPA, which
generally prohibits companies and their intermediaries from making corrupt payments to foreign officials for the
purpose of obtaining or keeping business or otherwise obtaining favorable treatment, and requires companies to
maintain adequate record-keeping and internal accounting practices to accurately reflect the transactions of the
company. We are also subject to a number of other laws and regulations relating to money laundering,
international money transfers and electronic fund transfers. These laws apply to companies, individual directors,
officers, employees and agents.

If any of our operations are found to have violated or be in violation of any of the laws described above and
other applicable state and federal fraud and abuse laws, we may be subject to penalties, among them being civil
and criminal penalties, damages, fines, exclusion from government healthcare programs, and the curtailment or
restructuring of our operations.

Third-Party Reimbursement

In the U.S., healthcare providers generally rely on third-party payors, principally private insurers and
governmental payors such as Medicare and Medicaid, to cover and pay for all or part of the cost of a spine
surgery in which our medical devices are used. We expect that sales volumes and prices of our products will
depend in large part on the continued availability of reimbursement from such third-party payors. These third-
party payors may deny reimbursement if they determine that a device used in a procedure was not medically
necessary in accordance with cost-effective treatment methods, as determined by the third-party payor, or was
used for an unapproved indication. Particularly in the U.S., third-party payors continue to carefully review, and
increasingly challenge, the prices charged for procedures and medical products.

Medicare reimbursement policies are developed by the Centers for Medicare and Medicaid Services, or

CMS, the federal agency responsible for administering the Medicare program, and its contractors. CMS
establishes Medicare reimbursement policies for medical products and procedures and such policies are
periodically reviewed and updated. While private payors vary in their coverage and payment policies, the
Medicare program is viewed as a benchmark. Medicare payment rates for the same or similar procedures vary
due to geographic location, nature of the facility in which the procedure is performed (i.e., teaching or
community hospital) and other factors. We cannot assure you that government or private third-party payors will
cover and provide adequate payment for the procedures in which our products are used.

PPACA and other reform proposals contain significant changes regarding Medicare, Medicaid and other
third party payors. Among these changes is the imposition of a 2.3% excise tax on domestic sales of medical
devices following December 31, 2012. These taxes will result in a significant increase in the tax burden on our
industry. Other elements of this legislation include numerous provisions to limit Medicare spending through

reductions in various fee schedule payments and by instituting more sweeping payment reforms, such as bundled
payments for episodes of care, the establishment of “accountable care organizations” under which hospitals and
physicians will be able to share savings that result from cost control efforts, comparative effectiveness research,
value-based purchasing, and the establishment of an independent payment advisory board. Many of these
provisions will be implemented through the regulatory process, and policy details have not yet been finalized. In
addition, PPACA has been subject to various legal and legislative challenges. For example, the U.S. House of
Representatives recently voted to repeal PPACA, two courts have ruled that one provision, the minimum
coverage rule, or so-called personal mandate, which is not scheduled to go into effect until 2014, is
unconstitutional. Other proposals have been introduced in Congress to repeal the device tax. Various healthcare
reform proposals have also emerged at the state level. We cannot predict with certainty whether PPACA will be
fully implemented as enacted or what other healthcare initiatives at the federal or state level, if any, will be
implemented. However, an expansion in government’s role in the U.S. healthcare industry may lower
reimbursements for our products, reduce medical procedure volumes, and adversely affect our business and
results of operations, possibly materially.

Internationally, healthcare payment systems vary substantially from country to country and include single-

payor, government-managed systems as well as systems in which private payors and government-managed
systems exist side-by-side. Our ability to achieve market acceptance or significant sales volume in international
markets we enter will be dependent in large part on the availability of reimbursement for procedures performed
using our products under the healthcare payment systems in such markets. A small number of countries may
require us to gather additional clinical data before covering our products. It is our intent to complete the requisite
clinical studies and obtain coverage in countries where it makes economic sense to do so.

We believe that the overall escalating cost of medical products and services has led to, and will continue to

lead to, increased pressures on the healthcare industry to reduce the costs of products and services. We cannot
assure you that government or private third-party payors will cover and provide adequate payment for the
procedures using our products. In addition, it is possible that future legislation, regulation, or reimbursement
policies of third-party payors will adversely affect the demand for procedures using our products or our ability to
sell our products on a profitable basis. The unavailability or inadequacy of third-party payor coverage or
reimbursement could have a significant adverse effect on our business, operating results and financial condition.

Employees

As of December 31, 2011, we had approximately 470 employees worldwide in the following areas: sales,
physician services, marketing, clinical education, manufacturing, advanced manufacturing, quality assurance,
regulatory affairs, research and development, human resources, finance, legal, information technology and
administration. We have never experienced a work stoppage due to labor difficulties and believe that our
relations with our employees are good. Certain employees in Europe have labor committees and collective
bargaining agreements in place.

Item 1A. Risk Factors

Investing in our common stock involves a high degree of risk. You should carefully consider the following

risk factors and all other information contained in this Annual Report on Form 10-K. The risks and uncertainties
described below are not the only ones facing us. Additional risks and uncertainties that we are unaware of, or
that we currently deem immaterial, also may become important factors that affect us. If any of such risks or the
risks described below occur, our business, financial condition or results of operations could be materially and
adversely affected. In that case, the trading price of our common stock could decline, and you may lose some or
all of your investment.

Risks Related to Our Business and Industry

Our business plan relies on certain assumptions pertaining to the market for our products that, if incorrect,
may adversely affect our growth and profitability.

We allocate our design, development, manufacturing, marketing, management and financial resources based

on our business plan, which includes assumptions about various demographic trends and trends in the treatment
of spine disorders and the resulting demand for our products. However, these trends are uncertain. There can be
no assurance that our assumptions with respect to an aging population with broad medical coverage and longer
life expectancy, which we expect to lead to increased spinal injuries and degeneration, are accurate. In addition,
an increasing awareness and use of non-invasive means for the prevention and treatment of back pain and
rehabilitation purposes may reduce demand for, or slow the growth of sales of, spine fusion products. A
significant shift in technologies or methods used in the treatment of back pain or damaged or diseased bone and
tissue could adversely affect demand for some or all of our products. For example, pharmaceutical advances
could result in non-surgical treatments gaining more widespread acceptance as a viable alternative to spine
fusion. The emergence of new biological or synthetic materials to facilitate regeneration of damaged or diseased
bone and to repair damaged tissue could increasingly minimize or delay the need for spine fusion surgery and
provide other biological alternatives to spine fusion. New surgical procedures could diminish demand for some
of our products. The increased acceptance of emerging technologies that do not require spine fusion, such as
artificial discs and nucleus replacement, for the surgical treatment of spine disorders would reduce demand for,
or slow the growth of sales of, spine fusion products. If our assumptions regarding these factors prove to be
incorrect or if alternative treatments to those offered by our products gain further acceptance, then actual demand
for our products could be significantly less than the demand we anticipate for our products and we may not be
able to achieve or sustain growth or profitability.

If we fail to properly manage our anticipated growth, our business could suffer.

We continue to experience growth in, and we will continue to pursue growth in, the number of surgeons
using our products, the types of products we offer and the geographic regions in which our products are sold.
Such growth has placed and will continue to place significant demands on our managerial, operational and
financial resources and systems. Future growth would impose significant added responsibilities on members of
management, including the need to identify, recruit, maintain, motivate and integrate additional personnel. Also,
our management may need to divert a disproportionate amount of its attention away from our day-to-day
activities and devote a substantial amount of time to managing these growth activities. We are currently focused
on increasing the size and effectiveness of our sales force and distribution network, marketing activities, research
and development efforts, inventory management systems, management team and corporate infrastructure. If we
do not manage our growth effectively, the quality of our products, our relationships with physicians, distributors
and hospitals, and our reputation could suffer, which would have a significant adverse effect on our business,
financial condition and results of operations. We must attract and retain qualified personnel and third-party
distributors and manage and train them effectively. Personnel qualified in the design, development, production
and marketing of our products are difficult to find and hire, and enhancements of information technology systems
to support our growth are difficult to implement. We will also need to carefully monitor and manage our surgeon
services, our manufacturing capabilities, quality assurance and efficiency, and the quality assurance and
efficiency of our suppliers and distributors. This managing, training and monitoring will require allocation of
valuable management resources and significant expense. If our management is unable to effectively manage our
expected growth, our expenses may increase more than expected, our ability to generate and/or grow revenues
could be reduced and we may not be able to implement our business strategy.

Global economic and credit market conditions could affect a portion of our client base, subcontractors and
suppliers, which could materially affect our backlog and profits.

Volatility and disruption in the global capital and credit markets has reduced the availability of liquidity and

credit to fund or support the continuation and expansion of industrial business operations worldwide. Recent
financial market conditions have resulted in significant write-downs of asset values by financial institutions, and

have caused many financial institutions to seek additional capital, to merge with larger and stronger institutions
and, in some cases, to fail. Many lenders and institutional investors have reduced and, in some cases, ceased to
provide funding to borrowers. Continued disruption of the credit markets could adversely affect the borrowing
capacity of us or our suppliers and customers, which support the continuation and expansion of our sales
worldwide, and could result in suppliers not being able to supply us with raw materials or finished goods or
payment delays or defaults by our customers. In addition, in response to current market conditions, vendors or
customers may choose to seek contract terms more favorable to them. Finally, our ability to expand our business
could be limited if, in the future, we are unable to raise capital, on favorable terms or at all.

We are in a highly competitive market segment, face competition from large, well-established medical device
companies with significant resources, and may not be able to compete effectively.

The market for spine fusion products and procedures is intensely competitive, subject to rapid technological

change and significantly affected by new product introductions and other market activities of industry
participants. In 2011, a large portion of global spinal implant product revenues were generated by Medtronic
Sofamor Danek, a subsidiary of Medtronic, Inc., Depuy Spine, a subsidiary of Johnson & Johnson, Stryker Spine,
and Synthes Spine. Our competitors also include numerous other publicly traded companies and privately held
companies.

Several of our competitors enjoy competitive advantages over us, including:

• more established relationships with spine surgeons;

• more established distribution networks;

•

broader spine surgery product offerings;

stronger intellectual property portfolios;

greater financial and other resources for product research and development, sales and marketing, and patent
litigation;

greater experience in, and resources for, launching, marketing, distributing and selling products;

significantly greater name recognition as well as more recognizable trademarks for products similar to the
products that we sell;

• more established relationships with healthcare providers and payors;

•

products supported by more extensive clinical data; and

greater experience in obtaining and maintaining FDA and other regulatory clearances or approvals for
products and product enhancements.

In addition, at any time our current competitors or other companies may develop alternative treatments,
products or procedures for the treatment of spine disorders that compete directly or indirectly with our products,
including ones that prove to be superior to our spine surgery products. For these reasons, we may not be able to
compete successfully against our existing or potential competitors. Any such failure could lead us to modify our
strategy, lower our prices, increase the commissions we pay on sales of our products and have a significant
adverse effect on our business, financial condition and results of operations.

A significant percentage of our revenues are derived from the sale of our systems that include polyaxial
pedicle screws.

Net sales of our systems that include polyaxial pedicle screws represented approximately 46% and 34% of

our net sales for 2011 and 2010, respectively. A decline in sales of these systems, due to market demand, the
introduction by a third party of a competitive product, an intellectual property dispute involving these systems, or
otherwise, would have a significant adverse impact on our business, financial condition and results of operations.

Some of the technology related to our polyaxial pedicle screw systems is licensed to us. Any action that would
prevent us from manufacturing, marketing and selling our polyaxial pedicle screw systems would have a
significant adverse effect on our business, financial condition and results of operations.

Our sales and marketing efforts in the U.S. are largely dependent upon third parties, some of which are free to
market products that compete with our products.

As of December 31, 2011, approximately 25% of our independent distributors in the U.S. also market and
sell the products of our competitors, and those competitors may have the ability to influence the products that our
independent distributors choose to market and sell. Our competitors may be able, by offering higher commission
payments or otherwise, to convince our independent distributors to terminate their relationships with us, carry
fewer of our products or reduce their sales and marketing efforts for our products.

We may be unable to accurately predict future sales through distributors that purchase products directly from
us, which could harm our ability to forecast sales performance.

A portion of our sales are made through domestic and international third-party distributors that purchase our
products directly though us and then resell such products to hospitals. As a result, our financial results, quarterly
product sales, trends and comparisons are affected by fluctuations in the buying patterns and inventory levels of
these distributors. While we attempt to assist such distributors in forecasting its future sales and maintaining
adequate inventory levels, we may not consistently be accurate or successful. In addition, our distributors’
decision-making process regarding orders is complex and involves several factors, including surgeon demand
levels, which can make it difficult to accurately predict our sales until late in a quarter. Our failure to accurately
forecast sales through distributors that purchase products directly from us could lead to a decline in sales and
adversely affect our results of operations.

If pricing pressures causes us to decrease prices for our goods and services and we are unable to compensate
for such reductions through product mix and reductions to our expenses, our results of operations will suffer.

We may experience decreasing prices for our goods and services we offer due to pricing pressure exerted by
our customers in response to increased cost containment efforts from managed care organizations and other third-
party payors and increased market power of our customers as the medical device industry consolidates. If we are
unable to offset such price reductions through product mix or reductions in our expenses, our business, financial
condition, results of operations and cash flows will be adversely affected.

We conduct a significant amount of our sales activity outside of the U.S., which subjects us to additional
business risks and may adversely affect our results of operations and financial condition.

During the year ended December 31, 2011, we derived approximately $63.9 million, or 32% of our net sales

from sales of products outside of the U.S. We intend to continue to pursue growth opportunities in sales
internationally, which could expose us to additional risks associated with international sales and operations. Our
international operations are, and will continue to be, subject to a number of risks and potential costs, including:

•

changes in foreign medical reimbursement policies and programs;

unexpected changes in foreign regulatory requirements;

differing local product preferences and product requirements;

diminished protection of intellectual property in some countries outside of the United States;

differing payment cycles;

trade protection measures and import or export licensing requirements;

difficulty in staffing, training and managing foreign operations;

•

differing legal regulations and labor relations;

potentially negative consequences from changes in tax laws (including potentially taxes payable on earnings
of foreign subsidiaries upon repatriation); and

political and economic instability.

In addition, we are subject to risks arising from currency exchange rate fluctuations, which could decrease
our revenues, increase our costs and may adversely affect our results of operations. Significant increases in the
value of the U.S. dollar relative to foreign currencies could have a material adverse effect on our international
results of operations.

To be commercially successful, we must convince the spine surgeon community that our products are an
attractive alternative to our competitors’ products. If the spine surgeon community does not use our products,
our sales will decline and we will be unable to increase our sales and profits.

In order for us to sell our products, surgeons must be convinced that they are superior to competing products

for use in spine fusion procedures. Acceptance of our products depends on educating the spine surgeon
community as to the distinctive characteristics, perceived benefits, safety and cost-effectiveness of our products
compared to our competitors’ products and on training surgeons in the proper application of our products. If we
are not successful in convincing the spine surgeon community of the merit of our products, our sales will decline
and we will be unable to increase our sales and will be unable to achieve and sustain growth or profitability.

There is a learning process involved for spine surgeons to become proficient in the use of our products.
Although most spine surgeons may have adequate knowledge on how to use most of our products based on their
clinical training and experience, we believe that the most effective way to introduce and build market demand for
our products is by directly training spine surgeons in the use of the products. If surgeons are not properly trained,
they may misuse or ineffectively use our products. This may also result in unsatisfactory patient outcomes,
patient injury, negative publicity or lawsuits against us, any of which could have a significant adverse effect on
our business, financial condition and results of operations.

We must retain the current distributors of our products and attract new distributors of our products.

As we launch new products and increase our marketing efforts with respect to existing products, we will

need to expand our sales and marketing organization. We plan to accomplish this by increasing our network of
independent distributors and hiring additional direct sales representatives. The establishment and development of
a broader sales network and dedicated sales force may be expensive and time consuming. Because of the intense
competition for their services, we may be unable to recruit or retain additional qualified independent distributors
and to hire additional direct sales representatives to work with us. Often, our competitors enter into distribution
agreements with independent distributors that require such distributors to exclusively sell the products of our
competitors. Further, we may not be able to enter into agreements with independent distributors on commercially
reasonable terms, if at all. Even if we do enter into agreements with additional independent distributors, it often
takes 90 to 120 days for new distributors to reach full operational effectiveness and such distributors may not
generate revenue as quickly as we expect them to, commit the necessary resources to effectively market and sell
our products or ultimately be successful in selling our products. Our business, financial condition and results of
operations will be materially adversely affected if we do not retain our existing independent distributors and
attract new, additional independent distributors or if the marketing and sales efforts of our independent
distributors and our own direct sales representatives are unsuccessful.

We may not be successful in manufacturing products at the levels required to meet future market demand.

We are seeking to rapidly grow sales of our products and if we are successful, such growth may strain our

ability to manufacture an increasingly large supply of our products. We have never produced products in

quantities significantly in excess of our current production levels. Manufacturers regularly experience difficulties
in scaling up production and we may face such difficulties in increasing our production levels. Moreover, we
may not be able to manufacture our products with consistent and satisfactory quality or in sufficient quantities to
meet demand. Our failure to produce products of satisfactory quality or in sufficient quantities could hurt our
reputation, cause hospitals, surgeons or distributors to cancel orders or refrain from placing new orders for our
products and reduce or slow growth of sales of our products. Increases in our production volume also could make
it harder for us to maintain control over expenses, manage our relationships with our suppliers, maintain good
relations with our employees or otherwise manage our business. In addition, should we not be able to achieve our
revenue forecast and cash consumption starts to exceed forecasted consumption, management will need to adjust
our production of 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.

We depend on various third-party suppliers, and in one case a single third-party supplier, for key raw
materials used in our manufacturing processes and the loss of these third-party suppliers, or their inability to
supply us with adequate raw materials, could harm our business.

We use a number of raw materials, including titanium, titanium alloys, stainless steel, PEEK, and human

tissue. We rely from time to time on a number of suppliers and in one case on a single source vendor,
Invibio, Inc. We have a supply agreement with Invibio, pursuant to which it supplies us with PEEK, a
biocompatible plastic that we use in some of our spacers. Invibio is one of a limited number of companies
approved to distribute PEEK in the U.S. for use in implantable devices. During 2011 and 2010 approximately
16% of our revenues were derived from products manufactured using PEEK.

We depend on a limited number of sources of human tissue for use in our biologics products, and any failure
to obtain tissue from these sources or to have the tissue processed by these entities for us in a timely manner will
interfere with our ability to effectively meet demand for our biologics products. The processing of human tissue
into biologics products is labor intensive and it is therefore difficult to maintain a steady supply stream. In
addition, due to seasonal changes in mortality rates, some scarce tissues used for our biologics products are at
times in particularly short supply. We cannot be certain that our supply of human tissue from our current
suppliers and our current inventory of biologics products will be available at current levels or will be sufficient to
meet our needs.

Our dependence on a single third-party PEEK supplier and the challenges we may face in obtaining

adequate supplies of biologics products involve several risks, including limited control over pricing, availability,
quality and delivery schedules. In addition, any supply interruption in a limited or sole sourced component or raw
material, such as PEEK or human tissue, could materially harm our ability to manufacture our products until a
new source of supply, if any, could be found. We may be unable to find a sufficient alternative supply channel in
a reasonable time period or on commercially reasonable terms, if at all, which would have a significant adverse
effect on our business, financial condition and results of operations.

Our tissue-based products and related technologies could become subject to significantly greater regulation by
the FDA, which could disrupt our business.

The FDA may regulate certain tissue-based products as medical devices, drugs or biologics if the product is
deemed to have been more than minimally manipulated or indicated for nonhomologous use. Homologous use is
generally interpreted as the use of tissue for the same basic function in the recipient as it fulfilled in the donor. If
the FDA decides that any of our current or future tissue-based products are more than minimally manipulated or
indicated for nonhomologous use, it would require us to either obtain 510(k) clearance or a PMA approval if the
biologics product is viewed as a medical device or obtain approval as a drug or licensure as a biologic if it is
viewed as a drug or biologic. Depending on the nature and extent of any FDA decision applicable to our tissue-
based products, further distribution of the affected products could be interrupted for a substantial period of time,
which would reduce our revenues and hurt our profitability.

The regulatory status of our PureGen product is unclear, and we could be forced to stop marketing the
product.

In 2010, we began to market and sell our PureGen Osteoprogenitor Cell Allograft product pursuant to
section 361 of the Public Health Service Act and 21 CFR Part 1271 Human Cell & Tissue Products Controls, or
the HCT/P. Such action was based on our good faith belief that PureGen was a 361 HCT/P tissue product. In
June 2011 the manufacturer of PureGen, Parcell Laboratories, was contacted by FDA concerning the regulatory
status of PureGen. These communications stated FDA’s belief that PureGen was a biologic product subject to
regulation under Section 351 of the Public Health Service Act, or the PHS Act, by the Center for Biologics
Evaluation and Research, or CBER. Both we and Parcell disagreed with this position. Parcell responded to the
FDA’s letter in July of 2011 with more complete information of the function of PureGen and how the product
meets all of the criteria for being marketed under Section 361. In addition, in January 2012 both we and Parcell
filed a joint appeal of the FDA’s classification of the PureGen product. Until a final determination is made as to
the regulatory status of the PureGen product, we intend to continue to market and sell the product. In the event
that the FDA requires us to stop marketing or selling PureGen until it has achieved regulatory approval as a
medical device or biologic product, we would be forced to stop selling the product. In addition, if we fail to
comply with applicable regulatory requirements related to PureGen, the FDA could deny future marketing
clearance, approval or licensing, withdraw approvals or revoke licenses, or impose civil penalties, including
fines, product seizures or product recalls and, in extreme cases, criminal sanctions.

Negative publicity concerning methods of tissue recovery and screening of donor tissue in our industry could
reduce demand for biologics products and impact the supply of available donor tissue.

Media reports or other negative publicity concerning both alleged improper methods of tissue recovery from

donors and disease transmission from donated tissue could limit widespread acceptance of biologics products.
Unfavorable reports of improper or illegal tissue recovery practices, both in the U.S. and internationally, as well
as incidents of improperly processed tissue leading to the transmission of disease, may broadly affect the rate of
future tissue donation and market acceptance of biologics product. In addition, such negative publicity could
cause the families of potential donors to become reluctant to agree to donate tissue to for-profit tissue processors,
which could have a negative effect on our biologics products business.

If we or our suppliers fail to comply with the FDA’s quality system and good tissue practice regulations, the
manufacture of our products could be delayed.

We and our suppliers are required to comply with the FDA’s QSRs, which cover the methods and
documentation of the design, testing, production, control, quality assurance, labeling, packaging, sterilization,
record keeping, storage and shipping of our products. In addition, suppliers and processors of products derived
from human cells and tissues must comply with the FDA’s current good tissue practice regulations, or CGTPs,
which govern the methods used in and the facilities and controls used for the manufacture of human cell tissue
and cellular products, record keeping and the establishment of a quality program. The FDA audits compliance
with the QSRs and CGTPs through inspections of manufacturing and other facilities. If we or our suppliers have
significant non-compliance issues or if any corrective action plan is not sufficient, we or our suppliers could be
forced to delay the manufacture of our products until such problems are corrected to the FDA’s satisfaction,
which could have a material adverse effect on our business, financial condition and results of operations. Further,
our products could be subject to recall if the FDA determines, for any reason, that our products are not safe or
effective. Any recall or FDA requirement demanding that we seek additional approvals or clearances could result
in delays, costs associated with modification of a product, loss of revenue and potential operating restrictions
imposed by the FDA, all of which could have a material adverse effect on our business, financial condition and
results of operations.

The FDA inspected our Carlsbad, California facilities in February 2010 and non-compliance items were

cited on an FDA Form 483 that we received following the inspection. In June 2010, we received a Warning
Letter from the Irvine District office of the FDA. The Warning Letter related specifically to non-conformances in

quality systems previously identified in the Form 483 that was related to the February inspection. We have
responded to the Warning Letter and completed corrective actions to address the observations. Subsequent to a
follow-up audit of our Carlsbad, California facility in December 2010 the FDA issued a close-out letter dated
September 28, 2011 in which the FDA stated that the Company has resolved all of the deficiencies contained in
the Warning Letter.

Healthcare policy changes, including recent federal legislation to reform the U.S. healthcare system, may
have a material adverse effect on us.

In response to perceived increases in health care costs in recent years, there have been and continue to be

proposals by the federal government, state governments, regulators and third-party payors to control these costs
and, more generally, to reform the U.S. healthcare system. Certain of these proposals could limit the prices we
are able to charge for our products or the amounts of reimbursement available for our products, limit the
acceptance and availability of our products, and have a material adverse effect on our financial position and
results of operations.

In March 2010, the U.S. Congress adopted and President Obama signed into law the PPACA. The

legislation imposes a 2.3% excise tax on domestic sales of medical devices following December 31, 2012. These
taxes will result in a significant increase in the tax burden on our industry. Other elements of this legislation
include numerous provisions to limit Medicare spending through reductions in various fee schedule payments
and by instituting more sweeping payment reforms, such as bundled payments for episodes of care, the
establishment of “accountable care organizations” under which hospitals and physicians will be able to share
savings that result from cost control efforts, comparative effectiveness research, value-based purchasing, and the
establishment of an independent payment advisory board. Many of these provisions will be implemented through
the regulatory process, and policy details have not yet been finalized. In addition, PPACA has been subject to
various legal and legislative challenges. For example, the U.S. House of Representatives recently voted to repeal
PPACA, two courts have ruled that one provision, the minimum coverage rule, or so-called personal mandate,
which is not scheduled to go into effect until 2014, is it unconstitutional. Other proposals have been introduced in
Congress to repeal the device tax. We cannot predict with certainty whether PPACA will be fully implemented as
enacted or what other healthcare initiatives at the federal or state level, if any, will be implemented. However, an
expansion in government’s role in the U.S. healthcare industry may lower reimbursements for our products,
reduce medical procedure volumes and adversely affect our business and results of operations, possibly
materially.

The demand for our products and the prices at which customers and patients are willing to pay for our
products depend upon the ability of our customers to obtain adequate third-party coverage and reimbursement
for their purchases of our products.

Sales of our products depend in part on the availability of adequate coverage and reimbursement from
governmental and private payors. In the U.S., healthcare providers that purchase our products generally rely on
third-party payors, principally Medicare, Medicaid and private health insurance plans, to pay for all or a portion
of the costs and fees associated with the use of our products. While our currently marketed products are eligible
for reimbursement in the U.S., if surgical procedures utilizing our products are performed on an outpatient basis,
it is possible that private payors may no longer provide reimbursement for our products without further
supporting data on our procedure. Any delays in obtaining, or an inability to obtain, adequate coverage or
reimbursement for procedures using our products could significantly affect the acceptance of our products and
have a significant adverse effect on our business. Additionally, third-party payors continue to review their
coverage policies carefully for existing and new therapies and can, without notice, deny coverage for treatments
that include the use of our products. Our business would be negatively impacted to the extent any such changes
reduce reimbursement for our products.

With respect to coverage and reimbursement outside of the U.S., reimbursement systems in international

markets vary significantly by country, and by region within some countries, and reimbursement approvals must
be obtained on a country-by-country basis and can take up to 18 months, or longer. Many international markets
have government-managed healthcare systems that govern reimbursement for new devices and procedures. In
most markets, there are private insurance systems as well as government-managed systems. Additionally, some
foreign reimbursement systems provide for limited payments in a given period and therefore result in extended
payment periods. Reimbursement in international markets may require us to undertake country-specific
reimbursement activities, including additional clinical studies, which could be time consuming, expensive and
may not yield acceptable reimbursement rates.

Furthermore, healthcare costs have risen significantly over the past decade. There have been and may

continue to be proposals by legislators, regulators and third-party payors to contain these costs. Several such
proposals were enacted as part of PPACA, and include numerous provisions to limit Medicare spending through
reductions in various fee schedule payments and sweeping payment reforms. Other federal and state cost-control
measures include prospective payment systems, capitated rates, group purchasing, redesign of benefits, requiring
pre-authorizations or second opinions prior to major surgery, encouragement of healthier lifestyles and
exploration of more cost-effective methods of delivering healthcare. Some healthcare providers in the U.S. have
adopted or are considering a managed care system in which the providers contract to provide comprehensive
healthcare for a fixed cost per person. Healthcare providers may also attempt to control costs by authorizing
fewer elective surgical procedures or by requiring the use of the least expensive devices possible. These cost-
control methods also potentially limit the amount which healthcare providers may be willing to pay for medical
devices. In addition, in the U.S., no uniform policy of coverage and reimbursement for medical technology exists
among all these payors. Therefore, coverage of and reimbursement for medical technology can differ
significantly from payor to payor. The continuing efforts of third-party payors, whether governmental or
commercial, whether inside the U.S. or outside, to contain or reduce these costs, combined with closer scrutiny of
such costs, could restrict our customers’ ability to obtain adequate coverage and reimbursement from these third-
party payors. The cost containment measures contained in PPACA and other measures being considered at the
federal and state level, as well as internationally, could harm our business by adversely affecting the demand for
our products or the price at which we can sell our products.

Consolidation in the healthcare industry could lead to demands for price concessions or to the exclusion of
some suppliers from certain of our markets, which could have an adverse effect on our business, financial
condition or results of operations.

Because healthcare costs have risen significantly over the past decade, numerous initiatives and reforms
initiated by legislators, regulators and third-party payors to curb these costs have resulted in a consolidation trend
in the healthcare industry to create new companies with greater market power, including hospitals. As the
healthcare industry consolidates, competition to provide products and services to industry participants has
become and will continue to become more intense. This in turn has resulted and will likely continue to result in
greater pricing pressures and the exclusion of certain suppliers from important market segments as group
purchasing organizations, independent delivery networks and large single accounts continue to use their market
power to consolidate purchasing decisions for some of our customers. We expect that market demand,
government regulation, third-party reimbursement policies and societal pressures will continue to change the
worldwide healthcare industry, resulting in further business consolidations and alliances among our customers,
which may reduce competition, exert further downward pressure on the prices of our products and may adversely
impact our business, financial condition or results of operations.

We may be subject to or otherwise affected by federal and state healthcare laws, including fraud and abuse,
health information privacy and security, and disclosure laws, and could face substantial penalties if we are
unable to fully comply with such laws.

Although we do not provide healthcare services, submit claims for third-party reimbursement, or receive
payments directly from Medicare, Medicaid, or other third-party payors for our products or the procedures in

which our products are used, healthcare regulation by federal and state governments significantly impacts our
business. Healthcare fraud and abuse, health information privacy and security, and disclosure laws potentially
applicable to our operations include:

•

the federal Anti-Kickback Law, as well as state analogs, which constrains our marketing practices and those
of our independent sales agents and distributors, educational programs, pricing policies, and relationships
with healthcare providers by prohibiting, among other things, knowingly and willfully soliciting, receiving,
offering or providing remuneration, intended to induce the purchase or recommendation of an item or
service reimbursable under a federal (or state or commercial) healthcare program (such as the Medicare or
Medicaid programs);

the federal ban, as well as state analogs, on physician self-referrals, which prohibits, subject to certain
exceptions, physician referrals of Medicare and Medicaid patients to an entity providing certain “designated
health services” if the physician or an immediate family member of the physician has any financial
relationship with the entity;

federal false claims laws which prohibit, among other things, knowingly presenting, or causing to be
presented, claims for payment from Medicare, Medicaid, or other third-party payors that are false or
fraudulent;

the federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, and its implementing
regulations, which created federal criminal laws that prohibit executing a scheme to defraud any healthcare
benefit program or making false statements relating to healthcare matters and which also imposes certain
regulatory and contractual requirements regarding the privacy, security and transmission of individually
identifiable health information;

the state and federal laws “sunshine” provisions that require the reporting and disclosures of any “transfer of
value” made or distributed to prescribers and other health care providers, require the adoption of marketing
codes of conduct, and constrain their relationships with physicians and other referral sources; and

state laws analogous to each of the above federal laws, such as anti-kickback and false claims laws that may
apply to items or services reimbursed by any third-party payor, including commercial insurers, and state
laws governing the privacy of certain health information, many of which differ from each other in
significant ways and often are not preempted by HIPAA, thus complicating compliance efforts.

PPACA includes various provisions designed to strengthen significantly fraud and abuse enforcement, such

as increased funding for enforcement efforts and the lowering of the intent requirement of the federal anti-
kickback statute and criminal healthcare fraud statute such that a person or entity no longer needs to have actual
knowledge of this statute or specific intent to violate it.

If our past or present operations, or those of our independent sales agents and distributors are found to be in

violation of any of such laws or any other governmental regulations that may apply to us, we may be subject to
penalties, including civil and criminal penalties, damages, fines, exclusion from federal healthcare programs
and/or the curtailment or restructuring of our operations. Similarly, if the healthcare providers, sales agents,
distributors or other entities with whom we do business are found to be non-compliant with applicable laws, they
may be subject to sanctions, which could also have a negative impact on us. Any penalties, damages, fines,
curtailment or restructuring of our operations could adversely affect our ability to operate our business and our
financial results. The risk of our being found in violation of these laws is increased by the fact that many of them
have not been fully interpreted by the regulatory authorities or the Courts, and their provisions are open to a
variety of interpretations. Any action against us for violation of these laws, even if we successfully defend
against them, could cause us to incur significant legal expenses and divert our management’s attention from the
operation of our business.

In January 2004, the Advanced Medical Technology Association or AdvaMed, the principal U.S. trade
association for the medical device industry, put in place a model “code of conduct” that sets forth standards by

which its members should abide in the promotion of their products. We have in place policies and procedures for
compliance that we believe are at least as stringent as those set forth in the AdvaMed Code, and we provide
routine training to our sales and marketing personnel on our policies regarding sales and marketing practices. The
AdvaMed Code was revised in 2009 to make it more stringent with respect to interactions with healthcare
professionals. We have adopted the new aspects of the revised AdvaMed Code.

The sales and marketing practices of our industry have been the subject of increased scrutiny from federal

and state government agencies, and we believe that this trend will continue. Prosecutorial scrutiny and
governmental oversight over some major device companies regarding the retention of healthcare professionals as
consultants has affected and may continue to affect the manner in which medical device companies may retain
healthcare professionals as consultants. We have in place policies to govern how we may retain healthcare
professionals as consultants that reflect the current climate on this issue and are providing training on these
policies. Any action against us for violation of these laws, even if we successfully defend against them, could
cause us to incur significant legal expenses and divert our management’s attention from the operation of our
business.

Our international operations may expose us to liabilities under the Foreign Corrupt Practices Act and Money
Laundering Laws.

We may be exposed to liabilities under the U.S. Foreign Corrupt Practices Act, or FCPA, which generally
prohibits companies and their intermediaries from making corrupt payments to foreign officials for the purpose
of obtaining or keeping business or otherwise obtaining favorable treatment, and requires companies to maintain
adequate record keeping and internal accounting practices to accurately reflect the transactions of the company.
We are also subject to a number of other laws and regulations relating to money laundering, international money
transfers and electronic fund transfers, which we collectively refer to as Money Laundering Laws. These laws
apply to companies, individual directors, officers, employees and agents.

We operate in a number of jurisdictions with developing economies that pose a high risk of potential
violations of the FCPA and Money Laundering Laws, and we utilize third-party distributorships that have
government customers. If our employees, third-party distributors or other agents are found to have engaged in
such practices, we could suffer severe penalties, including criminal and civil penalties, disgorgement and other
remedial measures, any of which could have a material adverse effect on our business, financial condition and
results of operations.

If we fail to obtain, or experience significant delays in obtaining, FDA clearances or approvals for our future
products or modifications to our products, our ability to commercially distribute and market our products
could suffer.

Our medical devices are subject to rigorous regulation by the FDA and numerous other federal, state and

foreign governmental authorities. The process of obtaining regulatory clearances or approvals to market a
medical device, particularly from the FDA, can be costly and time consuming, and there can be no assurance that
such clearances or approvals will be granted on a timely basis, if at all. In particular, the FDA permits
commercial distribution of most new medical devices only after the devices have received clearance under
Section 510(k) of the Federal Food, Drug and Cosmetic Act, or 510(k), or are the subject of an approved
premarket approval application, or a PMA. The 510(k) process generally takes three to nine months, but can take
significantly longer, especially if the FDA requires a clinical study to support the 510(k) application. In
connection with the 510(k) that we submitted for the OsseoFix system, the FDA required clinical data to support
the 510(k). Currently, we are not certain as to whether the FDA will require clinical data in support of any other
510(k)s that we intend to submit for other products in our pipeline. In addition, the FDA is currently
re-examining its 510(k) clearance process for medical devices and recently published several draft guidance
documents that could change that process. Any changes that make the process more restrictive could increase the
time it takes for us to obtain clearances or could make the 510(k) process unavailable for certain of our products.

A PMA must be submitted to the FDA if the device cannot be cleared through the 510(k) process or is not
exempt from premarket review by the FDA. A PMA must be supported by extensive data, including results of
preclinical studies and clinical trials, manufacturing and control data and proposed labeling, to demonstrate to the
FDA’s satisfaction the safety and effectiveness of the device for its intended use. The PMA process is more
costly and uncertain than the 510(k) clearance process, and generally takes between one and three years, if not
longer. In addition, any modification to a 510(k)-cleared device that could significantly affect its safety or
effectiveness, or that would constitute a major change in its intended use, design or manufacture, requires a new
510(k) clearance or, possibly, a PMA.

Our commercial distribution and marketing of any products or product modifications that we develop
may be delayed since regulatory clearance or approval is required. In addition, because we cannot assure you that
any new products or any product modifications we develop will be subject to the shorter 510(k) clearance
process, the regulatory approval process for our new products or product modifications may take significantly
longer than anticipated. There is no assurance that the FDA will not require a new product or product
modification to go through the lengthy and expensive PMA approval process. Delays in obtaining regulatory
clearances and approvals may:

•

delay or prevent commercialization of products we develop;

require us to perform costly procedures;

diminish any competitive advantages that we might otherwise have obtained; and

reduce our ability to collect revenues.

To date, all of our non-biologic medical device products that have required FDA review that are being sold
in the U.S. have been cleared through the 510(k) process without any required clinical trials. However, the FDA
may require clinical data in support of any 510(k)s that we intend to submit for products in our pipeline. We have
limited experience in obtaining approval for a device through the 510(k) clinical trial process or the PMA
process. If any of our products require the 510(k) clinical process of the PMA process, such processes could
delay the commercialization of such products and could have a material adverse effect on our business, financial
condition and results of operations.

The safety of our products is not yet supported by long-term clinical data and may therefore prove to be less
safe and effective than initially thought.

We obtained clearance to offer all of our current non-biologic medical device products through the FDA’s
510(k) clearance process. The 510(k) clearance process is generally based on the FDA’s agreement that a new
product is substantially equivalent to already marketed products. Thus, the FDA’s 510(k) review process is less
rigorous than the PMA process and requires little, if any, supporting clinical data. For these reasons, surgeons
may be slow to adopt our 510(k)-cleared products, we may not have the comparative data that our competitors
have or are generating, and we may be subject to greater regulatory and product liability risks. With the passage
of the American Recovery and Reinvestment Act of 2009, funds have been appropriated for the U.S. Department
of Health and Human Services’ Healthcare Research and Quality to conduct comparative effectiveness research
to determine the effectiveness of different drugs, medical devices, and procedures in treating certain conditions
and diseases. Some of our products or procedures performed with our products could become the subject of such
research. It is unknown what effect, if any, this research may have on our business. Further, future research or
experience may indicate that treatment with our products does not improve patient outcomes. Such results would
reduce demand for our products and this could cause us to withdraw our products from the market. Moreover, if
future research or experience indicate that our products cause unexpected or serious complications or other
unforeseen negative effects, we could be subject to significant legal liability, significant negative publicity,
damage to our reputation and a dramatic reduction in sales of our products, all of which would have a material
adverse effect on our business, financial condition and results of operations.

If clinical trials of our current or future product candidates do not produce results necessary to support
regulatory approval in the U.S., we will be unable to commercialize these products.

Several investigational devices in our development pipeline, including our OsseoFix Spinal Fracture
Reduction System, require either a 510(k) with clinical trial data or a PMA from the FDA before we can market
such product in the U.S. The clinical trial is required by the FDA to demonstrate to the FDA’s satisfaction the
safety and effectiveness of the device for its intended use. As a result, to receive regulatory approval in the U.S.
for OsseoFix, we must conduct, at our own expense, a clinical trial to demonstrate efficacy and safety in humans.
Clinical testing is expensive and has an uncertain outcome. Clinical failure can occur at any stage of the testing.
Our clinical trials may produce negative or inconclusive results, and we may decide, or regulators may require
us, to conduct additional clinical and/or non-clinical testing. Our failure to adequately demonstrate the efficacy
and safety of any of our devices would prevent receipt of regulatory approval and, ultimately, the
commercialization of that device.

If we choose to acquire new and complementary businesses, products or technologies, we may be unable to
complete these acquisitions or successfully integrate them in a cost-effective and non-disruptive manner.

Our success depends in part on our ability to continually enhance and broaden our product offering in
response to changing customer demands, competitive pressures and technologies and our ability to increase our
market share. Accordingly, we intend to pursue the acquisition of complementary businesses, products or
technologies instead of developing them ourselves. We do not know if we will be able to successfully complete
any acquisitions, or whether we will be able to successfully integrate any acquired business, product or
technology into our business or retain any key personnel, suppliers or distributors. Our ability to successfully
grow through acquisitions depends upon our ability to identify, negotiate, complete and integrate suitable
acquisitions and to obtain any necessary financing. These efforts could be expensive and time consuming, disrupt
our ongoing business and distract management. If we are unable to integrate any future acquired businesses,
products or technologies effectively, our business, financial condition and results of operations will be materially
adversely affected. For example, an acquisition could materially impair our operating results by causing us to
incur debt or requiring us to amortize significant amounts of expenses, including non-cash acquisition costs, and
acquired assets.

We may not be able to timely develop new products or product enhancements that will be accepted by the
market.

We sell our products in a market that is characterized by technological change, product innovation, evolving
industry standards, competing patent claims, patent litigation and intense competition. Our success will depend in
part on our ability to develop and introduce new products and enhancements or modifications to our existing
products, which we will need to do before our competitors do so and in a manner that does not infringe issued
patents of third parties from which we do not have a license. We cannot assure you that we will be able to
successfully develop or market new, improved or modified products, or that any of our future products will be
accepted by even the surgeons who use our current products. Our competitors’ product development capabilities
could be more effective than our capabilities, and their new products may get to market before our products. In
addition, the products of our competitors may be more effective or less expensive than our products. The
introduction of new products by our competitors may lead us to have price reductions, reduced margins or loss of
market share and may render our products obsolete or noncompetitive. The success of any of our new product
offerings or enhancement or modification to our existing products will depend on several factors, including our
ability to:

•

properly identify and anticipate surgeon and patient needs;

develop new products or enhancements in a timely manner;

obtain the necessary regulatory approvals for new products or product enhancements;

provide adequate training to potential users of new products;

•

receive adequate reimbursement approval of third-party payors such as Medicaid, Medicare and private
insurers; and

develop an effective marketing and distribution network.

Developing products in a timely manner can be difficult, in particular because product designs change
rapidly to adjust to third-party patent constraints and to market preferences. As a result, we may experience
delays in our product launches which may significantly impede our ability to enter or compete in a given market
and may reduce the sales that we are able to generate from these products. We may experience delays in any
phase of a product launch, including during research and development, clinical trials, manufacturing, marketing
and the surgeon training process. In addition, our suppliers of products or components that we do not
manufacture can suffer similar delays, which could cause delays in our product introductions. If we do not
develop new products or product enhancements in time to meet market demand or if there is insufficient demand
for these new products or enhancements, it could have a significant adverse effect on our business financial
condition and results of operations.

We are dependent on our senior management team, sales and marketing team, engineering team and key
surgeon advisors, and the loss of any of them could harm our business.

Our continued success depends in part upon the continued availability and contributions of our senior
management, sales and marketing team and engineering team and the continued participation of our key surgeon
advisors. While we have entered into employment agreements with all members of our senior management team,
other than with respect to our President of Alphatec Pacific, none of these agreements guarantees the services of
the individual for a specified period of time. We would be adversely affected if we fail to adequately prepare for
future turnover of our senior management team. Our ability to grow or at least maintain our sales levels depends
in large part on our ability to attract and retain sales and marketing personnel and for these sales people to
maintain their relationships with surgeons directly and through our distributors. We rely on our engineering team
to research, design and develop potential products for our product pipeline. We also rely on our surgeon advisors
to advise us on our products, our product pipeline, long-term scientific planning, research and development and
industry trends. We compete for personnel and advisors with other companies and other organizations, many of
which are larger and have greater name recognition and financial and other resources than we do. The loss of
members of our senior management team, sales and marketing team, engineering team and key surgeon advisors,
or our inability to attract or retain other qualified personnel or advisors could have a significant adverse effect on
our business, financial conditions and results of operations.

We rely on our information technology systems for inventory management, distribution and other functions
and to maintain our research and development data. If our information technology systems fail to adequately
perform these functions, or if we experience an interruption in their operation, our business, financial
condition and results of operations could be adversely affected.

The efficient operation of our business is dependent on our information technology systems. We rely on our

information technology systems to effectively manage accounting and financial functions; manage order entry,
order fulfillment and inventory replenishment processes; and maintain our research and development data. The
failure of our information technology systems to perform as we anticipate could disrupt our business and product
development and could result in decreased sales, increased overhead costs, excess inventory and product
shortages, all of which could have a significant adverse effect on our business, financial condition and results of
operations. In addition, our information technology systems are vulnerable to damage or interruption from:

•

earthquake, fire, flood and other natural disasters;

terrorist attacks and attacks by computer viruses or hackers;

power loss; and

computer systems, or Internet, telecommunications or data network failure.

Any such interruption could have significant adverse effect on our business, financial condition and results

of operations.

The majority of our operations and all of our manufacturing facilities are currently conducted in locations
that may be at risk of damage from fire, earthquakes or other natural disasters. If a natural disaster strikes,
we may be unable to manufacture certain products for a substantial amount of time.

We currently conduct the majority of our development, manufacturing and management activities in
Carlsbad, California near known wildfire areas and earthquake fault zones. We have taken precautions to
safeguard our facilities, including obtaining property and casualty insurance, and implementing health and safety
protocols. We have developed an Information Technology disaster recovery plan. However, any future natural
disaster, such as a fire or an earthquake, could cause substantial delays in our operations, damage or destroy our
equipment or inventory and cause us to incur additional expenses. A disaster could seriously harm our business,
financial condition and results of operations. Our facilities would be difficult to replace and would require
substantial lead time to repair or replace. The insurance we maintain against earthquakes, fires, and other natural
disasters would not be adequate to cover a total loss of our manufacturing facilities, may not be adequate to cover
our losses in any particular case and may not continue to be available to us on acceptable terms, or at all.

Alphatec Holdings is a holding company with no operations, and unless it receives dividends or other
payments from its subsidiaries, it will be unable to fulfill its cash obligations.

As a holding company with no business operations, Alphatec Holdings’ material assets consist only of the

common stock of its subsidiaries, including Alphatec Spine and Scient’x, dividends and other payments received
from time to time from its subsidiaries, and the proceeds raised from the sale of debt and equity securities.
Alphatec Holdings’ subsidiaries are legally distinct from Alphatec Holdings and have no obligation, contingent
or otherwise, to make funds available to Alphatec Holdings. Alphatec Holdings will have to rely upon dividends
and other payments from its subsidiaries to generate the funds necessary to fulfill its cash obligations. Alphatec
Holdings may not be able to access cash generated by its subsidiaries in order to fulfill cash commitments. The
ability of Alphatec Spine to make dividend and other payments to Alphatec Holdings is subject to the availability
of funds after taking into account its subsidiaries’ funding requirements, the terms of its subsidiaries’
indebtedness and applicable state laws. For example, our current credit facility with Silicon Valley Bank, or
SVB, prohibits Alphatec Spine from declaring or paying dividends, other than dividends payable in capital stock,
during the term of the facility.

Compliance with changing regulations and standards for accounting, corporate governance and public
disclosure may result in additional expenses.

Changing laws, regulations and standards relating to corporate governance and public disclosure, including

the Sarbanes-Oxley Act of 2002, new SEC regulations, including accelerated SEC filing timelines and new Proxy
rules, new NASDAQ Stock Market rules, and new accounting pronouncements are creating uncertainty and
additional complexities for companies such as ours. In particular, the Section 404 internal control evaluation
requirements under the Sarbanes-Oxley Act have added and will continue to add complexity and costs to our
business and require a significant investment of our time and resources to complete each year. We take these
requirements seriously and will make every effort to ensure that we receive clean attestations on our internal
controls each year from our outside auditors, but there is no guarantee that our efforts to do so will be successful.
To maintain high standards of corporate governance and public disclosure, we intend to invest all reasonably
necessary resources to comply with all other evolving standards. These investments may result in increased
general and administrative expenses and a diversion of management time and attention from strategic revenue
generating and cost management activities.

If we fail to maintain effective internal controls and procedures for financial reporting, we could be unable

to provide timely and accurate financial information and therefore be subject to delisting from The NASDAQ

Global Select Market, an investigation by the SEC, and civil or criminal sanctions. Additionally, ineffective
internal control over financial reporting would place us at increased risk of fraud or misuse of corporate assets
and could cause our stockholders, lenders, suppliers and others to lose confidence in the accuracy or
completeness of our financial reports.

Risks Related to Our Financial Results and Need for Financing

The current global recession and credit crisis could adversely affect our business.

The financial and credit crisis that began in 2007 triggered a period of upheaval characterized by

bankruptcy, failure, collapse or sale at nominal amounts of various financial institutions. Despite the
unprecedented level of intervention in the credit markets by the U.S. and foreign governments that has already
occurred and is likely to continue to occur, this crisis could temporarily restrict our ability to borrow money on
acceptable terms in the credit markets and potentially could affect our ability to draw on our current credit
facility. The financial and credit crisis could make it difficult or, in many cases, impossible for our customers to
borrow money to fund their operations. Their lack of or limited access to capital may adversely affect their
ability to purchase our products or, in some cases, to pay for our products on a timely basis.

Our quarterly financial results could fluctuate significantly.

Our quarterly financial results are difficult to predict and may fluctuate significantly from period to period,
particularly because our sales prospects are uncertain. The level of our revenues and results of operations at any
given time will be based primarily on the following factors:

•

acceptance of our products by surgeons, patients, hospitals and third-party payors;

demand and pricing of our products;

the mix of our products sold, because profit margins differ among our products;

timing of new product offerings, acquisitions, licenses or other significant events by us or our competitors;

our ability to grow and maintain a productive sales and marketing organization;

regulatory approvals and legislative changes affecting the products we may offer or those of our
competitors;

the effect of competing technological and market developments;

levels of third-party reimbursement for our products;

interruption in the manufacturing or distribution of our products;

our ability to produce or obtain products of satisfactory quality or in sufficient quantities to meet demand;
and

changes in our ability to obtain FDA, state and international approval or clearance for our products.

In addition, until we have a larger base of surgeons using our products, occasional fluctuations in the use of
our products by individual surgeons or small groups of surgeons will have a proportionately larger impact on our
revenues than for companies with a larger customer base.

Many of the products we may seek to develop and introduce in the future will require FDA, state and
international approval or clearance. We cannot begin to commercialize any such products in the U.S. without
FDA approval or clearance or outside of the U.S. without appropriate regulatory approvals and import licenses.
As a result, it will be difficult for us to forecast demand for these products with any degree of certainty. We
cannot assure you that our revenue will increase or be sustained in future periods or that we will be profitable in
any future period. Any shortfalls in revenue or earnings from levels expected by our stockholders or by securities
or industry analysts could have an immediate and significant adverse effect on the trading price of our common
stock in any given period.

We may need to raise additional funds in the future and such funds may not be available on acceptable terms,
if at all.

We believe that our current cash and cash equivalents, revenues from our operations, and Alphatec Spine’s
ability to draw down on its credit facility, will be sufficient to fund our projected operating requirements through
December 31, 2012. Despite this belief, we may seek additional funds from public and private stock offerings,
borrowings under new debt facilities or other sources. Our capital requirements will depend on many factors,
including:

•

the revenues generated by sales of our products;

the costs associated with expanding our sales and marketing efforts;

the expenses we incur in manufacturing and selling our products;

the costs of developing new products or technologies;

the cost of obtaining and maintaining FDA or other regulatory approval or clearance for our products and
products in development;

the number and timing of acquisitions and other strategic transactions;

the costs associated with increased capital expenditures; and

the costs associated with our employee retention programs and related benefits.

As a result of these factors, we may need to raise additional funds and such funds may not be available on
favorable terms, if at all. Furthermore, if we issue equity or debt securities to raise additional funds, our existing
stockholders may experience dilution and the new equity or debt securities may have rights, preferences and
privileges senior to those of our existing stockholders. In addition, if we raise additional funds through
collaboration, licensing or other similar arrangements, it may be necessary to relinquish valuable rights to our
potential products or proprietary technologies, or to grant licenses on terms that are not favorable to us. If we
cannot raise funds on acceptable terms, we may not be able to develop or enhance our products, execute our
business plan, take advantage of future opportunities, or respond to competitive pressures or unanticipated
customer requirements. Any of these events could adversely affect our ability to achieve our development and
commercialization goals and have a significant adverse effect on our business, financial condition and results of
operations.

We may be unable to comply with the covenants of our credit facility.

In November 2011, we and SVB executed an agreement for a third amendment to the amended credit
facility which included a waiver for non-compliance with the financial covenants for the quarterly period ended
September 30, 2011 and it also restructured our amended credit facility terms including future financial
covenants. As of December 31, 2011, we were not in compliance with the minimum quarterly EBITDA covenant
of our amended credit facility and we obtained a waiver from the lender for such noncompliance.

We are required to maintain compliance with financial covenants in our credit facility. In order to meet the
covenants for 2012, we will need to achieve growth over our historical revenue and earnings levels. If we are not
able to achieve planned revenue growth or incur costs in excess of our forecast, we could be in default of the
credit facility and the Lenders would have the right to declare the loan immediately due and payable. To secure
the repayment of any amounts borrowed under this credit facility, we granted to the lenders a first priority
security interest in all of our assets, other than our intellectual property and our rights under license agreements
granting us rights to intellectual property. We also agreed not to pledge or otherwise encumber our intellectual
property assets without the approval of the lenders. The credit facility also contains customary affirmative and
negative covenants for loan agreements of this type, including, but not limited to, limitations on the incurrence of
indebtedness, asset dispositions, acquisitions, investments, dividends and other restricted payments, liens and
transactions with affiliates. A nonappealable judgment in excess of $100,000 that is unsatisfied for a period of
ten days is also defined as an event of default.

In the event of an event of default, the lenders have the right to declare the amounts borrowed under the
credit facility immediately due and payable and terminate all commitments to extend further credit. An event of
default under the credit facility, includes, among other things, the failure to make payments when due, breaches
of representations, warranties or covenants, the occurrence of certain insolvency events, or the occurrence of an
event which could have a material adverse effect on us. If we were unable to repay those amounts, the lenders
under the credit facility could proceed against the collateral granted to them pursuant to the credit facility. We
have pledged a significant portion of our assets as collateral under the credit facility. If the lenders accelerate the
repayment of our borrowings, we cannot assure you that we will have sufficient cash on hand to repay the
amounts borrowed under the credit facility and we may be forced to obtain alternative financing as discussed
above.

If we default on our obligations to make settlement payments to Cross Medical Products, the amounts due
under the settlement agreements accelerates and becomes due and payable.

Any default of our payment obligation under the settlement agreements we entered into with Cross Medical

Products would give Cross the right to declare all of the future payments to be immediately payable, together
with additional payments to cover interest and Cross’ legal fees. As of March 2, 2012, the outstanding amount to
be paid to Cross Medical through August 2015 is $13,000,000. If this acceleration of payments occurs, our
business, financial condition and results of operations could be materially and adversely affected.

Risks Related to Our Intellectual Property Regulatory Penalties and Potential Litigation

If our patents and other intellectual property rights do not adequately protect our products, we may lose
market share to our competitors and be unable to operate our business profitably.

Our success depends significantly on our ability to protect our proprietary rights of the technologies used in

our products. We rely on patent protection, as well as a combination of copyright, trade secret and trademark
laws, and nondisclosure, confidentiality and other contractual restrictions to protect our proprietary technology.
However, these legal means afford only limited protection and may not adequately protect our rights or permit us
to gain or keep any competitive advantage. For example, we cannot assure you that any of our pending patent
applications will result in the issuance of patents to us. The U.S. Patent and Trademark Office, or PTO, may deny
or require significant narrowing of claims in our pending patent applications, and patents issued as a result of the
pending patent applications, if any, may not provide us with significant commercial protection or be issued in a
form that is advantageous to us. We could also incur substantial costs in proceedings before the PTO. These
proceedings could result in adverse decisions as to the priority of our inventions and the narrowing or
invalidation of claims in issued patents. Our issued patents and those that may be issued in the future could
subsequently be successfully challenged by others and invalidated or rendered unenforceable, which could limit
our ability to stop competitors from marketing and selling related products. In addition, our pending patent
applications include claims to aspects of our products and procedures that are not currently protected by issued
patents.

Both the patent application process and the process of managing patent disputes can be time consuming and
expensive. Competitors may be able to design around our patents or develop products that provide outcomes that
are comparable to our products. Although we have entered into confidentiality agreements and intellectual
property assignment agreements with certain of our employees, consultants and advisors as one of the ways we
seek to protect our intellectual property and other proprietary technology, such agreements may not be
enforceable or may not provide meaningful protection for our trade secrets or other proprietary information in the
event of unauthorized use or disclosure or other breaches of the agreements. Furthermore, the laws of some
foreign countries may not protect our intellectual property rights to the same extent as the laws of the U.S., if at
all. Since most of our issued patents and pending patent applications are for the U.S. only, we lack a
corresponding scope of patent protection in other countries, including Japan. Thus, we may not be able to stop a
competitor from marketing products in other countries that are similar to some of our products.

In the event a competitor infringes upon one of our patents or other intellectual property rights, enforcing

those patents and rights may be difficult and time consuming. Even if successful, litigation to defend our patents
against challenges or to enforce our intellectual property rights could be expensive and time consuming and
could divert management’s attention from managing our business. Moreover, we may not have sufficient
resources to defend our patents against challenges or to enforce our intellectual property rights.

The medical device industry is characterized by patent and other intellectual property litigation and we could
become subject to litigation that could be costly, result in the diversion of management’s time and efforts,
require us to pay damages, and/or prevent us from marketing our existing or future products.

The medical device industry is characterized by extensive litigation and administrative proceedings over
patent and other intellectual property rights. Determining whether a product infringes a patent involves complex
legal and factual issues, the determination of which is often uncertain. Our competitors may assert that our
products, the components of those products, the methods of using those products, or the methods we employ in
manufacturing or processing those products are covered by U.S. or foreign patents held by them. In addition, they
may claim that their patents have priority over ours because their patents were filed first. Because patent
applications can take many years to issue, there may be applications now pending of which we are unaware,
which may later result in issued patents that our products may infringe. There could also be existing patents that
one or more components of our products may be inadvertently infringing, of which we are unaware. As the
number of participants in the market for spine disorder devices and treatments increases, the possibility of patent
infringement claims against us also increases.

Any such claim against us, even those without merit, may cause us to incur substantial costs, and could

place a significant strain on our financial resources, divert the attention of management from our core business
and harm our reputation. If the relevant patents were upheld as valid and enforceable and we were found to
infringe, we could be required to pay substantial damages, including treble, or triple, damages if an infringement
is found to be willful, and/or royalties and we could be prevented from selling our products unless we could
obtain a license or were able to redesign our products to avoid infringement. Any such license may not be
available on reasonable terms, if at all, and there can be no assurance that we would be able to redesign our
products in a way that would not infringe those patents. If we fail to obtain any required licenses or make any
necessary changes to our products or technologies, we may have to withdraw existing products from the market
or may be unable to commercialize one or more of our products, either of which could have a significant adverse
effect on our business, financial condition and results of operations.

In addition, in order to further our product development efforts, from time to time we enter into agreements
with surgeons to develop new products. As consideration for product development activities rendered pursuant to
these agreements, in certain instances we have agreed to pay such surgeons royalties on products developed by
cooperative involvement between us and such surgeons. There can be no assurance that surgeons with whom we
have entered into such an arrangement will not claim to be entitled to a royalty even if we do not believe that
such products were developed by cooperative involvement between us and such surgeons. Any such claim
against us, even those without merit, may cause us to incur substantial costs, and could place a significant strain
on our financial resources, divert the attention of management from our core business and harm our reputation.

If we become subject to product liability claims, we may be required to pay damages that exceed our insurance
coverage.

Our business exposes us to potential product liability claims that are inherent in the testing, design,

manufacture and sale of medical devices for spine surgery procedures. Spine surgery involves significant risk of
serious complications, including bleeding, nerve injury, paralysis and even death. To date, our products have not
been the subject of any material product liability claims. Currently, we carry product liability insurance in the
amount of $10 million per occurrence and $10 million in the aggregate. Our existing product liability insurance
coverage may be inadequate to satisfy liabilities we might incur. Any product liability claim brought against us,

with or without merit, could result in the increase of our product liability insurance rates or our inability to secure
coverage in the future on commercially reasonable terms, if at all. In addition, if our product liability insurance
proves to be inadequate to pay a damage award, we may have to pay the excess out of our cash reserves, which
could harm our financial condition. If longer-term patient results and experience indicate that our products or any
component of our products cause tissue damage, motor impairment or other adverse effects, we could be subject
to significant liability. Even a meritless or unsuccessful product liability claim could harm our reputation in the
industry, lead to significant legal fees and result in the diversion of management’s attention from managing our
business. If a product liability claim or series of claims is brought against us in excess of our insurance coverage
limits, our business could suffer and our financial condition, results of operations and cash flow could be
materially adversely impacted.

Because biologics products entail a potential risk of communicable disease to human recipients, we may be the
subject of product liability claims regarding our biologics products.

Our biologics products may expose us to additional potential product liability claims. The development of
biologics products entails a risk of additional product liability claims because of the risk of transmitting disease
to human recipients, and substantial product liability claims may be asserted against us. In addition, successful
product liability claims made against one of our competitors could cause claims to be made against us or expose
us to a perception that we are vulnerable to similar claims. Even a meritless or unsuccessful product liability
claim could harm our reputation in the industry, lead to significant legal fees and result in the diversion of
management’s attention from managing our business.

Any claims relating to our improper handling, storage or disposal of biological, hazardous and radioactive
materials could be time consuming and costly.

The manufacture of certain of our products, including our biologics products, involves the controlled use of

biological, hazardous and/or radioactive materials and waste. Our business and facilities and those of our
suppliers are subject to foreign, federal, state and local laws and regulations governing the use, manufacture,
storage, handling and disposal of these hazardous materials and waste products. Although we believe that our
safety procedures for handling and disposing of these materials comply with legally prescribed standards, we
cannot completely eliminate the risk of accidental contamination or injury from these materials. In the event of
an accident, we could be held liable for damages or penalized with fines. This liability could exceed our
resources and any applicable insurance. In addition, under some environmental laws and regulations, we could
also be held responsible for all of the costs relating to any contamination at our past or present facilities and at
third-party waste disposal sites, even if such contamination was not caused by us. We may incur significant
expenses in the future relating to any failure to comply with environmental laws. Any such future expenses or
liability could have a significant negative impact on our business, financial condition and results of operations.

We may be subject to damages resulting from claims that we, our employees or our independent distributors
have wrongfully used or disclosed alleged trade secrets of our competitors or are in breach of non-competition
or non-solicitation agreements with our competitors.

Many of our employees were previously employed at other medical device companies, including our
competitors or potential competitors. Many of our independent distributors sell, or in the past have sold, products
of our competitors. We may be subject to claims that we, our employees or our independent distributors have
inadvertently or otherwise used or disclosed the trade secrets or other proprietary information of our competitors.
In addition, we have been and may in the future be subject to claims that we caused an employee or independent
distributor to break the terms of his or her non-competition agreement or non-solicitation agreement. Litigation
may be necessary to defend against such claims. Even if we are successful in defending against such claims,
litigation could result in substantial costs and be a distraction to management. If we fail in defending such claims,
in addition to paying monetary damages, we may lose valuable intellectual property rights and/or personnel. A
loss of key personnel and/or their work product could hamper or prevent our ability to commercialize products,
which could have an adverse effect on our business, financial condition and results of operations.

Scient’x was named as a defendant in a qui tam complaint, and despite the fact that the matter was dismissed
without prejudice, the government continues to review the allegations raised in the complaint.

On August 13, 2009, a complaint filed under the qui tam provisions of the Federal False Claims Act, or the
FCA, that had been filed by private parties against Scient’x’s subsidiary, Scient’x USA, Inc., or Scient’x USA,
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). Such complaint alleged
violations of the FCA arising from allegations that Scient’x USA 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 USA, or to decline to intervene and allow the private plaintiffs to proceed with the case. On
August 7, 2009, the DOJ filed a notice informing the court that it was declining to intervene in the case. On
December 4, 2009, the private plaintiffs who filed the action moved the court to dismiss the matter without
prejudice and the Attorney General consented to such dismissal on December 14, 2009.

The matter was dismissed without prejudice on December 15, 2009. Despite the dismissal of this matter, the

DOJ is continuing its review of the facts alleged by the original plaintiffs in this matter. Scient’x USA believes
that its 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 if further litigation is instituted. To date, Scient’x USA has
not been subpoenaed by any governmental agency in connection with the governmental review. The ultimate
outcome of any governmental review is difficult to estimate. A negative outcome of a governmental review is
likely to have a material effect on the combined business’s cash flows, results of operations and financial
position.

Risks Related to Our Common Stock

We expect that the price of our common stock will fluctuate substantially and the market price of our common
stock may decline in value in the future.

The market price of our common stock is likely to be highly volatile and may fluctuate substantially due to

many factors, including:

•

volume and timing of orders for our products;

quarterly variations in our or our competitors’ results of operations;

our announcement or our competitors’ announcements regarding new products, product enhancements,
significant contracts, number of distributors, number of hospitals and surgeons using products, acquisitions
or strategic investments;

announcements of technological or medical innovations for the treatment of spine pathology;

changes in earnings estimates or recommendations by securities analysts;

our ability to develop, obtain regulatory clearance or approval for, and market new and enhanced products
on a timely basis;

changes in healthcare policy in the U.S. and internationally;

product liability claims or other litigation involving us;

sales of large blocks of our common stock, including sales by our executive officers, directors and
significant stockholders;

changes in governmental regulations or in the status of our regulatory approvals, clearances or applications;

disputes or other developments with respect to intellectual property rights;

changes in the availability of third-party reimbursement in the U.S. or other countries;

•

changes in accounting principles; and

general market conditions and other factors, including factors unrelated to our operating performance or the
operating performance of our competitors.

We and certain of our current officers and directors have been named as defendants in litigation that could
result in substantial costs, divert management’s attention and otherwise result in dilution to our stockholders.

We and certain of our current and former executive officers, have been sued for alleged violations of federal

securities laws related to alleged false and misleading statements and breaches of fiduciary duties in connection
with our acquisition of Scient’x, and the completion of the public offering that took place in April 2010.
Currently there are three shareholder derivative litigations pending and one Federal securities class action
litigation pending. We have been engaged in a vigorous defense of such claims. If we are not successful in our
defense of such claims, we may have to pay damages awards or otherwise enter into settlement arrangements in
connection with such other lawsuits. Any such payments or settlement arrangements could have a material
adverse effect on our business, operating results or financial condition. Even if the pending claims are not
successful, the litigations could result in substantial costs and a significant adverse impact on our reputation and
divert management’s attention and resources, which could have a material adverse effect on our business,
operating results or financial condition.

We may become involved in additional securities class action litigation that could divert management’s
attention and harm our business.

The stock market in general, and The NASDAQ Global Select Market and the market for medical device
companies in particular, has experienced extreme price and volume fluctuations that have often been unrelated or
disproportionate to the operating performance of those companies. Further, the market prices of securities of
medical device companies have been particularly volatile. In the past, following periods of volatility in the
market price of a particular company’s securities, securities class action litigation has often been brought against
that company. We may become involved in this type of litigation in the future. Litigation is often expensive and
diverts management’s attention and resources, which could materially harm our financial condition, results of
operations and business.

Securities analysts may not continue to provide coverage of our common stock or may issue negative reports,
which may have a negative impact on the market price of our common stock.

Securities analysts may not continue to provide research coverage of our common stock. If securities
analysts do not cover our common stock, the lack of research coverage may cause the market price of our
common stock to decline. The trading market for our common stock may be affected in part by the research and
reports that industry or financial analysts publish about our business. If one or more of the analysts who elects to
cover us downgrades our stock, our stock price would likely decline rapidly. If one or more of these analysts
ceases coverage of us, we could lose visibility in the market, which in turn could cause our stock price to decline.
In addition, rules mandated by the Sarbanes-Oxley Act and a global settlement reached in 2003 between the SEC,
other regulatory agencies and a number of investment banks have led to a number of fundamental changes in
how analysts are reviewed and compensated. In particular, many investment banking firms are required to
contract with independent financial analysts for their stock research. It may be difficult for companies such as
ours, with smaller market capitalizations, to attract independent financial analysts that will cover our common
stock. This could have a negative effect on the market price of our stock.

Because of their significant stock ownership, our executive officers, directors and principal stockholders will
be able to exert control over us and our significant corporate decisions.

Based on shares outstanding at February 29, 2012, our executive officers, directors and stockholders holding

more than 5% of our outstanding common stock and their affiliates, in the aggregate, beneficially own

approximately 40% of our outstanding common stock. As a result, these persons will have the ability to
significantly impact the outcome of all matters requiring stockholder approval, including the election and
removal of directors and any merger, consolidation, or sale of all or substantially all of our assets. This
concentration of ownership may harm the market price of our common stock by, among other things:

•

delaying, deferring or preventing our change in control;

impeding a merger, consolidation, takeover or other business combination involving us;

causing us to enter into transactions or agreements that are not in the best interests of all of our stockholders;
or

reducing our public float held by non-affiliates.

Certain members of our Board of Directors also serve as officers and directors of HealthpointCapital, its
affiliates and other portfolio companies.

Four members of our Board of Directors also serve as officers and directors of our largest stockholder,
HealthpointCapital, or its related entities and of other companies in which HealthpointCapital invests, including
companies with which we compete or may in the future compete. As of February 29, 2012, HealthpointCapital
owned approximately 37% of our outstanding common stock. The Chairman of our Executive Committee of our
Board of Directors, Mortimer Berkowitz III, is a managing member of HGP, LLC and HGP II, LLC, the general
partners of HealthpointCapital Partners, LP and HealthpointCapital Partners II, LP, respectively. John H. Foster,
a member of our Board of Directors, is a managing member of HGP, LLC and HGP II, LLC and the Chairman,
Chief Executive Officer, a member of the Board of Managers and a Managing Director of HealthpointCapital,
LLC. Our directors R. Ian Molson and Stephen E. O’Neil also serve on the board of managers of
HealthpointCapital, LLC. In addition, Messrs. Berkowitz, Foster, O’Neil, Molson, and two other directors,
Messrs. Rohit Desai and James Glynn also have financial interests in HealthpointCapital investment funds.

Because of these possible conflicts of interest, such directors may direct potential business and investment
opportunities to other entities rather than to us or such directors may undertake or otherwise engage in activities
or conduct on behalf of such other entities that is not in, or which may be adverse to, our best interests. Whether
a director directs an opportunity to us or to another company, our directors may face claims of breaches of
fiduciary duty and other duties relating to such opportunities. Our amended and restated certificate of
incorporation requires us to indemnify our directors to the fullest extent permitted by law, which may require us
to indemnify them against claims of breaches of such duties arising from their service on our Board of Directors.
HealthpointCapital or its affiliates may pursue acquisition opportunities that may be complementary to our
business and, as a result, those acquisition opportunities may not be available to us. Furthermore,
HealthpointCapital may have an interest in us pursuing acquisitions, divestitures, financings or other transactions
that, in its judgment, could enhance its equity investment, even though such transactions might involve risks to us
and our stockholders generally. In addition, if we were to seek a business combination with a target business with
which one or more of our existing stockholders or directors may be affiliated, conflicts of interest could arise in
connection with negotiating the terms of and completing the business combination. Conflicts that may arise
may not be resolved in our favor.

Anti-takeover provisions in our organizational documents and change of control provisions in some of our
employment agreements and agreements with distributors, and in some of our outstanding debt agreements, as
well as the terms of our redeemable preferred stock, may discourage or prevent a change of control, even if an
acquisition would be beneficial to our stockholders, which could affect our stock price adversely.

Certain provisions of our amended and restated certificate of incorporation and restated by-laws could
discourage, delay or prevent a merger, acquisition or other change in control that stockholders may consider
favorable, including transactions in which our stockholders might otherwise receive a premium for their shares.

These provisions also could limit the price that investors might be willing to pay in the future for shares of our
common stock, thereby depressing the market price of our common stock. Stockholders who wish to participate
in these transactions may not have the opportunity to do so. Furthermore, these provisions could prevent or
frustrate attempts by our stockholders to replace or remove our management. These provisions:

•

allow the authorized number of directors to be changed only by resolution of our Board of Directors;

allow vacancies on our Board of Directors to be filled only by resolution of our Board of Directors;

authorize our Board of Directors to issue, without stockholder approval, blank check preferred stock that, if
issued, could operate as a “poison pill” to dilute the stock ownership of a potential hostile acquirer to
prevent an acquisition that is not approved by our Board of Directors;

require that stockholder actions must be effected at a duly called stockholder meeting and prohibit
stockholder action by written consent;

establish advance notice requirements for stockholder nominations to our Board of Directors and for
stockholder proposals that can be acted on at stockholder meetings; and

limit who may call stockholder meetings.

Some of our employment agreements and all of our restricted stock agreements and incentive stock option

agreements provide for accelerated vesting of benefits, including full vesting of restricted stock and options,
upon a change of control. A limited number of our agreements with our distributors include a provision that
extends the term of the distribution agreement upon a change in control and makes it more difficult for us or our
successor to terminate the agreement. These provisions may discourage or prevent a change of control.

In addition, in the event of a change of control, we would be required to redeem all outstanding shares of
our redeemable preferred stock for an aggregate of $29.9 million, at the price of $9.00 per share. Further, our
amended and restated certificate of incorporation permits us to issue additional shares of preferred stock. The
terms of our redeemable preferred stock or any new preferred stock we may issue could have the effect of
delaying, deterring or preventing a change in control.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Annual Report on Form 10-K and, in particular, the description of our Business set forth in Item 1, the
Risk Factors set forth in this Item 1A and our Management’s Discussion and Analysis of Financial Condition and
Results of Operations set forth in Item 7 contain or incorporate a number of forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, or the Securities Act, and Section 21E of
the Exchange Act, including 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 successfully integrate, and realize benefits from our acquisition of, Scient’x;

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

the effect of any existing or future federal, state or international regulations on our ability to effectively
conduct our business;

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;

the amount of our legal expenses associated with the securities and stockholder derivative litigation,
litigation regarding our intellectual property and any future litigation that may arise, and the adequacy
of our insurance policy coverage regarding those expenses and any damages or settlement payments
related to such litigation;

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;

the difficulty in accurately predicting the future purchases of our U.S.-based and international stocking
distributors;

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 maintain compliance with the quality requirements of the FDA and similar regulatory
authorities outside of the U.S.;

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

our ability to obtain alternative financing, if needed;

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 Annual Report may turn out to be wrong. 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 Annual 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
Annual Report. 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 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 1B. Unresolved Staff Comments

We have not received from the SEC any written comments that have not been resolved regarding our filings

under the Exchange Act.

Item 2.

Properties

Our corporate office and manufacturing facilities are located in Carlsbad, California. Scient’x’s operations

are headquartered in Beaurains, France. The table below provides selected information regarding our current
material operating leased locations.

Location

Use

Carlsbad, California

Corporate headquarters and product design

Carlsbad, California

Product design and manufacturing

Beaurains, France

Scient’x administration, manufacturing and
distribution

Approximate
Square
Footage

76,693

73,480

35,400

Lease Expiration

January 2016

January 2017

December 2013

Item 3.

Legal Proceedings

Litigation

On February 12, 2010, a complaint was filed in the U.S. District Court for the Central District of California,

by Cross Medical Products, LLC, or Cross, (a subsidiary of Biomet), Cross Medical Products, LLC v. Alphatec
Spine, Inc., Case No. 8:10-cv-00176-MRP -MLG, alleging that we breached a patent license agreement with
Cross by failing to make certain royalty payments allegedly due under the agreement. Cross was seeking
payment of prior royalties allegedly due from the Company’s sales of polyaxial screws and an order from the
court regarding payment of future royalties by us. In its complaint, Cross alleged a material amount of damages
were due to it as a result of our alleged breach of the patent license agreement.

In January 2011, we filed a complaint in the U.S. District Court for the Southern District of California

against Biomet, Inc., or Biomet, alleging that Biomet’s TPS-TL products infringe one of our patents.

On December 30, 2011, we reached a global settlement agreement of the pending lawsuits with Biomet and

Cross. Under the terms of the settlement, all parties obtained a release of all claims that were the subject of the
disputes. No party has admitted liability in connection with the settlement. The settlement also includes an
amendment to the April 23, 2003 License Agreement.

As part of the settlement, we agreed to pay Cross an initial payment of $5 million, which payment was made

in January 2012. In addition to the initial payment, we will make thirteen quarterly payments of $1 million
beginning on August 1, 2012, with each subsequent payment due three months thereafter until the final payment
is made in August 2015. The cash obligations totaling $18 million will be paid as follows: $7 million in 2012, $4
million in 2013, $4 million in 2014 and $3 million in 2015. In addition, pursuant to the settlement, the parties
have exchanged covenants not to sue for patent infringement with respect to products that each respective
company had on the market as of December 30, 2011.

In 1998, 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 a contractual dispute
and a $9 million judgment was entered against Eurosurgical by a California court. At the same time, a federal
court in California declared Eurosurgical liable to Orthotec for $30 million in connection with an intellectual
property dispute. In 2006, Eurosurgical’s European assets were ultimately acquired by Surgiview, SAS, or
Surgiview, in a sale agreement 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 denied Orthotec’s
motion, indicating that Orthotec had not carried its burdens of proof. Orthotec chose to not proceed with a further
hearing in September 2007. In May 2008, after the acquisition of Scient’x by HealthpointCapital in 2007,
Orthotec sued Scient’x, Surgiview, HealthpointCapital and certain Scient’x former directors (who also serve on
our board) in a new action in California state court. In addition, at the same time, a similar action was filed in
New York against HealthpointCapital and two former directors of Scient’x (who also serve on our board). In
April 2009, the California court dismissed this matter on jurisdictional grounds, and Orthotec appealed such
ruling. In December 2010, the California Court of Appeal issued a decision that affirmed in part and reversed in
part the trial court’s decision dismissing the entire California action based on lack of personal jurisdiction. The
Court of Appeal affirmed the trial court’s ruling that Orthotec failed to establish personal jurisdiction over all
parties except Surgiview, finding that the trial court could exercise jurisdiction over that entity. In November
2009, the New York court dismissed Orthotec’s claims based on collateral estoppel, and Orthotec appealed this
ruling. In March 2011, the state appeals court in New York reversed the lower court’s decision to dismiss
Orthotec’s claims, and the New York matter is proceeding with HealthpointCapital and certain former Scient’x
directors (who also serve on our board) as the only defendants. While the Company intends to vigorously defend
against 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 Orthotec could have a significant adverse effect on
the Company’s financial condition and results of operations.

In 2004, Scient’x’s wholly owned U.S. subsidiary, Scient’x USA, Inc. (“Scient’x USA”), entered into a
distribution agreement with DAK Surgical, Inc. and DAK Spine, Inc., two independent distributors (collectively
“DAK”), for the distribution of products in certain defined sales areas. In September 2007, shortly after the
expiration of the distribution contract, DAK, and their principals filed a lawsuit in Florida state court against
Scient’x USA and Scient’x in which they alleged, among other things, that (i) Scient’x USA breached the
distribution agreement, (ii) Scient’x USA interfered with DAK’s business relationships, and (iii) personnel at
Scient’x USA made defamatory remarks regarding the principals of DAK. In February 2011, the court granted
Scient’x USA’s Partial Motion for Summary Judgment finding that there was no obligation for Scient’x USA or
Scient’x to pay DAK under a change of ownership clause in the distribution agreement with DAK. While the
Company intends to vigorously defend itself against the complaint, and believes that the plaintiff’s remaining
allegations are also without merit, the outcome of the litigation cannot be predicted at this time and any outcome
in favor of DAK 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 USA 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 USA engaged in improper activities related to consulting payments to
surgeon customers. The relators in the complaint were the principals of the plaintiff in the DAK Surgical matter
discussed above. Under the FCA, the United States Department of Justice, Civil Division, (“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 the Company
nor Scient’x USA have been subpoenaed by any governmental agency in connection with this review. The
Company believes that Scient’x USA’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.

On August 10, 2010, a purported securities class action complaint was filed in the United States District
Court for the Southern District of California on behalf of all persons who purchased the Company’s common
stock between December 19, 2009 and August 5, 2010 against us and certain of its directors and executives
alleging violations of the Securities Exchange Act of 1934, as amended, and Rule 10b-5 thereunder. On
February 17, 2011, an amended complaint was filed against the Company and certain of its directors and officers
adding alleged violations of the Securities Act of 1933. HealthpointCapital, Jefferies & Company, Inc.,
Canaccord Adams, Inc., Cowen and Company, Inc., and Lazard Capital Markets LLC are also defendants in this
action. The complaint alleges that the defendants made false or misleading statements, as well as failed to
disclose material facts, about the Company’s business, financial condition, operations and prospects, particularly
relating to the Scient’x transaction and the Company’s financial guidance following the closing of the
acquisition. The complaint seeks unspecified monetary damages, attorneys’ fees, and other unspecified relief.
The Company believes the claims are without merit and intends to vigorously defend itself against this
complaint; however no assurances can be given as to the timing or outcome of this lawsuit.

On August 25, 2010, an alleged shareholder of the Company’s filed a derivative lawsuit in the Superior

Court of California, San Diego County, purporting to assert claims on behalf of the Company against all of its
directors and certain of its officers and HealthpointCapital. Following the filing of this complaint, similar
complaints were filed in the same court and in the U.S. District Court for the Southern District of California
against the same defendants containing similar allegations. The complaint filed in Federal court was dismissed by
the plaintiff without prejudice in July 2011. The state court complaints have been consolidated into a single
action. The Company has been named as a nominal defendant in the consolidated action. Each complaint alleges
that the Company’s directors and certain of its officers breached their fiduciary duties to the Company related to
the Scient’x transaction, and by making allegedly false statements that led to unjust enrichment of
HealthpointCapital and certain of the Company’s directors. The complaints seek unspecified monetary damages
and an order directing the Company to adopt certain measures purportedly designed to improve its corporate
governance and internal procedures. This consolidated lawsuit has been stayed by order of the court until
August 26, 2012. The Company believes the claims are without merit and intends to vigorously defend itself
against these complaints; however no assurances can be given as to the timing or outcome of this lawsuit.

At December 31, 2011, the probable outcome of any of the aforementioned litigation matters cannot be

determined nor can the Company estimate a range of potential loss. Accordingly, in accordance with the
authoritative guidance on the evaluation of contingencies, the Company has not recorded an accrual related to
these litigation matters. 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 will
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.

Item 4.

(Removed and Reserved)

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of

PART II

Equity Securities

Market Information

Our common stock is traded on The NASDAQ Global Select Market under the symbol “ATEC.” The
following table sets forth the high and low sales prices for our common stock as reported on The NASDAQ
Global Select Market for the periods indicated.

Year Ended December 31, 2011
First quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Year Ended December 31, 2010
First quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Second quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Third quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fourth quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

High
$2.95
3.91
3.87
2.42

High
$6.80
7.62
4.87
2.84

Low
$2.33
2.64
1.99
1.38

Low
$4.10
4.53
1.85
2.01

Stockholders

As of February 29, 2012, there were approximately 211 holders of record of an aggregate 89,592,795 shares

of our common stock.

Dividend Policy

We have never declared or paid cash dividends on our capital stock. We currently intend to retain all
available funds and any future earnings for use in the operation and expansion of our business and do not
anticipate paying any cash dividends in the foreseeable future.

Sales of Unregistered Securities

None.

Issuer Purchases of Equity Securities

Under the terms of our Amended and Restated 2005 Employee, Director and Consultant Stock Plan, or the
Stock 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
Stock Plan and are available for future awards under the terms of the Stock Plan. Common shares repurchased
during the quarter ended December 31, 2011 were as follows:

Period
October 2011 . . . . . . . . . . . . .
November 2011 . . . . . . . . . . .
December 2011 . . . . . . . . . . .

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
—
—
—

(1) Not included in the table above are 13,293 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.

Selected Financial Data

The following table sets forth consolidated financial data for each of the five years in the period ended
December 31, 2011. The selected consolidated financial data set forth below have been derived from our audited
consolidated financial statements, and may not be indicative of future operating results. The results of operations
for the year ended December 31, 2010 do not include the results of Scient’x for the first quarter 2010 as the
acquisition closed on March 26, 2010. The selected consolidated financial data set forth below should be read in
conjunction with our audited consolidated financial statements and related notes thereto found at “Item 8—
Financial Statements and Supplementary Data” and “Item 7—Management’s Discussion and Analysis of
Financial Condition and Results of Operations” included elsewhere in this Annual Report on Form 10-K.

Year Ended December 31,

2011

2010

2009

2008

2007

(in thousands, except per share amounts)

Consolidated Statement of Operations Data:
Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss from continuing operations . . . . . . . . . . . . . . . . . .
Income from discontinued operations . . . . . . . . . . . . . .

$197,711
(24,516)
(22,181)
—

$171,610
(11,789)
(14,433)
78

$120,618
(10,185)
(13,505)
216

$ 92,181
(28,419)
(29,688)
400

$ 72,481
(20,189)
(20,446)
244

Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ (22,181) $ (14,355) $ (13,289) $(29,288) $(20,202)

Net loss per common share:

Basic and diluted . . . . . . . . . . . . . . . . . . . . . . . . . .

(0.25) $

(0.18) $

(0.27) $

(0.63) $

(0.54)

Weighted-average shares used in computing net loss

per share:

Basic and diluted . . . . . . . . . . . . . . . . . . . . . . . . . .

88,798

78,590

49,292

46,290

37,283

As of December 31,

2011

2010

2009

2008

2007

(in thousands)

Consolidated Balance Sheet Data:
Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . .
Working capital
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt, less current portion . . . . . . . . . . . . . .
Redeemable preferred stock . . . . . . . . . . . . . . . . . . . . .
Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . .

$ 20,666
59,292
366,692
23,802
23,603
245,328

$ 23,168
79,233
377,016
32,474
23,603
266,434

$ 10,085
29,543
161,888
23,631
23,603
74,829

$ 18,315
34,299
155,548
26,488
23,605
71,469

$ 25,843
39,802
147,240
1,954
23,612
94,850

Item 7. 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 that could cause our actual results to differ materially from those
indicated. See “Item 1A -Risk Factors” included elsewhere in this Annual Report on Form 10-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 addresses 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. Our principal product offerings are focused on the global market for
orthopedic spinal disorder solution products. 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, which is human tissue that
surgeons can use in place of metal and PEEK. We also sell bone-grafting products that are comprised of both
human tissue and synthetic materials. 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. All of our implants that
are sold in the U.S. that require FDA clearance have been cleared by the FDA.

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 general, except for those countries where
we have a direct sales force (Japan, France, and the United Kingdom), we use independent distributors that
purchase our products and market them to their surgeon customers. A majority of our business is conducted with
customers within markets in which we have experience and with payment terms that are customary. If we offer
payment terms greater than our customary business terms or begin operating in a new market, revenues are
deferred until the sooner of when payments become due or cash is received from the related distributors.

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. The product costs of certain of our biologics products include the cost of procuring
and processing human tissue. We incur royalties related to the technologies that we license from others and the
products that are 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 expense. Research and development expense consists of costs associated with

the design, development, testing, and enhancement of our products. Research and development expense also
includes 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 expense, or IPR&D. IPR&D expense consists of acquired research
and development assets that were not part of an acquisition of a business and 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 expense. 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 expense. General and administrative expense consists primarily of salaries and

related employee benefits, professional service fees and legal expenses.

Transaction-related expense. Transaction-related expense consists of legal, accounting and financial

advisory fees associated with the acquisition of Scient’x.

Restructuring expense. Restructuring expense consists of severance and other personnel costs related to the

reorganization of the Company’s management and those costs associated with exit or disposal activities related to
the acquisition of Scient’x.

Litigation settlement. Litigation settlement expense consists of material settlements of lawsuits.

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 (benefit) provision. Income tax (benefit) provision consists primarily of income tax benefits
related to the French income tax settlement and acquired Scient’x operations offset by state income taxes and the
tax effect of changes in deferred tax liabilities associated with tax deductible goodwill.

Results of Operations

The first table below sets forth our statements of operations data for the periods presented. Statements of

operations data for the year ended December 31, 2010 do not include the results of Scient’x for the first quarter
2010 as the acquisition closed on March 26, 2010. Our historical results are not necessarily indicative of the
operating results that may be expected in the future.

Year Ended December 31,

2011

2010

2009

Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of acquired intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$197,711
79,168
1,613

(in thousands)
$171,610
57,657
1,136

$120,618
39,606
—

Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating expenses:

116,930

112,817

81,012

Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
In-process research and development
Sales and marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of acquired intangible assets . . . . . . . . . . . . . . . . . . . . . . . .
Transaction related expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Litigation settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

16,888
—
75,189
36,367
2,152
—
1,050
9,800

16,431
2,967
66,542
31,078
1,535
3,671
2,382
—

Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

141,446

124,606

13,487
6,383
49,396
19,333
—
2,598
—
—

91,197

Operating loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income (expense):

Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income (expense), net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total other income (expense) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Loss from continuing operations before taxes . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax (benefit) provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Loss from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from discontinued operations, net of tax . . . . . . . . . . . . . . . . . . . . . . . .

(24,516)

(11,789)

(10,185)

148
(3,027)
707

(2,172)

(26,688)
(4,507)

(22,181)
—

81
(5,946)
1,167

(4,698)

(16,487)
(2,054)

(14,433)
78

51
(3,454)
210

(3,193)

(13,378)
127

(13,505)
216

Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ (22,181) $ (14,355) $ (13,289)

Year Ended December 31, 2011 Compared to the Year Ended December 31, 2010

Revenues. Revenues were $197.7 million for the year ended December 31, 2011 compared to $171.6 million

for the year ended December 31, 2010, representing growth of $26.1 million, or 15.2%. The increase was
comprised of $13.9 million and $12.2 million of sales in the U.S. and International regions, respectively.

U.S. revenues were $133.8 million for the year ended December 31, 2011 compared to $119.9 million for
the year ended December 31, 2010, representing an increase of $13.9 million, or 11.6%. The growth was due to
increased sales of Alphatec products ($12.5 million) from instruments and implants ($8.3 million) and Biologics
($4.2 million) and sales of Scient’x products ($1.4 million).

International revenues were $63.9 million for the year ended December 31, 2011 compared to $51.7 million

for the year ended December 31, 2010, representing an increase of $12.2 million, or 23.5%. The growth was
due to increased sales of Alphatec products of $9.9 million and Scient’x products of $4.1 million, offset by

$1.8 million for the recognition of deferred revenue in 2010 related to a European sale that was not repeated in
2011. The increase in revenues is inclusive of $4.6 million in favorable exchange rate effect.

Cost of revenues. Cost of revenues was $79.2 million for the year ended December 31, 2011 compared to
$57.7 million for the year ended December 31, 2010, representing an increase of $21.5 million, or 37.3%. The
increase was primarily related to greater product costs due to growth in sales and variation in product mix
($2.2 million), inventory write-offs resulting from the redesign of a deployment mechanism and the associated
instrumentation ($2.1 million), inventory adjustments ($4.5 million), an increase in instrument depreciation costs
based on a larger installed base of surgical instruments ($1.7 million), unfavorable purchase price variances
($0.5 million), unfavorable manufacturing and absorption variances related to production volume and operational
costs ($6.7 million), offset by royalty and sales milestone accruals due to sales mix and timing of contractual
obligations ($1.2 million), and a decrease in amortization expense related to acquired technology ($0.1 million).
Our costs for Scient’x products for the year ended December 31, 2011 was $5.1 million higher than such product
costs for the year ended December 31, 2010 as we sold Scient’x products for the full year of 2011 as compared to
only nine months in 2010.

Amortization of acquired intangible assets. Amortization of acquired intangible assets was $1.6 million for

the year ended December 31, 2011 compared to $1.1 million for the year ended December 31, 2010, representing
an increase of $0.5 million, or 42.0%. This expense represents amortization in the period for intangible assets
associated with product related assets obtained in the Scient’x acquisition.

Gross profit. Gross profit was $116.9 million for the year ended December 31, 2011 compared to $112.8
million for the year ended December 31, 2010, representing an increase of $4.1 million, or 3.6%. The increase is
comprised of increased revenues from Scient’x products ($0.5 million) and Alphatec products in the International
region ($5.6 million), offset by increased cost of revenues related to Alphatec products ($2.0 million).

Gross margin. Gross margin was 59.1% for the year ended December 31, 2011 compared to 65.7% for the

year ended December 31, 2010. The decrease of 6.6% was the result of a decrease in the gross margin of Scient’x
products from 44.5% to 38.7% and a decrease in Alphatec products from 69.9% to 63.3%.

Gross margin for the U.S. region was 65.1% for the year ended December 31, 2011 compared to 74.4% for
the year ended December 31, 2010. The decrease of 9.4% was the result of a decrease in Scient’x gross margin
(19.3 percentage points) and a decrease in Alphatec gross margins (8.9 percentage points), primarily related to
inventory write-offs and unfavorable manufacturing and absorption variances.

Gross margin for the International region was 46.7% for the year ended December 31, 2011 compared to

45.6% for the year ended December 31, 2010. The increase of 1.2% was the result of increased gross margin for
Alphatec products (3.7 percentage points) offset by decreased gross margin for Scient’x products (3.1 percentage
points) primarily related to a variation in product mix and pricing.

Research and development expense. Research and development expense was $16.9 million for the year
ended December 31, 2011 compared to $16.4 million for the year ended December 31, 2010, representing an
increase of $0.5 million, or 2.8%. The increase was primarily related to increased European research and
development activities to support the Scient’x products ($0.9 million), increased testing, consulting and
prototypes for new products ($2.0 million), offset by reduced activity due to the variation in the timing of the
development cycle for clinical research and trials ($0.5 million) and biologics products ($1.1 million).

In-process research and development expense. IPR&D expense was $0 for the year ended December 31,
2011 compared to $3.0 million for the year ended December 31, 2010. During 2010 we incurred expenses of $2.5
million for the acquisition of technology related to stem cells, $0.4 million for the acquisition of bone-anchoring
screw technology and $0.1 million for the acquisition of technology related to an anterior cervical plate system.
We did not have any acquisitions of a business during 2011.

Sales and marketing expense. Sales and marketing expense was $75.2 million for the year ended

December 31, 2011 compared to $66.5 million for the year ended December 31, 2010, representing an increase
of $8.6 million, or 13.0%. The increase was primarily related to expenses related to increased European selling
and marketing activities in support of the Scient’x products ($2.3 million), increased expense for our
international sales force ($5.3 million), and increased selling and marketing activities in the U.S. to increase sales
volume ($1.0 million).

General and administrative expense. General and administrative expense was $36.4 million for the year
ended December 31, 2011 compared to $31.1 million for the year ended December 31, 2010, representing an
increase of $5.3 million, or 17.0%. The increase was primarily a result of an expanded administrative structure to
drive sales growth in both the U.S. and International regions. Specifically, human resources ($1.5 million),
finance and accounting ($0.8 million), information technology ($0.5 million), legal ($0.6 million) and increased
sales and use tax accruals for periods under audit ($0.7 million). Increased expenses resulting from European
general and administrative activities in support of the Scient’x products ($2.1 million) were partially offset by a
reduction in international expenses resulting from integration efforts ($0.9 million).

Amortization of acquired intangible assets. Amortization of acquired intangible assets was $2.2 million for

the year ended December 31, 2011 compared to $1.5 million for the year ended December 31, 2010, representing
an increase of $0.6 million, or 40.2%. This expense represents amortization in the period for intangible assets
associated with general business assets obtained in the Scient’x acquisition.

Transaction-related expense. Transaction-related expense was $0 for the year ended December 31, 2011
compared to $3.7 million for the year ended December 31, 2011. The transaction-related expenses were for legal,
accounting and financial advisory fees associated with the acquisition of Scient’x.

Restructuring expense. Restructuring expense was $1.1 million for the year ended December 31, 2011
compared to $2.4 million for the year ended December 31, 2010, representing a decrease of $1.3 million, or
55.9%. The restructuring expenses were due to severance and other personnel costs incurred in connection with
restructuring activities in the United States and Europe.

Litigation settlement. Litigation settlement expense was $9.8 million for the year ended December 31, 2011.

The expense was due to a settlement agreement we entered into in December 2011 with Biomet. The amount
expensed in 2011 represents the allocated value of the settlement and past royalties element due from the sale of
our polyaxial screws. There was no corresponding litigation settlement expense in 2010.

Interest income. Interest income was $0.1 million for the year ended December 31, 2011 compared to $0.1

million for the year ended December 31, 2010.

Interest expense. Interest expense was $3.0 million for the year ended December 31, 2011 compared to $5.9

million for the year ended December 31, 2010, representing a decrease of $2.9 million, or 49.1%. Interest
expense consisted primarily of interest related to loan agreements and lines of credit with Silicon Valley Bank
and the associated amortization expenses related to loan costs. The reduction in interest expense was due to lower
interest rates resulting from a different loan structure during 2011 as compared to 2010.

Other income (expense), net. Other income was $0.7 million for the year ended December 31, 2011
compared to $1.2 million for the year ended December 31, 2011, representing a decrease in income of $0.5
million, or 39.4%. The decrease was due to lower foreign currency exchange gains realized in 2011 as compared
to 2010.

Income tax benefit. Income tax was a benefit of $4.5 million for the year ended December 31, 2011
compared to a benefit of $2.1 million for the year ended December 31, 2010, representing an increase of $2.4
million, or 119.4%. The income tax benefit consists primarily of income tax benefits related to a French income
tax settlement and acquired Scient’x operations, offset by state income taxes and the tax effect of changes in
deferred tax liabilities associated with tax deductible goodwill.

Discontinued Operations. The company entered into an agreement to sell one of its wholly owned
subsidiaries, IMC Co., to a third party in April 2010 and recorded $0.1 million in income from discontinued
operations, net of tax, during 2010.

Year Ended December 31, 2010 Compared to the Year Ended December 31, 2009

Revenues. Revenues were $171.6 million for the year ended December 31, 2010 compared to $120.6 million

for the year ended December 31, 2009, representing growth of $51.0 million, or 42.3%. The increase was
comprised of $15.4 million and $35.6 million of sales in the U.S. and International regions, respectively.

U.S. revenues were $119.9 million for the year ended December 31, 2010 compared to $104.5 million for
the year ended December 31, 2009, representing an increase of $15.4 million, or 14.7%. The growth was due to
increased sales of Alphatec products of $10.2 million and the addition of Scient’x products represent an increase
of $5.2 million.

International revenues were $51.7 million for the year ended December 31, 2010 compared to $16.1 million

for the year ended December 31, 2009, representing an increase of $35.6 million, or 221.1%. The growth was
due to increased sales of Alphatec products of $12.0 million and the addition of Scient’x products represents an
increase of $25.0 million, partially offset by $1.4 million in unfavorable exchange rate effect.

Cost of revenues. Cost of revenues was $57.7 million for the year ended December 31, 2010 compared to
$39.6 million for the year ended December 31, 2009, representing an increase of $18.1 million, or 45.6%. The
increase was primarily due to greater product costs associated with the increased sales volume and addition of
Scient’x products ($15.6 million), an increase in instrument depreciation costs based on a larger installed base of
surgical instruments ($3.3 million), and inventory step- up expenses related to the Scient’x acquisition ($1.3
million), offset by royalty and sales milestone accruals due to sales mix, timing of contractual obligations and the
expiration of the certain patents ($0.4 million), and a decrease in amortization costs due to the full amortization
of older intangible assets ($1.7 million).

Amortization of acquired intangible assets. Amortization of acquired intangible assets was $1.1 million for

the year ended December 31, 2010. This expense represents amortization in the period for intangible assets
associated with product related assets obtained in the Scient’x acquisition.

Gross profit. Gross profit was $112.8 million for the year ended December 31, 2010 compared to $81.0
million for the year ended December 31, 2009, representing an increase of $31.8 million, or 39.3%. The increase
is comprised of the addition of Scient’x products ($12.6 million) and increased sales of Alphatec products in the
U.S. ($12.9 million) and International ($6.3 million).

Gross margin. Gross margin was 65.7% for the year ended December 31, 2010 compared to 67.2% for the
year ended December 31, 2009. The decrease of 1.5 percentage points was the result of an increase in Alphatec
products from 67.2% to 70.3%, offset by the addition of Scient’x products at 43.5%.

Gross margin for the U.S. region was 74.4% for the year ended December 31, 2010 compared to 69.3% for
the year ended December 31, 2009. The increase of 5.1 percentage points resulted from improved manufacturing
efficiencies and favorable mix, partially offset by price erosion (net 3.9 percentage points), reduced royalty
expenses (2.7 percentage points), lower amortization expenses (1.8 percentage points) and lower period expenses
(0.9 percentage points), offset by increased instrument depreciation expense (2.1 percentage points), increased
sales milestone accruals (1.2 percentage points), and increased excess and obsolete reserves as our inventory
balances grow to support increased sales volume (0.9 percentage points).

Gross margin for the International region was 45.6% for the year ended December 31, 2010 compared to
53.5% for the year ended December 31, 2009. The decrease of 7.9 percentage points resulted from the addition of
Scient’x products and the associated amortization of costs related to the acquisition and a variation in product
mix.

Research and development expense. Research and development expense was $16.4 million for the year
ended December 31, 2010 compared to $13.5 million for the year ended December 31, 2009, representing an
increase of $2.9 million, or 21.8%. The increase was primarily related to increased European research and
development activities ($2.1 million), and increased testing and consulting expenses for new products,
specifically, Solus, PureGen and prototypes ($1.6 million), offset by decreased stock based compensation of $0.8
million primarily related to the impact of our lower stock price on non-employee R&D-related stock options.

In-process research and development expense. IPR&D expense was $3.0 million for the year ended
December 31, 2010 compared to $6.4 million for the year ended December 31, 2009, representing a decrease of
$3.4 million, or 53.1%. In the year ended December 31, 2010, we incurred expenses of $2.5 million related to our
acquisition of technology related to stem cells, $0.4 million related to our acquisition of bone-anchoring screw
technology and $0.1 million related to our acquisition of technology related to an anterior cervical plate system.
In the year ended December 31, 2009, we incurred expenses of $4.1 million related to a development milestone
that was achieved in connection with our intellectual property involving an expandable pedicle screw ($1.8
million in stock and $2.3 million in cash), $0.9 million in non-cash costs related to our acquisition of technology
related to an anterior lumbar interbody fusion device, $0.5 million related to our acquisition of technology related
to an interbody device, $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 $0.3 million combined
for four IPR&D collaborations with third parties.

Sales and marketing expense. Sales and marketing expense was $66.5 million for the year ended

December 31, 2010 compared to $49.4 million for the year ended December 31, 2009, representing an increase
of $17.1 million, or 34.7%. The increase was primarily related to expenses related to increased European selling
and marketing activities ($7.9 million), increased expenses in the Alphatec Asian subsidiary ($1.2 million) and
higher commission expense ($3.2 million) due to the higher U.S. sales volume, increased selling, marketing and
medical education expenses ($4.6 million) and increased stock based compensation ($0.2 million).

General and administrative expense. General and administrative expense was $31.1 million for the year
ended December 31, 2010 compared to $19.3 million for the year ended December 31, 2009, representing an
increase of $11.8 million, or 60.8%. The increase was primarily a result of increased European general and
administrative activities ($5.6 million), increases in expenses in the Alphatec Asian subsidiary ($0.4 million),
increased stock based compensation ($0.2 million) and increases in U.S. general and administrative expenses
($5.6 million). The increase in U.S. general and administrative expenses represents $1.7 million in U.S. general
and administrative expenses attributed to the absence of two benefits recognized in 2009; one related to a
reduction of $0.5 million in a payroll tax contingency reserve and the other related to a reduction of $1.2 million
in legal expenses related to the settlement of a litigation matter. The remaining $3.9 million increase is primarily
related to increased regulatory ($0.8 million), integration costs ($0.5 million) and other administrative costs,
including information technology, finance and human resources ($2.6 million).

Amortization of acquired intangible assets. Amortization of acquired intangible assets was $1.5 million for

the year ended December 31, 2010 compared to $0 for the year ended December 31, 2009. This expense
represents amortization in the period for intangible assets associated with general business assets obtained in the
Scient’x acquisition.

Transaction-related expense. Transaction-related expense was $3.7 million for the year ended December 31,

2010 compared to $2.6 million for the year ended December 31, 2009, representing an increase of $1.1 million,
or 41.3%. The transaction-related expenses were for legal, accounting and financial advisory fees associated with
the acquisition of Scient’x.

Restructuring expense. Restructuring expense was $2.4 million for the year ended December 31, 2010
compared to $0 for the year ended December 31, 2009. The restructuring expenses were due to severance and
other administrative expenses incurred in connection with restructuring activities in the United States and
Europe.

Interest income. Interest income was $0.1 million for the year ended December 31, 2010 compared to $0.1

million for the year ended December 31, 2009.

Interest expense. Interest expense was $5.9 million for the year ended December 31, 2010 compared to $3.5

million for the year ended December 31, 2009, representing an increase of $2.4 million, or 72.1%. Interest
expense in 2010 consisted primarily of interest related to loan agreements and lines of credit with Silicon Valley
Bank and Oxford Finance Corporation and the associated amortization expenses related to loan costs. The
increase in interest expense was due to a higher amount of debt outstanding in 2010.

Other income (expense), net. Other income was $1.2 million for the year ended December 31, 2010
compared to $0.2 million for the year ended December 31, 2009, representing an increase in income of $1.0
million, or 500%. The decrease was due to greater foreign currency exchange gains realized in 2010 as compared
to 2009.

Income tax benefit. Income tax was a benefit of $2.1 million for the year ended December 31, 2010
compared to an expense of $0.1 million for the year ended December 31, 2009, representing an increase of $2.2
million. The income tax benefit consists primarily of income tax benefits related to the acquired Scient’x
operations, offset by state income taxes and the tax effect of changes in deferred tax liabilities associated with tax
deductible goodwill.

Discontinued Operations. The company entered into an agreement to sell one of its wholly owned

subsidiaries, IMC Co., to a third party in April 2010 and recorded income from discontinued operations, net of
tax, during 2010 and 2009.

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 expenses, restructuring expenses and
litigation settlement expenses. We believe that the most directly comparable GAAP financial measure to adjusted
EBITDA is net income (loss). Adjusted EBITDA has limitations, therefore, it 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 years ended December 31, 2011, 2010 and 2009 (in thousands):

Year Ended December 31,

2011

2010

2009

Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of acquired intangible assets . . . . . . . . . . . . . . . . . . . . . . . . .
In-process research and development
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax (benefit) expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other (income) expense, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Income) from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition-related inventory step up . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transaction related expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Litigation settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$(22,181) $(14,355) $(13,289)
3,571
8,627
3,329
—
6,383
3,403
127
(210)
(216)
—
2,598
—
—

3,177
13,126
1,449
2,671
2,967
5,865
(2,054)
(1,167)
(78)
1,281
3,671
2,382
—

2,425
14,789
1,322
3,765
—
2,879
(4,507)
(707)
—
751
—
1,050
9,800

Adjusted EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 9,386

$ 18,935 $ 14,323

Non-GAAP earnings (loss) represents net income (loss) excluding the effects of in-process research and

development expenses and acquisition related transaction expenses, restructuring expenses and litigation
settlement expenses. Management does not consider these expenses when it makes certain evaluations of our
operations. 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 years ended December 31, 2011, 2010 and 2009 (in thousands):

Year Ended December 31,

2011

2010

2009

Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
In-process research and development
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition-related inventory step up . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of acquired intangible assets . . . . . . . . . . . . . . . . . . . . . . . . .
Transaction related expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Litigation settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$(22,181) $(14,355) $(13,289)
6,383
—
—
2,598
—
—

2,967
1,281
2,671
3,671
2,382
—

—
751
3,765
—
1,050
9,800

Non-GAAP net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ (6,815) $ (1,383) $ (4,308)

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 years ended December 31, 2011, 2010 and 2009 (in thousands):

Year Ended December 31,

2011

2010

2009

Net loss per common share-basic and diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
In-process research and development
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition-related inventory step up . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of acquired intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transaction related expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Litigation settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$(0.25) $(0.18) $(0.27)
0.13
0.04
—
0.01
—
0.03
0.05
0.05
—
0.03
—
—

—
0.01
0.04
—
0.01
0.11

Non-GAAP net loss per common share-basic and diluted . . . . . . . . . . . . . . . .

$(0.08) $(0.02) $(0.09)

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):

Year Ended December 31,

2011

2010

2009

Pro Forma Combined:

Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net loss per share, basic and diluted . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pro Forma Adjusted EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$197,711
$ (23,466)
$ (21,131)
(0.24)
$
59.1%
9,386

$182,945
$ (6,892)
$ (8,785)
(0.10)
$
65.7%

$ 19,528

$170,843
$ (26,478)
$ (28,131)
(0.38)
$
57.6%
8,261

The following is a reconciliation of pro forma adjusted EBITDA to pro forma net loss for the years ended

December 31, 2011, 2010 and 2009 (in thousands):

Year Ended December 31,

2011

2010

2009

Pro Forma net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
In-process research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense, net
Income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other (income) expense, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquisition-related inventory step-up . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Litigation settlement
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-controlling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$(21,131) $ (8,785) $(28,131)
3,925
3,280
10,132
13,496
8,645
4,961
6,383
2,967
4,093
6,045
(3,070)
(2,126)
714
(1,975)
(216)
(78)
5,654
1,717
—
—
132

2,425
14,789
5,087
—
2,879
(4,507)
(707)
—
751
9,800
—

Pro Forma Adjusted EBITDA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 9,386

$19,528

$ 8,261

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 date 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.

Liquidity and Capital Resources

At December 31, 2011, our principal sources of liquidity consisted of cash and cash equivalents of $20.7

million and accounts receivable, net of $41.7 million. Management believes that such amounts will be sufficient
to fund our projected operating requirements through at least December 31, 2012.

Our Amended Credit Facility with Silicon Valley Bank, or SVB, contains financial covenants consisting of

a minimum adjusted quick ratio and minimum quarterly free cash flow. In November 2011, we executed an
agreement for a third amendment to the Amended Credit Facility, or, the Third Amended Credit Facility with
SVB. The Third Amended Credit Facility included a waiver for non-compliance with the minimum quarterly
financial covenants for the quarterly period ended September 30, 2011 and it also restructured the credit facility
terms including future financial covenants. As of December 31, 2011, we were in compliance with the minimum
adjusted quick ratio covenant but were not in compliance with the minimum quarterly EBITDA covenant. In
February 2012, we executed a fourth amendment to the Amended Credit Facility which included a waiver from
SVB for such non-compliance. (See “Credit Facility and Other Debt” below).

Based on our current board approved operating plan, we believe that we will be in compliance with our

financial covenants of the Third Amended Credit Facility in the foreseeable future. However, there is no
assurance that we will be able to do so. If we are not able to achieve our planned revenue growth or incur costs in
excess of our forecasts, we may be required to substantially reduce discretionary spending, and we could be in
default of the Third Amended Credit Facility. In addition to the financial covenants, the Third Amended Credit
Facility contains other covenants including subjective covenants that would allow the lender to declare the loan
immediately due and payable. Upon the occurrence of a covenant violation or other event of default that is not
waived, the lender could elect to declare all amounts outstanding under the Third Amended Credit Facility to be
immediately due and payable and terminate all commitments to extend further credit. If the lender were to
accelerate the repayment of borrowings under the Third Amended Credit Facility for any reason, we may not
have sufficient cash on hand to repay the amounts borrowed under the Third Amended Credit Facility and would
be forced to obtain alternative financing.

If we are not able to achieve the minimum targeted revenue growth and related improvements in

profitability to meet the quarterly covenants or we have other unanticipated expenditures, we may be required to
attempt to seek a waiver of such covenants, renegotiate the amended credit facility, seek additional capital and/or
substantially reduce discretionary spending, which could have a material adverse effect on our ability to achieve
our intended business objectives. There can be no assurances that such a waiver could be obtained, that the Third
Amended Credit Facility could be successfully renegotiated or that we could modify our operations to maintain
liquidity. If we are unable to obtain any required waivers or amendments, the lender would have the right to
exercise remedies specified in the Third Amended Credit Facility, including accelerating the repayment of debt
obligations as discussed above. We may be forced to seek additional financing, which may include additional
debt and/or equity financing or funding through other third party agreements. There can be no assurances that
additional financing will be available on acceptable terms or available at all. Furthermore, any equity financing
may result in dilution to existing stockholders and any debt financing may include restrictive covenants.

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.

We will need to invest in working capital and surgical instruments (the costs of which are capitalized) in
order to support our revenue projections through 2012. 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.

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
December 31, 2011.

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.

Operating Activities

We generated net cash of $13.4 million in operating activities for the year ended December 31, 2011.
During this period, net cash provided by operating activities primarily consisted of a net loss of $22.2 million,
which was offset by an increase in working capital and other assets of $1.8 million and $33.8 million of non-cash
costs including amortization, depreciation, deferred income taxes, stock-based compensation, provision for
excess and obsolete inventory, litigation settlement expense and interest expense related to amortization of debt
discount and issue costs. The increase in working capital and other assets of $1.8 million consisted of decreases
in inventory of $1.0 million in support of the lower sales volume, decreases in prepaid expenses and other assets
of $2.6 million, increases in accounts payable of $2.5 million and increases in accrued expenses and other
liabilities of $1.3 million, partially offset by increases in accounts receivable of $5.0 million and decreases in
deferred revenue of $0.6 million.

Investing Activities

We used net cash of $9.5 million in investing activities for the year ended December 31, 2011 primarily for

the purchase of $8.2 million in surgical instruments, computer equipment, leasehold improvements and
manufacturing equipment, payment for the acquisition of our Brazilian subsidiary of $0.6 million and the
purchase of intangible assets of $0.7 million.

Financing Activities

We used net cash of $6.9 million from financing activities for the year ended December 31, 2011. We
received proceeds from borrowings under our term loan with SVB of $10.0 million, proceeds from borrowings
under our line of credit of $2.3 million and $0.1 million in cash received from the exercise of stock options. We
made payments on our line of credit of $17.4 million and other principal payments on notes payable and capital
lease obligations totaling $1.9 million.

Credit Facility and Other Debt

In December 2008, we entered into a Loan and Security Agreement with SVB and Oxford Finance

Corporation (the “Lenders”), consisting of a $15.0 million term loan and a $15.0 million working capital line of
credit. The term loan carried a fixed interest rate of 11.25% with interest payments due monthly and principal
repayments commencing in October 2009. Thereafter, we were required to repay the principal plus interest in 30
equal monthly installments, ending in April 2012. The working capital line of credit carried a variable interest
rate equal to the prime rate plus either 2.5% or 2.0%, depending on our financial performance. Interest-only
payments were due monthly and the principal was due at maturity in April 2012.

On March 26, 2010, we amended our Loan and Security Agreement, or as amended, the Credit Facility, with

the Lenders. The working capital line of credit was increased by $10 million, to $25 million. In addition, we
combined the previously existing term loan facility provided by Oxford to Scient’x with our existing term loan
facility. Commencing in the second quarter 2010, the amended term loan collectively could not exceed $19.5
million.

Our term loan interest rate was amended to a fixed rate of 12.0%. We were required to repay the principal
plus interest in 25 equal monthly installments, ending in April 2012. 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 were due monthly and the principal was
due at maturity in April 2012. The funds from the credit facility were 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. The debt issuance costs were capitalized and were
being amortized over the remaining term of the loan using the effective interest method.

To secure the repayment of any amounts borrowed under the 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 were 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 were also required to maintain a cash balance with
SVB equal to at least $10 million.

On October 29, 2010, we amended and restated the Credit Facility, or, the Amended Credit Facility. As part
of the Amended Credit Facility, Oxford was removed as a co-lender. The Amended Credit Facility consisted of a
working capital line of credit, which permitted us to borrow up to $32 million. The actual amount available was
based on eligible accounts receivable and eligible inventory. The working capital line of credit carried an interest
rate of the greater of 5.5% or the prime rate plus 1.5% as of January 2011, and during the fourth quarter of 2010
the prime rate plus 3.5%. Interest-only payments were due monthly and the principal was due at maturity, which
occurs in October 2013. The working capital line of credit was intended to refinance our existing debt facilities
and to support future working capital needs.

Upon execution of the Amended Credit Facility, we drew $17.6 million on the working capital line of credit,

resulting in a total line of credit draw of $31.9 million. The funds from the working capital line of credit were
used to pay off our then-existing term loans with SVB and Oxford totaling $9.5 million and Scient’x’s then-
existing term loan of $5.3 million with Oxford. In addition, we paid early termination and other fees of
$0.5 million, a final finance charge of $1.2 million and accrued monthly interest of $0.2 million. We incurred
debt issuance costs on the Amended Credit Facility of $0.6 million, which included an upfront fee of

$0.2 million paid to SVB. The debt issuance costs were capitalized and are being amortized over the term of the
loan using the effective interest method. In addition, we recorded non-cash interest expense of approximately
$0.5 million to write off its debt issuance costs and debt discount related to its prior term loans.

To secure the repayment of any amounts borrowed under the Amended Credit Facility, we granted to SVB a

first-priority security interest in all of its assets, other than our owned and licensed intellectual property assets.
We also agreed not to pledge or otherwise encumber our intellectual property assets without the consent of SVB.

The Amended Credit Facility contained customary lending and reporting covenants, which, among other
things, prohibit us from assuming further debt obligations and any liens, unless otherwise permitted under the
Amended Credit Facility. Upon the occurrence of an event of default, which includes the failure to make
payments when due, breaches of representations, warranties or covenants, the occurrence of certain insolvency
events, or the occurrence of an event or change that could have a material adverse effect on us, the interest to be
charged pursuant to the Amended Credit Facility will be increased to a rate that is up to five percentage points
above the rate effective immediately before the event of default, and all outstanding obligations become
immediately due and payable.

We were also required to maintain compliance with financial covenants consisting of a minimum adjusted
quick ratio and minimum quarterly free cash flow. The minimum adjust quick ratio is defined as the sum of our
cash held with SVB and 80% of eligible domestic accounts receivable divided by the Amended Credit Facility
balance. Free cash flow is defined as Adjusted EBITDA (a non-GAAP term defined as 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, less capital expenditures and cash taxes. As of December 31,
2010, we were in compliance with the financial covenants.

In January 2011, we executed a first amendment to the Amended Credit Facility with SVB. The working
capital line of credit interest rate was amended to equal the SVB prime rate plus 3.5% during the first half of
2011, the SVB prime rate plus 3.0% during the third quarter of 2011, the SVB prime rate plus 2.0% during the
fourth quarter of 2011, and the greater of 5.5% or the SVB prime rate plus 1.5% thereafter. In addition, the
adjusted quick ratio covenant was amended to allow for a lower minimum ratio. There was no change to the
minimum quarterly free cash flow covenant requirements.

In August 2011, we executed a second amendment to the Amended Credit Facility with SVB, or, the Second

Amended Credit Facility. The Second Amended Credit Facility included a waiver for non-compliance with the
minimum quarterly free cash flow covenant for the quarterly period ended June 30, 2011. The working capital
line of credit interest rate was amended to equal the greater of 5.5% or the SVB prime rate plus 2.0% beginning
on January 1, 2012. There was no change to the financial covenant requirements. In conjunction with the Second
Amended Credit Facility, we paid Silicon Valley Bank a fee of $50,000.

In December 2011, we executed a third amendment to the Amended Credit Facility, or, the Third Amended

Credit Facility. The Third Amended Credit Facility included a waiver for non-compliance with the minimum
quarterly financial covenants for the quarterly period ended September 30, 2011 and it also restructured the credit
facility terms including future financial covenants.

The Third Amended Credit Facility consists of a $10 million term loan and a working capital line of credit

which permits us to borrow up to $22 million. The actual amount available under the line of credit is based on
eligible accounts receivable and eligible inventory.

The term loan carries a fixed interest rate equal to the greater of 8.5% or the SVB prime rate plus 4.5% with

principal plus interest repayments due in 16 equal quarterly installments. The term loan matures October 2015
and we are subject to a prepayment penalty if the term loan is repaid prior to maturity. The funds from the term
loan were used to refinance a portion of the line of credit under the Amended Credit Facility.

The working capital line of credit carries an interest rate equal to the SVB prime rate plus 3.5%, which can

be adjusted downward to the SVB prime rate plus a range of 1.0% to 3.0% depending on the result of the
adjusted quick ratio covenant computed monthly. Minimum monthly interest totals $0.1 million. Interest only
payments are due monthly and the principal is due at maturity, October 2013, which is consistent with the
amended credit facility.

In connection with the Third Amended Credit Facility, finance charges totaling $150,000 were waived in

exchange for the issuance of 93,750 warrants to SVB to purchase shares of our common stock. The warrants are
immediately exercisable, can be exercised through a cashless exercise, have an exercise price of $1.60 per share
and have a ten year term. We recorded the value of the warrants of $0.1 million as a debt discount. The value of
the warrants was determined on the date of grant using the Black-Scholes-Merton valuation method with the
following assumptions: risk free interest rate of 1.23%, volatility of 57.4%, a ten year term and no dividend yield.

Under the Third Amended Credit Facility, we are required to maintain compliance with financial covenants

consisting of a quarterly minimum adjusted quick ratio and a quarterly minimum EBITDA level, as well as a
maximum annual capital expenditures limit. The minimum adjust quick ratio is defined as the sum of our cash
held with SVB and 80% of eligible domestic accounts receivable divided by the Third Amended Credit Facility
balance. The EBITDA definition is consistent with the definition of EBITDA in the Amended Credit Facility. As
of December 31, 2011, we were in compliance with the minimum adjusted quick ratio covenant but were not in
compliance with the minimum quarterly EBITDA covenant.

In February 2012, we executed a fourth amendment to the Amended Credit Facility, or, the Fourth Amended
Credit Facility. The Fourth Amended Credit Facility included a waiver for such non-compliance for the quarterly
period ended December 31, 2011. The amendment also reduced the maximum amount available on the working
capital line of credit from $22 million to $19.5 million and accelerated one of the quarterly term loan payments
of $0.6 million which was due and payable upon execution of the amendment. There was no change to the
financial covenant requirements from those of the Third Amended Credit Facility which are required to be met
for the first quarterly period ended March 31, 2012. In conjunction with the Fourth Amended Credit Facility, we
paid SVB a fee of $50,000.

During the year ended December 31, 2011, we repaid $17.4 million and drew an additional $2.3 million on

the working capital line of credit. The balance of the line of credit as of December 31, 2011 was $16.9 million.
Amortization of the debt discount and debt issuance costs and accretion of the finance charge, which were
recorded as non-cash interest expense, totaled $0.4 million, $2.2 million and $0.9 million for the years ended
December 30, 2011, 2010 and 2009, respectively. Interest expense for the term loans and our working capital line
of credit, excluding debt discount and debt issuance cost amortization and accretion of the additional finance
charge, totaled $2.2 million, $3.5 million and $2.6 million for the years ended December 31, 2011, 2010 and
2009, respectively.

Other Debt Agreements

Alphatec Pacific has a term note payable of $0.6 million 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.

We 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.

In March 2011, we executed a $0.2 million note payable to a third party for the purchase of software

licenses, bearing interest at a rate of 4.6% and a maturity date of March 2012.

In November 2011, we executed financing arrangements totaling $0.9 million for the payment of premiums

on various insurance policies. The financing agreements bear interest at a rate of 3.9% and are payable through
September 2012. In 2010, we had financing agreements totaling $1.6 million for the payment of premiums on
various insurance policies. The financing arrangements bear interest at a rate of 4.7% to 5.3% and were payable
from March 2010 through September 2011. Such financing agreements had been fully repaid as of September 30,
2011.

In February 2010, we executed a note payable to Oracle for the purchase of software and the related support

totaling $0.9 million. The note bears interest at 5.3% and has maturity date of February 2013. Payments of
principal and interest are due every three months.

Scient’x had 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. This note
was fully repaid in 2011.

Contractual obligations and commercial commitments

Total contractual obligations and commercial commitments as of December 31, 2011 are summarized in the

following table (in thousands):

Term loan with SVB (1) . . . . . . . . . . . .
Line of Credit with SVB . . . . . . . . . . . .
Note payable for software licenses . . . .
Note payable for insurance

premiums . . . . . . . . . . . . . . . . . . . . .
Note payable to Oracle . . . . . . . . . . . . .
Notes and bond payable to Japanese

banks . . . . . . . . . . . . . . . . . . . . . . . . .
Capital lease obligations . . . . . . . . . . . .
Operating lease obligations . . . . . . . . .
Litigation settlement obligation . . . . . .
Guaranteed minimum royalty

Payment Due by Year

Total

2012

2013

2014

2015

2016

Thereafter

$10,000
16,854
64

$ 3,125
—
64

$ 2,500
16,854
—

$ 2,500
—
—

$ 1,875
—
—

$ —
—
—

$—
—
—

736
206

202
220
13,737
18,000

736
206

138
163
3,800
7,000

—
—

59
56
3,356
4,000

—
—

5
1
2,525
4,000

—
—

—
—
2,352
3,000

—
—

—
—
1,277
—

—

—
—

—
—
427
—

—

obligations . . . . . . . . . . . . . . . . . . . .

11,400

1,600

3,100

3,350

New product development

milestones (2) . . . . . . . . . . . . . . . . . .

10,100

6,100

4,000

—

Total . . . . . . . . . . . . . . . . . . . . . . . . . . .

$81,519

$22,932

$33,925

$12,381

$10,577

$1,277

$427

(1) Reflects acceleration of a term loan payment in 2012 based on February 2012 amendment to credit facility.
(2) 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 2012 through 2013.

Real Property Leases

In February 2008, we entered into a sublease agreement, or the Sublease, for 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 additional 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 leases office and manufacturing warehouse and distribution space in Beaurains, France. The lease
term commenced in December 2002 and ends in December 2013. The monthly base rent payable by Scient’x is
approximately $40,000 per month, which increases annually with the cost of inflation in France.

Off-Balance Sheet Arrangements

As of December 31, 2011, we did not have any off-balance sheet arrangements.

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 assumptions conditions.

We believe the following accounting policies to be critical to the judgments and estimates used in the

preparation of our consolidated financial statements.

Revenue Recognition

We recognize revenue when all four of the following criteria are met: (i) persuasive evidence that an
arrangement exists; (ii) delivery of the products and/or services has occurred; (iii) the selling price is fixed or
determinable; and (iv) collectability is reasonably assured. In addition, we account for revenue under provisions
which set forth guidelines for the timing of revenue recognition based upon factors such as passage of title,
installation, payment and customer acceptance. Determination of criteria (iii) and (iv) are based on
management’s judgment regarding the fixed nature of the fee charged for products delivered and the
collectability of those fees. Specifically, our revenue from sales of spinal and other surgical implants is

recognized upon receipt of written acknowledgement that the product has been used in a surgical procedure or
upon shipment to third-party customers who immediately accept title to such implant. Should changes in
conditions cause management to determine these criteria are not met for certain future transactions, revenues
recognized for any reporting period could be adversely impacted.

Deferred Revenues

Deferred revenues consist of products sold to distributors with payment terms greater than our customary
business terms due to lack of credit history or operating in a new market in which we have no prior experience.
We defer the recognition of revenue until payments become due or cash is received from these distributors.

Accounts Receivable

Accounts receivable are presented net of allowance for doubtful accounts. We make judgments as to our
ability to collect outstanding receivables and provide allowances for a portion of receivables when collection
becomes doubtful. Provisions are made based upon a specific review of all significant outstanding invoices and
the overall quality and age of those invoices not specifically reviewed. In determining the provision for invoices
not specifically reviewed, we analyze historical collection experience and current economic trends. If the
historical data used to calculate the allowance provided for doubtful accounts does not reflect our future ability to
collect outstanding receivables or if the financial condition of customers were to deteriorate, resulting in
impairment of their ability to make payments, an increase in the provision for doubtful accounts may be required.

Inventories

Inventories are stated at the lower of cost or market, with cost primarily determined under the first-in,
first-out method. We review the components of inventory on a periodic basis for excess, obsolete and impaired
inventory, and record a reserve for the identified items. We calculate an inventory reserve for estimated excess
and obsolete inventory based upon historical turnover and assumptions about future demand for our products and
market conditions. Our biologics product inventories are subject to demand fluctuations based on the availability
and demand for alternative implant products. Our estimates and assumptions for excess and obsolete inventory
are subject to uncertainty as we are a high growth company, and we are continually reviewing our existing
products and introducing new products. Increases in the reserve for excess and obsolete inventory result in a
corresponding increase to cost of revenues and establish a new cost basis for the part.

Valuation of Goodwill and Intangible Assets

We assess the impairment of our goodwill and intangible assets annually in December or each quarter if

business conditions change and an earlier impairment indicator arises. This assessment requires us to make
assumptions and judgments regarding the carrying value of these assets. These assets are considered to be
impaired if we determine that their carrying value may not be recoverable based upon our assessment of the
following events or changes in circumstances:

•

a determination that the carrying value of such assets cannot be recovered through undiscounted cash flows;

loss of legal ownership or title to the assets;

significant changes in our strategic business objectives and utilization of the assets; or

the impact of significant negative industry or economic trends.

If the assets are considered to be impaired, the impairment we recognize is the amount by which the
carrying value of the assets exceeds the fair value of the assets. In addition, we base the useful lives and the
related amortization expense on our estimate of the useful life of the assets. Due to the numerous variables
associated with our judgments and assumptions relating to the carrying value of our goodwill and intangible

assets and the effects of changes in circumstances affecting these valuations, both the precision and reliability of
the resulting estimates are subject to uncertainty, and as additional information becomes known, we may change
our estimate, in which case the likelihood of a material change in our reported results would increase.

The goodwill impairment test is a two-step process. The first step compares the our fair value to our net
book value. If the fair value is less than the net book value, the second step of the test compares the implied fair
value of our goodwill to our carrying amount. Our assessment resulted in a fair value that was greater than our
carrying value at December 31, 2011. In accordance with the authoritative literature, the second step of the
impairment test was not required to be performed and no impairment of goodwill was recorded as of
December 31, 2011.

Stock-Based Compensation

We account for stock-based compensation under provisions which 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 our future volatility, the expected term for our stock options,
the number of options expected to ultimately vest, and the timing of vesting for our share-based awards.

We use a Black-Scholes-Merton option-pricing model to estimate the fair value of our stock option awards.
The calculation of the fair value of the awards using the Black-Scholes-Merton option-pricing model is affected
by our stock price on the date of grant as well as assumptions regarding the following:

• Estimated volatility is a measure of the amount by which our stock price is expected to fluctuate each year
during the expected life of the award. Our estimated volatility through December 31, 2011 was based on a
weighted-average volatility of our actual historical volatility since our initial public offering in June 2006
and the historical stock volatilities of similar peer entities whose stock prices were publicly available. Our
calculation of estimated volatility is based in part on historical stock prices of these peer entities over a
period equal to the expected life of the awards. We continue to use the historical volatility of peer entities
due to the lack of sufficient historical data of our stock price since our initial public offering. Our estimated
volatility may increase or decrease depending on the changes in our peer entities’ historical stock prices,
changes in the composition of the peer entity group and changes to the expected term of our stock option
awards. An increase in the estimated volatility would result in an increase to our stock-based compensation
expense.

• The expected term represents the period of time that awards granted are expected to be outstanding. Our

estimated expected term through December 31, 2011 was calculated using a weighted-average term based
on historical exercise patterns and the term from option date to full exercise for the options granted within
the specified date range. An increase in the expected term would result in an increase to our stock-based
compensation expense.

• The risk-free interest rate is based on the yield curve of a zero-coupon U.S. Treasury bond on the date the
stock option award is granted with a maturity equal to the expected term of the stock option award. An
increase in the risk-free interest rate would result in an increase to our stock-based compensation expense.

• The assumed dividend yield is based on our expectation of not paying dividends in the foreseeable future.

We use historical data to estimate the number of future stock option forfeitures. Share-based compensation
recorded in our consolidated statement of operations is based on awards expected to ultimately vest and has been
reduced for estimated forfeitures. Our estimated forfeiture rates may differ from our actual forfeitures which
would affect the amount of expense recognized during the period.

We account for stock option grants to non-employees under provisions which 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. As a result of these subjective and forward-looking estimates, the
actual value of our share-based awards could differ significantly from those amounts recorded in our financial
statements.

Stock-based compensation has been classified as follows in the accompanying consolidated statements of

operations (in thousands, except per share data):

Cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales and marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 180
289
693
1,263

$ 252
185
1,008
1,732

$ 245
965
807
1,554

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$2,425

$3,177

$3,571

Effect on basic and diluted net loss per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ (0.03) $ (0.04) $ (0.07)

Year Ended December 31,

2011

2010

2009

Income Taxes

We account for income taxes in accordance with provisions which set forth an asset and liability approach

that requires the recognition of deferred tax assets and deferred tax liabilities for the expected future tax
consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities.
Valuation allowances are established when necessary to reduce deferred tax assets to the amount that is more
likely than not expected to be realized. In making such a determination, a review of all available positive and
negative evidence must be considered, including scheduled reversal of deferred tax liabilities, projected future
taxable income, tax planning strategies, and recent financial performance.

We recognize interest and penalties related to uncertain tax positions as a component of the income tax

provision.

Recent Accounting Pronouncements

In September 2011, the Financial Accounting Standards Board, or FASB, amended its goodwill guidance by

providing entities an option to use a qualitative approach to test goodwill for impairment. An entity will be able
to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a
reporting unit is less than its carrying value. If it is concluded that this is the case, it is necessary to perform the
currently prescribed two-step goodwill impairment test. Otherwise, the two-step goodwill impairment test is not
required. The amendment will be effective for the Company on January 1, 2012. The Company does not
anticipate that this amendment will have a material impact on its financial position or results of operations.

In 2011, the FASB issued new accounting guidance that requires total comprehensive income, the

components of net income and the components of other comprehensive income to be presented either in a single
continuous statement or in two separate but consecutive statements. This guidance will be effective for the
Company in the fiscal year beginning January 1, 2012. The new guidance eliminates the current option to report
other comprehensive income and its components in the statement of shareholders’ equity. While the new
guidance changes the presentation of other comprehensive income, there are no changes to the components that
are recognized in other comprehensive income. Other than presentation, the adoption of this guidance will not
have an impact on the Company’s financial position or results of operations.

Item 7A. 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
December 31, 2011, our outstanding floating rate indebtedness totaled $16.9 million. The primary base interest
rate is the Silicon Valley Bank 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 $0.2 million. Other outstanding debt consists of fixed rate instruments, including
notes payable and capital leases.

Foreign Currency Risk

Our foreign currency exposure continues to grow as we expand internationally. Our exposure to foreign
currency transaction gains and losses is the result of certain net receivables due from our foreign subsidiaries and
customers being denominated in currencies other than the U.S. dollar, primarily the Euro and Japanese Yen, in
which our revenues and profits are denominated. We do not currently engage in hedging or similar transactions
to reduce these risks. Fluctuations in currency exchange rates could impact our results of operations, financial
position, and cash flows.

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 year ended December 31, 2011.

Item 8.

Financial Statements and Supplementary Data

The consolidated financial statements and supplementary data required by this item are set forth at the pages

indicated in Item 15.

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

Evaluation of 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 Annual Report on Form 10-K. 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, in that they provide reasonable assurance 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.

Management’s Report on Internal Control Over Financial Reporting

Our management, including our Chief Executive Officer and Chief Financial Officer, is responsible for
establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f)
under the Securities Exchange Act of 1934).

Our management, including our Chief Executive Officer and Chief Financial Officer, assessed the
effectiveness of our internal control over financial reporting as of December 31, 2011. Management based this
assessment on criteria for effective internal control over financial reporting described in “Internal Control—
Integrated Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on this assessment, management concluded that our internal control over financial reporting was effective
as of December 31, 2011.

Ernst and Young LLP, an independent registered public accounting firm, who audited the consolidated
financial statements included in this Annual Report on Form 10-K, has also audited the effectiveness of our
internal control over financial reporting as stated in its report appearing elsewhere in this Annual Report on
Form 10-K.

Changes in Internal Control over Financial Reporting.

There were no changes in our internal controls over financial reporting during the quarter ended
December 31, 2011 that have materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of
Alphatec Holdings, Inc.

We have audited Alphatec Holdings, Inc.’s internal control over financial reporting as of December 31,

2011, based on criteria established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (the COSO criteria). Alphatec Holdings, Inc.’s
management is responsible for maintaining effective internal control over financial reporting, and for its
assessment of the effectiveness of internal control over financial reporting included in the accompanying Report
of Management on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the
company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether effective internal control over financial reporting was maintained in all material respects. Our
audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a
material weakness exists, testing and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We
believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over financial reporting
includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company are being made
only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.

In our opinion, Alphatec Holdings, Inc. maintained, in all material respects, effective internal control over

financial reporting as of December 31, 2011, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board

(United States), the consolidated balance sheets of Alphatec Holdings, Inc. as of December 31, 2011 and 2010,
and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the three
years in the period ended December 31, 2011 of Alphatec Holdings, Inc. and our report dated March 2, 2012
expressed an unqualified opinion thereon.

/s/ Ernst & Young LLP

San Diego, California
March 2, 2012

Item 9B. Other Information

Not applicable.

PART III

Item 10. Directors, Executive Officers and Corporate Governance

The information required by Item 10 of this Annual Report on Form 10-K is incorporated by reference from

the discussion responsive thereto under the captions “Management,” “Corporate Governance Matters,”
“Compliance with Section 16(a) of the Securities Exchange Act of 1934,” and “Code of Conduct and Ethics” in
our Proxy Statement for the 2012 Annual Meeting of Stockholders.

Item 11. Executive Compensation

The information required by Item 11 of this Annual Report on Form 10-K is incorporated by reference from

the discussion responsive thereto under the captions “Executive Officer and Director Compensation,”
“Compensation Discussion and Analysis,” “Compensation Committee Interlocks and Insider Participation,”
“Compensation Committee Report,” and “Compensation Practices and Policies Relating to Risk Management” in
our Proxy Statement for the 2012 Annual Meeting of Stockholders.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder

Matters

The information required by Item 12 of this Annual Report on Form 10-K is incorporated by reference from

the discussion responsive thereto under the captions “Security Ownership of Certain Beneficial Owners and
Management” and “Equity Compensation Plan Information” in our Proxy Statement for the 2012 Annual
Meeting of Stockholders.

Item 13. Certain Relationships and Related Transactions, and Director Independence

The information required by Item 13 of this Annual Report on Form 10-K is incorporated by reference from

the discussion responsive thereto under the captions “Certain Relationships and Related Transactions,”
“Management” and “Corporate Governance Matters” in our Proxy Statement for the 2012 Annual Meeting of
Stockholders.

Item 14. Principal Accounting Fees and Services

The information required by Item 14 of this Annual Report on Form 10-K is incorporated by reference from
the discussion responsive thereto under the caption “Independent Public Accountants” in our Proxy Statement for
the 2012 Annual Meeting of Stockholders.

Item 15. Exhibits and Financial Statement Schedules

Item 15 (a) The following documents are filed as part of this Annual Report on Form 10-K:

PART IV

(1) Financial Statements:

Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . .
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Page

F-2
F-3
F-4
F-5
F-7
F-9

(2) Financial Statement Schedules:

Schedule II—Valuation and Qualifying Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-48

All other financial statement schedules have been omitted because they are not applicable, not required
or the information required is included in the consolidated financial statements or the notes thereto.

Item 15(a)(3) Exhibits List

The following is a list of exhibits filed as part of this Annual Report on Form 10-K.

Exhibit
Number

2.1

Exhibit Description

Acquisition Agreement, dated December 17,
2009, by and among the Company and
certain shareholders of Scient’x Groupe
S.A.S. and Scient’x S.A.

3.1

Restated Certificate of Incorporation

3.2

Restated Bylaws

4.1

Form of Common Stock Certificate

4.2

4.3

Stockholders’ Agreement by and among
Alphatec Holdings, Inc., HealthpointCapital
Partners, LP and certain investors, dated as
of March 17, 2005

Subscription Agreement dated as of June 4,
2009, between Alphatec Holdings, Inc. and
HealthpointCapital Partners II, L.P.

Filed
with this
Report

Incorporated by
Reference herein
from Form or
Schedule

Form 8-K
(Exhibit 2.1)

Filing
Date

SEC File/
Reg.
Number

12/22/09 000-52024

Amendment No. 2 to
Form S-1
(Exhibit 3.2)

Amendment No. 5 to
Form S-1
(Exhibit 3.4)

Amendment No. 5 to
Form S-1
(Exhibit 4.1)

Amendment No. 4 to
Form S-1
(Exhibit 4.2)

4/20/06 333-131609

5/26/06 333-131609

5/15/06 333-131609

Form 10-Q
(Exhibit 10.2)

8/4/09

000-52024

Exhibit
Number

4.4

4.5

4.6

4.7

4.8

10.1

10.2

10.3

10.4

10.5

10.6

10.7

Exhibit Description

Corporate Governance Agreement, dated
December 17, 2009, between the Company
and certain shareholders of Scient’x Groupe
S.A.S. and Scient’x S.A.

Registration Rights Agreement, dated
March 26, 2010, by and among Alphatec
Holdings, Inc. and the other signatories
thereto

Form of Subscription Agreement, dated as of
February 9, 2010, between the Company and
each of the investors in the Offering

Warrant with Oxford Finance Corporation as
the Warrantholder, dated as of December 5,
2008

Warrant with Silicon Valley Bank as the
Warrantholder, dated December 16, 2011

Lease Agreements

Standard Industrial Lease (Net) by and
between Alphatec Holdings, Inc. and H.G.
Fenton Property Company, dated as of
January 30, 2008

Sublease Agreement by and between
Alphatec Holdings, Inc. and K2 Inc., dated as
of February 28, 2008

Loan Agreements

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.

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

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

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

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

Filed
with this
Report

Incorporated by
Reference herein
from Form or
Schedule

Form 8-K
(Exhibit 10.1)

Filing
Date

SEC File/
Reg.
Number

12/22/09 000-52024

Form 8-K
(Exhibit 4.1)

3/31/10 000-52024

Form 8-K
(Exhibit 10.1)

Form 10-K
(Exhibit 4.4)

2/10/10 000-52024

3/4/09

000-52024

Form 10-Q
(Exhibit 10.2)

5/12/08 000-52024

Form 10-Q
(Exhibit 10.1)

5/12/08 000-52024

Form 10-Q
(Exhibit 10.1)

5/10/10 000-52024

Form 10-Q
(Exhibit 10.2)

Form 10-Q
(Exhibit 10.3)

Form 10-Q
(Exhibit 10.5)

Form 10-Q
(Exhibit 10.6)

5/10/10 000-52024

Exhibit
Number

10.8†

10.9†

10.10†

10.11†

10.12†

10.13†

10.14†

10.15†

10.16†

10.17†

Filed
with this
Report

Incorporated by
Reference herein
from Form or
Schedule

Form 10-K
(Exhibit 10.8)

Filing
Date

SEC File/
Reg.
Number

3/4/11

000-52024

Form 10-K
(Exhibit 10.9)

3/4/11

000-52024

Form 10-Q
(Exhibit 10.2)

8/8/2011 000-52024

Exhibit Description

Second Amended and Restated Loan and
Security Agreement, dated as of October 29,
2010 by and among Silicon Valley Bank,
Alphatec Holdings, Inc. and Alphatec Spine,
Inc.

First Amendment to the Amended Loan and
Security Agreement, dated as of January 31,
2011 by and among Silicon Valley Bank,
Alphatec Holdings, Inc. and Alphatec Spine,
Inc.

Second Amendment to the Amended and
Restated Loan and Security Agreement by
and among Alphatec Spine, Inc., Alphatec
Holdings, Inc. and Silicon Valley Bank,
dated August 5, 2011.

Third Amendment to the Amended and
Restated Loan and Security Agreement by
and among Alphatec Spine, Inc., Alphatec
Holdings, Inc. and Silicon Valley Bank,
dated December 16, 2011

Agreements with Respect to Collaborations, Licenses, Research and Development

License Agreement by and between
Alphatec Spine, Inc. and Cross Medical
Products, Inc., dated as of April 24, 2003

Supply Agreement by and between Alphatec
Spine, Inc. and Invibio, Inc., dated as of
October 18, 2004 and amended by Letter of
Amendment in respect of the Supply
Agreement, dated as of December 13, 2004

Exclusive License Agreement by and
between Alphatec Spine, Inc. and Stout
Medical Group, LP, dated as of
September 11, 2007

First Amendment to the Exclusive License
Agreement, effective March 31, 2009
between Alphatec Spine, Inc. and Stout
Medical Group LP

Amended and Restated License Agreement
effective March 31, 2009, by and among
Alphatec Holdings, Inc., Alphatec Spine,
Inc. and Stout Medical Group LP

Amended and Restated Developmental
Consulting Agreement, dated as of
March 31, 2009, by and among Alphatec
Holdings, Inc., Alphatec Spine, Inc. and
Stout Medical Group LP

Amendment No. 1 to
Form S-1
(Exhibit 10.26)

Amendment No. 4 to
Form S-1
(Exhibit 10.29)

3/23/06 333-131609

5/15/06 333-131609

Form 10-Q
(Exhibit 10.2)

11/9/07

000-52024

Form 10-Q
(Exhibit 10.4)

5/5/09

000-52024

Form 10-Q
(Exhibit 10.2)

5/5/09

000-52024

Form 10-Q
(Exhibit 10.3)

5/5/09

000-52024

Exhibit
Number

10.18†

10.19†

10.20†

10.21†

10.22†

10.23†

10.24†

10.25†

10.26†

10.27

Exhibit Description

Exclusive License Agreement by and
between Alphatec Spine, Inc. and JGMG
Bengochea, LLC, dated as of September 11,
2007

Exclusive License Agreement by and among
Alphatec Spine, Inc., Alphatec Holdings, Inc.
and Progressive Spinal Technologies LLC,
dated as of December 18, 2007

Amendment to Exclusive License Agreement
by and among Alphatec Spine, Inc., Alphatec
Holdings, Inc. and Progressive Spinal
Technologies LLC, dated as of January 14,
2008

Second Amendment to Exclusive License
Agreement by and among Alphatec Spine,
Inc., Alphatec Holdings, Inc. and Progressive
Spinal Technologies LLC, dated as of
January 12, 2009

Third Amendment to Exclusive License
Agreement dated as of June 30, 2009, by and
among Alphatec Holdings, Inc., Alphatec
Spine, Inc. and Progressive Spinal
Technologies LLC

Fourth Amendment to Exclusive License
Agreement dated as of December 7, 2009, by
and among Alphatec Holdings, Inc., Alphatec
Spine, Inc. and Progressive Spinal
Technologies LLC

Fifth Amendment to Exclusive License
Agreement dated as of November 30, 2010,
by and among Alphatec Holdings, Inc.,
Alphatec Spine, Inc. and Progressive Spinal
Technologies LLC

Cross License Agreement effective June 30,
2009, by and among Alphatec Holdings, Inc.,
Alphatec Spine, Inc. and International Spinal
Innovations, LLC

Letter Amendment between Alphatec Spine,
Inc. and Invibio, Inc., dated November 24,
2010

Filed
with this
Report

Incorporated by
Reference herein
from Form or
Schedule

Form 10-Q
(Exhibit 10.1)

Filing
Date

SEC File/
Reg.
Number

11/9/07 000-52024

Form 10-K
(Exhibit 10.29)

3/17/08 000-52024

Form 10-K/A
(Exhibit 10.22)

7/7/09

000-52024

Form 10-K/A
(Exhibit 10.23)

7/7/09

000-52024

Form 10-Q
(Exhibit 10.3)

8/4/09

000-52024

Form 10-K/A
(Exhibit 10.38)

4/8/10

000-52024

Form 10-K
(Exhibit 10.22)

3/4/11

000-52024

Form 10-Q
(Exhibit 10.1)

8/4/09

000-52024

Form 10-Q
(Exhibit 10.3)

5/6/2011 000-52024

Settlement Agreement and General Release
by and among Alphatec Spine, Inc., Cross
Medical Products, LLC, and EBI, LLC, dated
December 30, 2011

Exhibit
Number

10.28†

10.29*

10.30*

10.31*

10.32*

10.33*

10.34*

10.35*

10.36*

10.37*

Exhibit Description

Amended License Agreement between
Alphatec Spine, Inc. and Cross Medical
Products, LLC, dated December 30, 2011

Agreements with Officers and Directors

Amended and Restated Employment
Agreement by and between Alphatec
Holdings, Inc. and Dirk Kuyper, dated
January 1, 2011

Employment Agreement by and among
Alphatec Spine, Inc., Alphatec Holdings, Inc.
and Michael O’Neill, dated October 11, 2010

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

Amended and Restated Employment
Agreement by and among Alphatec Spine,
Inc., Alphatec Holdings, Inc. and Peter Wulff,
dated October 11, 2010.
Employment Agreement by and among
Alphatec Holdings, Inc., Alphatec Spine, Inc.
and Kermit P. Stott, dated August 13, 2007

Employment Agreement by and among
Alphatec Spine, Inc., Alphatec Holdings, Inc.
and Jens Peter Timm, dated January 28, 2008

Employment Agreement by and among
Alphatec Spine, Inc., Alphatec Holdings, Inc.
and Steve Lubischer, dated November 10,
2006

Amended and Restated Employment
Agreement by and between Alphatec Spine,
Inc. and Mitsuo Asai, dated January 14, 2011

Amended and Restated Employment
Agreement by and among Alphatec Holdings,
Inc., Alphatec Spine, Inc. and Ebun S.
Garner, Esq., dated July 17, 2006

10.38*† Consulting Agreement by and among

Alphatec Spine, Inc., Alphatec Holdings, Inc.
and Stephen H. Hochschuler, M.D., dated
October 13, 2006

10.39*

Employment Agreement by and among
Alphatec Spine, Inc., Alphatec Holdings, Inc.
and Patrick Ryan, dated February 18, 2011

Incorporated by
Reference herein
from Form or
Schedule

Filing
Date

SEC File/
Reg.
Number

Filed
with this
Report

Form 10-K
(Exhibit 10.24)

3/4/11

000-52024

Form 10-Q
(Exhibit 10.2)

Form 10-Q
(Exhibit 10.4)

Form 10-Q
(Exhibit 10.1)

Form 10-K
(Exhibit 10.17)

Form 10-K
(Exhibit 10.15)

Form 10-K
(Exhibit 10.27)

Form 10-K
(Exhibit 10.31)

Form 10-K
(Exhibit 10.20)

11/8/10 000-52024

5/10/10 000-52024

11/8/10 000-52024

3/17/08 000-52024

3/4/09 000-52024

4/2/07 000-52024

3/4/11

000-52024

3/17/08 000-52024

Form 10-K
(Exhibit 10.30)

4/2/07

000-52024

Form 10-Q
(Exhibit 10.1)

5/6/2011 000-52024

Incorporated by
Reference herein
from Form or
Schedule

Form 10-Q
(Exhibit 10.1)

Filing
Date

SEC File/
Reg.
Number

11/4/11

000-52024

Form 10-Q
(Exhibit 10.5)

5/5/09

000-52024

Amendment No. 5 to
Form S-1
(Exhibit 10.5)

Amendment No. 2 to
Form S-1
(Exhibit 10.6)

Amendment No. 2 to
Form S-1
(Exhibit 10.7)

Amendment No. 2 to
Form S-1
(Exhibit 10.8)

Form 10-Q
(Exhibit 10.2)

5/26/06 333-131609

4/20/06 333-131609

5/6/2011 000-52024

Exhibit
Number

Exhibit Description

Filed
with this
Report

10.40* Non-Executive Chairman Consulting

Agreement by and among Alphatec Spine,
Inc., Alphatec Holdings, Inc. and Leslie
Cross dated July 27, 2011.

10.41*

First Amendment to the Consulting
Agreement by and among Alphatec Spine,
Inc., Alphatec Holdings, Inc. and Stephen H.
Hochschuler, M.D.

10.42*

Form of Indemnification Agreement entered
into with each of the Company’s non-
employee directors

Equity Compensation Plans

10.43* Amended and Restated 2005 Employee,

Director and Consultant Stock Plan

10.44*

10.45*

10.46*

Form of Non-Qualified Stock Option
Agreement issued under the Amended and
Restated 2005 Stock Plan

Form of Incentive Stock Option Agreement
issued under the Amended and Restated
2005 Stock Plan

Form of Restricted Stock Agreement issued
under the Amended and Restated 2005
Stock Plan

10.47*

Summary Description of the Alphatec
Holdings, Inc. 2011 Bonus Plan

21.1

23.1

31.1

31.2

List of subsidiaries of the Registrant

Consent of Independent Registered Public
Accounting Firm

Certification of Principal Executive Officer
pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002

Certification of Principal Financial Officer
pursuant to Section 302 of the Sarbanes-
Oxley Act of 2002

Certification pursuant to 18 U.S.C. 1350, as
adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002

101.1

101.2

101.3

101.4

101.5

101.6

XBRL Instance Document**

XBRL Taxonomy Extension Schema Document**

XBRL Taxonomy Extension Calculation Linkbase Document**

XBRL Taxonomy Extension Definition Linkbase Document**

XBRL Taxonomy Extension Label Linkbase Document**

XBRL Taxonomy Extension Presentation Linkbase Document**

(*) Management contract or compensatory plan or arrangement.
(†) Confidential treatment has been granted by the Securities and Exchange Commission as to certain portions.
** Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not

filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act
of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of
1934, as amended, and otherwise are not subject to liability under those sections.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant
has duly caused this Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly
authorized.

Dated: March 2, 2012

ALPHATEC HOLDINGS, INC.

By:
Name:
Title:

/S/ LESLIE H. CROSS
Leslie H. Cross
Chairman and Chief Executive Officer
(principal executive officer)

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the

following persons on behalf of the registrant and in the capacities and on the dates indicated:

Signature

Title

Date

/S/ MORTIMER BERKOWITZ III

Mortimer Berkowitz III

/S/ MICHAEL O’NEILL

Michael O’Neill

/S/ ROHIT DESAI

Rohit Desai

/S/ DIRK KUYPER

Dirk Kuyper

/S/

JOHN H. FOSTER
John H. Foster

/S/

JAMES R. GLYNN
James R. Glynn

Chairman of the Executive
Committee of the Board of
Directors

Chief Financial Officer, Vice
President and Treasurer (principal
financial and accounting officer)

March 2, 2012

Director

March 2, 2012

President, Global Commercial
Operations and Director

Director

March 2, 2012

/S/ STEPHEN H. HOCHSCHULER, M.D.

Director

March 2, 2012

Stephen H. Hochschuler, M.D.

/S/ SIRI MARSHALL

Siri Marshall

/S/ R. IAN MOLSON

R. Ian Molson

/S/ STEPHEN E. O’NEIL
Stephen E. O’Neil

Director

March 2, 2012

[THIS PAGE INTENTIONALLY LEFT BLANK]

ALPHATEC HOLDINGS, INC.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Consolidated Statements of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Consolidated Statements of Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Page

F-2

F-3

F-4

F-5

F-7

F-9

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of
Alphatec Holdings, Inc.

We have audited the accompanying consolidated balance sheets of Alphatec Holdings, Inc. as of

December 31, 2011 and 2010, and the related consolidated statements of operations, stockholders’ equity, and
cash flows for each of the three years in the period ended December 31, 2011. Our audits also included the
financial statement schedule listed in the Index at Item 15(a)(2). These financial statements and schedule are the
responsibility of the Company’s management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the

consolidated financial position of Alphatec Holdings, Inc., at December 31, 2011 and 2010, and the consolidated
results of its operations and its cash flows for each of the three years in the period ended December 31, 2011, in
conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board

(United States), Alphatec Holdings, Inc.’s internal control over financial reporting as of December 31, 2011,
based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated March 2, 2012 expressed an unqualified
opinion thereon.

/s/ Ernst & Young LLP

San Diego, California
March 2, 2012

F-2

ALPHATEC HOLDINGS, INC.

CONSOLIDATED BALANCE SHEETS
(In thousands, except par value data)

December 31,

2011

2010

Current assets:

Assets

Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 20,666
41,711
45,916
6,888
1,248

$ 23,168
39,777
51,635
6,652
1,592

Total current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangibles, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

116,429
31,476
168,609
47,144
3,034

122,824
38,440
170,194
43,148
2,410

Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 366,692

$ 377,016

Current liabilities:

Liabilities and Stockholders’ Equity

Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Current portion of long-term debt

$ 17,390
32,583
2,768
4,396

$ 15,957
22,530
3,396
1,708

Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt, less current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commitments and contingencies
Redeemable preferred stock, $0.0001 par value; 20,000 authorized at December 31,

2011 and 2010; 3,319 shares issued and outstanding at both December 31, 2011 and
2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

57,137
23,802
12,997
3,825

43,591
32,474
2,153
8,761

23,603

Stockholders’ equity:

Common stock, $0.0001 par value; 200,000 authorized; 89,362 and 89,040 shares

issued and outstanding at December 31, 2011 and 2010, respectively . . . . . . . . .
Treasury stock, 19 shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated deficit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

9
(97)
386,224
(2,812)
(137,996)

9
(97)
383,647
(1,310)
(115,815)

Total stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

245,328

266,434

Total liabilities and stockholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 366,692

$ 377,016

See accompanying notes.

F-3

ALPHATEC HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)

Year Ended December 31,

2011

2010

2009

$197,711
79,168
1,613

$171,610
57,657
1,136

$120,618
39,606
—

Gross profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating expenses:

116,930

112,817

81,012

Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
In-process research and development
. . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales and marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization of acquired intangible assets . . . . . . . . . . . . . . . . . . . . . . . .
Transaction related expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Litigation settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

16,888
—
75,189
36,367
2,152
—
1,050
9,800

16,431
2,967
66,542
31,078
1,535
3,671
2,382
—

Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

141,446

124,606

13,487
6,383
49,396
19,333
—
2,598
—
—

91,197

Operating loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other income (expense):

Total other income (expense) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Loss from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from discontinued operations, net of tax . . . . . . . . . . . . . . . . . . . . . . . .

(24,516)

(11,789)

(10,185)

148
(3,027)
707

(2,172)

(26,688)
(4,507)

(22,181)
—

81
(5,946)
1,167

(4,698)

(16,487)
(2,054)

(14,433)
78

51
(3,454)
210

(3,193)

(13,378)
127

(13,505)
216

Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ (22,181) $ (14,355) $ (13,289)

Net loss per common share:

Basic and diluted net loss per share from continuing operations . . . . . . . .
Basic and diluted net income per share from discontinued operations . . .

Basic and diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(0.25) $

(0.18) $

—

(0.27)
—

(0.25) $

(0.18) $

(0.27)

Weighted-average shares used in computing net loss per share:

Basic and diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

88,798

78,590

49,292

See accompanying notes.

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S

ALPHATEC HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)

Year Ended December 31,
2010

2009

2011

Operating activities:

Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net loss to net cash provided by (used in)

$(22,181) $(14,355) $(13,289)

operating activities:

Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense related to amortization of debt discount and debt

issuance costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
In-process research and development paid in stock . . . . . . . . . . . . . . .
Provision for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for excess and obsolete inventory . . . . . . . . . . . . . . . . . . . .
Loss on sale of property and equipment, net . . . . . . . . . . . . . . . . . . . .
Gain on sale of IMC Co. (discontinued operations)
. . . . . . . . . . . . . .
Litigation settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income tax (benefit) expense . . . . . . . . . . . . . . . . . . . . . . . .

Changes in operating assets and liabilities:

Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prepaid expenses and other current assets . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses and other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by (used in) operating activities . . . . . . . . . . . . . . . . . . . . . . .
Investing activities:

Cash received from acquisition of Scient’x . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from sale of IMC Co. (discontinued operations) . . . . . . . . . . . . .
Proceeds from sale of Noas Medical Company . . . . . . . . . . . . . . . . . . . . . .
Purchases of property and equipment
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash paid for acquisition of Brazilian subsidiary . . . . . . . . . . . . . . . . . . . .
Net cash used in investing activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financing activities:

Net proceeds from issuance of common stock . . . . . . . . . . . . . . . . . . . . . . .
Exercise of stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Borrowings under lines of credit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayments under lines of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Principal payments on capital lease obligations . . . . . . . . . . . . . . . . . . . . . .
Proceeds from issuance of notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . .
Principal payments on notes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase of noncontrolling interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net cash provided by (used in) financing activities . . . . . . . . . . . . . . . . . . . . . . .
Effect of exchange rate changes on cash and cash equivalents . . . . . . . . . . . . . .
Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at beginning of period . . . . . . . . . . . . . . . . . . . . . . . .
Cash and cash equivalents at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

19,876
2,425

17,246
3,177

11,956
3,571

375
—
1,094
4,564
—
—
9,800
(4,345)

(5,004)
1,084
1,341
1,216
2,545
1,246
(628)
13,408

—
—
—
(8,206)
(690)
(620)
(9,516)

1,330
1,000
945
2,781
—
(188)
—
(1,945)

(2,179)
(14,661)
(2,130)
679
(5,203)
(2,591)
1,261
(14,833)

1,589
329
—
(14,028)
(2,300)
—
(14,410)

—
104
2,350
(17,346)
(143)
10,000
(1,880)
—
(6,915)
521
(2,502)
23,168
$ 20,666

49,659
213
20,174
(3,059)
(174)
—
(23,268)
(480)
43,065
(739)
13,083
10,085
$ 23,168

591
3,011
5
1,927
53
—
—
141

(6,048)
(7,274)
1,702
395
(1,825)
(741)
277
(5,548)

—
—
383
(11,763)
(1,353)
—
(12,733)

9,907
38
5,768
(2,533)
(342)
—
(2,569)
—
10,269
(218)
(8,230)
18,315
$ 10,085

See accompanying notes.

F-7

ALPHATEC HOLDINGS, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS—(Continued)
(in thousands)

Year Ended December 31,
2010

2009

2011

Supplemental disclosure of cash flow information:

Cash paid for interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash paid for income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of property and equipment in accounts payable . . . . . . . . . . . . . . . .
Purchase of software licenses through vendor financing arrangement
. . . . . . .
Financing of insurance premiums by insurance provider
. . . . . . . . . . . . . . . . .
Issuance of common stock for litigation settlement . . . . . . . . . . . . . . . . . . . . . .
Purchase of property and equipment through capital leases . . . . . . . . . . . . . . .
Non-cash exercise of warrants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Non-cash purchases of license agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Issuance of common stock in acquisition of Scient’x . . . . . . . . . . . . . . . . . . . .
Stock options issued in connection with Scient’x acquisition . . . . . . . . . . . . . .
Conversion of accounts receivable into notes receivable located in prepaid

$
$
$
$
$

4,245
426
3,487
872
1,179

$2,245
$2,322
$ 158
$ 523
$4,115
$3,242
$ —
$
64
$ 932
$ 997
$ — $ — $ 500
$ — $ — $
96
$ 360
540
$ — $
$ —
$8,000
2,500
$
$ —
$ — $151,639
$ —
1,040
$ — $

expenses and other current assets and other assets . . . . . . . . . . . . . . . . . . . .

$2,184

$ — $ —

See accompanying notes.

F-8

ALPHATEC HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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. and its subsidiaries (“Alphatec Spine”) designs, develops, manufactures and
markets products for the surgical treatment of spine disorders, primarily focused on the aging spine. In addition
to its U.S. operations, the Company also markets its products in over 50 international markets through its
subsidiary, Scient’x S.A.S. and its subsidiaries (“Scient’x”), via a direct salesforce in France, Italy and the United
Kingdom and via independent distributors in the rest of Europe, the Middle East and Africa, South America and
Latin America. In Asia and Australia, the Company markets its products through its subsidiary, Alphatec Pacific,
Inc. and its subsidiaries (“Alphatec Pacific”), and through Scient’x’s distributors in China, Korea and Australia.

The Company acquired Scient’x on March 26, 2010. Subsequent to the closing of the acquisition, the

Company became responsible for managing the operation of the combined entities (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 year ended December 31, 2010 include the results of
Scient’x beginning April 1, 2010 as the Company determined that Scient’x’s results of operations for the five
days from the acquisition date, March 26, 2010, to the fiscal quarter end were immaterial to the Company’s first
quarter consolidated results. All intercompany balances and transactions have been eliminated in the consolidated
financial statements.

In April 2010, Alphatec Pacific entered into an agreement to sell its wholly owned subsidiary, IMC Co., to a

third party. The results of operations and the gain on sale associated with this business have been presented as
discontinued operations in the accompanying consolidated statements of operations for all periods presented.

The accompanying 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 $20.7 million and accounts
receivable of $41.7 million at December 31, 2011 will be sufficient to fund its cash requirements through at least
December 31, 2012. The Company’s amended credit facility (the “Third Amended Credit Facility”) with Silicon
Valley Bank (“SVB”) contains financial covenants consisting of a quarterly minimum adjusted quick ratio and a
quarterly minimum EBITDA level, as well as a maximum annual capital expenditures limit (see Note 6). As of
December 31, 2011, the Company was in compliance with the minimum adjusted quick ratio covenant but was
not in compliance with the minimum quarterly EBITDA covenant. In February 2012, the Company executed an
amendment to the Third Amended Credit Facility which included a waiver from SVB for such non-compliance.
The amendment also accelerated one of the quarterly term loan payments of $0.6 million and it reduced the
maximum amount available on the working capital line of credit from $22 million to $19.5 million (see Note 6).

Based on the Company’s board approved current operating plan, the Company believes that it will be in

compliance with the financial covenants of the Third Amended Credit Facility in the foreseeable future.
However, there is no assurance that the Company will be able to do so. If the Company is not able to achieve its
planned revenue growth or incurs costs in excess of its forecasts, it may be required to substantially reduce
discretionary spending and it could be in default of the Third Amended Credit Facility. In addition to the
financial covenants, the Third Amended Credit Facility contains other covenants including subjective clauses that

F-9

ALPHATEC HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

would allow the lender to declare the loan immediately due and payable. Upon the occurrence of a covenant
violation or other event of default that is not waived, the lender could elect to declare all amounts outstanding
under the Third Amended Credit Facility to be immediately due and payable and terminate all commitments to
extend further credit. If the lender were to accelerate the repayment of borrowings under the Third Amended
Credit Facility for any reason, the Company may not have sufficient cash on hand to repay the amounts borrowed
under the Third Amended Credit Facility and would be forced to obtain alternative financing.

If the Company is not able to achieve the minimum targeted revenue growth and related improvements in

profitability to meet the quarterly covenants or has other unanticipated expenditures, the Company may be
required to attempt to seek a waiver of such covenants, renegotiate the amended credit facility, and/or
substantially reduce discretionary spending, which could have a material adverse effect on the Company’s ability
to achieve its intended business objectives. There can be no assurances that such a waiver could be obtained, that
the Third Amended Credit Facility could be successfully renegotiated or that the Company can modify its
operations to maintain liquidity. If the Company is unable to obtain any required waivers or amendments, the
lender would have the right to exercise remedies specified in the Third Amended Credit Facility, including
accelerating the repayment of debt obligations as discussed above. The Company may be forced to seek
additional financing, which may include additional debt and/or equity financing or funding through other third
party agreements. There can be no assurances that additional financing will be available on acceptable terms or
available at all. Furthermore, any equity financing may result in dilution to existing stockholders and any debt
financing may include restrictive covenants.

2. Summary of Significant Accounting Policies

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the
United States requires management to make estimates and assumptions that affect the reported amounts in the
Company’s consolidated financial statements and accompanying notes. Actual results could differ from those
estimates.

Concentrations of Credit Risk and Significant Customers

Financial instruments, which potentially subject the Company to concentrations of credit risk, consist
primarily of cash and cash equivalents and accounts receivable. The Company limits its exposure to credit loss
by depositing its cash and cash equivalents with established financial institutions. As of December 31, 2011 a
substantial portion of our available cash funds is in business accounts. Although the Company deposits its cash
and cash equivalents with multiple financial institutions, its deposits, at times, may exceed federally insured
limits.

The Company’s customers are primarily hospitals or surgical centers and no single customer represented

greater than 10 percent of consolidated revenues for any of the periods presented. Credit to customers is granted
based on an analysis of the customers’ credit worthiness and credit losses have not been significant.

Revenue Recognition

The Company derives its revenues primarily from the sale of spinal surgery implants used in the treatment

of spine disorders. The Company sells its products primarily through its direct sales force and independent
distributors. Revenue is recognized when all four of the following criteria are met: (i) persuasive evidence of an
arrangement exists; (ii) delivery of the products and/or services has occurred; (iii) the selling price is fixed or

F-10

ALPHATEC HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

determinable; and (iv) collectibility is reasonably assured. In addition, the Company accounts for revenue under
provisions which sets forth guidelines for the timing of revenue recognition based upon factors such as passage
of title, installation, payment and customer acceptance.

The Company’s revenue from sales of spinal and other surgical implants is recognized upon receipt of
written acknowledgement that the product has been used in a surgical procedure or upon shipment to third-party
customers who immediately accept title to such implant.

Deferred Revenues

Deferred revenues consist of products sold to distributors with payment terms greater than the Company’s
customary business terms due to lack of credit history or operating in a new market in which the Company has no
prior experience. The Company defers the recognition of revenue until payments become due or cash is received
from these distributors. As of December 31, 2011 and 2010, the balance in deferred revenue totaled $2.8 million
and $3.4 million, respectively.

Cash and Cash Equivalents

The Company considers all investments with a maturity of three months or less from the date of acquisition

to be cash equivalents. Cash equivalents primarily represent funds invested in money market funds, whose cost
equals fair market value.

Accounts Receivable

Accounts receivable are presented net of allowance for doubtful accounts. The Company makes judgments

as to its ability to collect outstanding receivables and provides allowances for a portion of receivables when
collection becomes doubtful. Provisions are made based upon a specific review of all significant outstanding
invoices and the overall quality and age of those invoices not specifically reviewed. In determining the provision
for invoices not specifically reviewed, the Company analyzes historical collection experience. If the historical
data used to calculate the allowance provided for doubtful accounts does not reflect the Company’s future ability
to collect outstanding receivables or if the financial condition of customers were to deteriorate, resulting in
impairment of their ability to make payments, an increase in the provision for doubtful accounts may be required.

Inventories

Inventories are stated at the lower of cost or market, with cost primarily determined under the first-in,
first-out method. The Company reviews the components of inventory on a periodic basis for excess, obsolete and
impaired inventory, and records a reserve for the identified items. The Company calculates an inventory reserve
for estimated excess and obsolete inventory based upon historical turnover and assumptions about future demand
for its products and market conditions. The Company’s biologics inventories have a five-year shelf life and are
subject to demand fluctuations based on the availability and demand for alternative implant products. The
Company’s estimates and assumptions for excess and obsolete inventory are reviewed and updated on a quarterly
basis. Increases in the reserve for excess and obsolete inventory result in a corresponding increase to cost of
revenues and establish a new cost basis for the part. Approximately $15 million and $17 million of inventory was
held at consigned locations as of December 31, 2011 and 2010, respectively.

Property and Equipment

Property and equipment are stated at cost, net of accumulated depreciation and amortization. Depreciation is

computed using the straight-line method over the estimated useful lives of the related assets, generally ranging
from four to seven years. Leasehold improvements and assets acquired under capital leases are amortized over
the shorter of their useful lives or the terms of the related leases.

F-11

ALPHATEC HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Goodwill and Other Intangible Assets

The Company accounts for goodwill and other intangible assets in accordance with provisions which require
that goodwill and other identifiable intangible assets with indefinite useful lives be tested for impairment at least
annually. The Company tests goodwill and intangible assets for impairment in December of each year, or more
frequently if events and circumstances warrant. These assets are impaired if the Company determines that their
carrying values may not be recoverable based on an assessment of certain events or changes in circumstances. If
the assets are considered to be impaired, the Company recognizes the amount by which the carrying value of the
assets exceeds the fair value of the assets as an impairment loss. The Company has not recognized any
impairment losses through December 31, 2011.

During the third quarter of 2011, the Company concluded that a decline in its stock price and market
capitalization was an indicator of a potential impairment in goodwill. As a result, the Company performed an
interim impairment test on its single operating unit. The Company’s assessment resulted in a fair value that was
greater than the Company’s carrying value at September 30, 2011 and no impairment of goodwill was recorded
as of September 30, 2011. The Company re-assessed goodwill impairment when it performed its annual test for
impairment in December 2011.

The goodwill impairment test is a two-step process. The first step compares the Company’s fair value to its
net book value. If the fair value is less than the net book value, the second step of the test compares the implied
fair value of the Company’s goodwill to its carrying amount. If the carrying amount of goodwill exceeds its
implied fair value, the Company would recognize an impairment loss equal to that excess amount.

The Company estimated the fair value in step one based on the income approach which included discounted

cash flows as well as a market approach that utilized the Company’s earnings and revenue multiples and recent
sales transactions. The Company’s discounted cash flows required management judgment with respect to
forecasted sales, launch of new products, gross margin, selling, general and administrative expenses, capital
expenditures and the selection and use of an appropriate discount rate. The Company utilized its weighted
average cost of capital as the discount rate for the projected future cash flows and its median revenue and
earnings multiples under the market approach. The Company’s assessment resulted in a fair value that was
greater than the Company’s carrying value at December 31, 2011. In accordance with the authoritative literature,
the second step of the impairment test was not required to be performed and no impairment of goodwill was
recorded as of December 31, 2011.

Significant management judgment is required in the forecast of future operating results that are used in the

Company’s impairment analysis. The estimates the Company used are consistent with the plans and estimates
that it uses to manage its business. Significant assumptions utilized in the Company’s income approach model
included the growth rate of sales for recently introduced products and the introduction of anticipated new
products. Another important assumption involved in forecasted sales is the projected mix of higher margin U.S.
based sales and lower margin non-U.S. based sales. Additionally, the Company has projected an improvement in
its gross margin as a result of its forecasted mix in U.S. sales versus non-U.S. based sales and lower
manufacturing cost per unit based on the increase in forecasted volume to absorb applied overhead over the next
three years. Although the Company believes its underlying assumptions supporting this assessment are
reasonable, if the Company’s forecasted sales, mix of product sales, growth rates of recently introduced new
products, timing of and growth rates of new product introductions, gross margin, selling, general and
administrative expenses, or the discount rate vary marginally from its forecasts, the Company may be required to
perform a step two analysis that could expose the Company to material impairment charges in the future.

F-12

ALPHATEC HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The accounting provisions also require that intangible assets with estimable useful lives be amortized over

their respective estimated useful lives and reviewed for indicators of impairment. The Company is amortizing its
intangible assets, other than goodwill, on a straight-line basis over a one to fifteen-year period.

Impairment of Long-Lived Assets

The Company assesses potential impairment to its long-lived assets when there is evidence that events or
changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment
loss is recognized when the carrying amount of the long-lived assets is not recoverable if it exceeds the sum of
the undiscounted cash flows expected to result from the use and eventual disposition of the asset. Any required
impairment loss is measured as the amount by which the carrying amount of a long-lived asset exceeds it fair
value and is recorded as a reduction in the carrying value of the related asset and a charge to operating results.
The Company has not recognized any impairment loss through December 31, 2011.

Foreign Currency

The Company’s results of operations and cash flows are subject to fluctuations due to changes in foreign
currency exchange rates. The Company’s primary functional currency is the U.S. dollar, while the functional
currency of the Company’s Japanese subsidiary is the Japanese yen, the Hong Kong subsidiary is the Hong Kong
dollar and the functional currency of the Company’s European operations is the Euro. Assets and liabilities
denominated in foreign currencies are translated at the rate of exchange on the balance sheet date. Revenues and
expenses are translated using the average exchange rate for the period. Net gains and losses resulting from the
translation of foreign financial statements are recorded as accumulated other comprehensive income (loss) in
stockholders’ equity. Net foreign currency gains or (losses) resulting from transactions in currencies other than
the functional currencies are included in other income (expense), net in the accompanying consolidated
statements of operations. For the years ended December 31, 2011, 2010 and 2009, the Company recorded net
foreign currency gains of approximately $0.5 million, $1.1 million and $0, respectively.

The change in cumulative foreign currency translation adjustment primarily relates to the Company’s
investment in Scient’x and fluctuations in exchange rates between Scient’x’s functional currency (the Euro) and
the U.S. dollar. During 2011 and 2010, the change in the foreign currency translation amounts resulted from
changes in the value of the Euro.

Fair Value of Financial Instruments

The carrying value of accounts receivable, foreign cash accounts, prepaid expenses, other current assets,

accounts payable, accrued expenses, and current portion of debt are considered to be representative of their
respective fair values because of the short- term nature of those instruments. Based on the borrowing rates
currently available to the Company for loans with similar terms, management believes the fair value of notes
payable, capital leases and other long-term debt approximates their carrying values.

The Company measures its fair value of financial instruments in accordance with the established framework

for fair value using “levels” which are defined as follows: Level 1 fair value is determined from observable,
quoted prices in active markets for identical assets or liabilities. Level 2 fair value is determined from quoted
prices for similar items in active markets or quoted prices for identical or similar items in markets that are not
active. Level 3 fair value is determined using the entity’s own assumptions about the inputs that market
participants would use in pricing an asset or liability.

F-13

ALPHATEC HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Research and Development

Research and development expense consists of costs associated with the design, development, testing, and

enhancement of the Company’s 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. Research and development costs
are expensed as incurred.

In-Process Research and Development

In-process research and development (“IPR&D”) consists of acquired research and development assets that

are not part of an acquisition of a business and were not technologically feasible on the date the Company
acquired them and had no alternative future use at that date. The Company expects all acquired IPR&D will
reach technological feasibility, but there can be no assurance that commercial viability of these products will be
achieved. The nature of the efforts to develop the acquired technologies into commercially viable products
consists principally of planning, designing, developing and testing products in order to obtain regulatory
approvals. If commercial viability were not achieved, the Company would likely look to other alternatives to
provide these products. Until the technological feasibility of the acquired research and development assets are
established, the Company expenses these costs.

Leases

The Company leases its facilities and certain equipment and vehicles under operating leases, and certain

equipment under capital leases. For facility leases that contain rent escalation or rent concession provisions, the
Company records the total rent payable during the lease term on a straight-line basis over the term of the lease.
The Company records the difference between the rent paid and the straight-line rent as a deferred rent liability in
the accompanying consolidated balance sheets.

Product Shipment Cost

Product shipment costs are included in sales and marketing expense in the accompanying consolidated
statements of operations. Product shipment costs totaled $3.6 million, $2.6 million and $1.3 million for the years
ended December 31, 2011, 2010 and 2009, respectively.

Advertising Costs

Advertising costs are expensed as incurred. Total advertising costs for each of the periods presented in the

accompanying statements of operations were not significant.

Stock-Based Compensation

The Company accounts for stock-based compensation under provisions which 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.

F-14

ALPHATEC HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The Company uses a Black-Scholes-Merton option-pricing model to estimate the fair value of its stock

option awards. The calculation of the fair value of the awards using the Black-Scholes-Merton option-pricing
model is affected by the Company’s stock price on the date of grant as well as assumptions regarding the
following:

• Estimated volatility is a measure of the amount by which the Company’s stock price is expected to fluctuate
each year during the expected life of the award. The Company’s estimated volatility through December 31,
2011 was based on a weighted-average volatility of its actual historical volatility since its initial public
offering in June 2006 and the historical stock volatilities of similar peer entities whose stock prices were
publicly available. Its calculation of estimated volatility is based in part on historical stock prices of these
peer entities over a period equal to the expected life of the awards. The Company continues to use the
historical volatility of peer entities due to the lack of sufficient historical data of its stock price since its
initial public offering.

• The expected term represents the period of time that awards granted are expected to be outstanding.

Through December 31, 2011, the Company calculated the expected term using a weighted-average term
based on historical exercise patterns and the term from option date to full exercise for the options granted
within the specified date range.

• The risk-free interest rate is based on the yield curve of a zero-coupon U.S. Treasury bond on the date the

stock option award is granted with a maturity equal to the expected term of the stock option award.

• The assumed dividend yield is based on the Company’s expectation of not paying dividends in the

foreseeable future.

The Company used historical data to estimate the number of future stock option forfeitures. Share-based
compensation recorded in the Company’s consolidated statement of operations is based on awards expected to
ultimately vest and has been reduced for estimated forfeitures. The Company’s estimated forfeiture rates may
differ from its actual forfeitures which would affect the amount of expense recognized during the period.

The Company accounts for stock option grants to non-employees in accordance with provisions which
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

Valuation of Stock Option Awards

The assumptions used to compute the share-based compensation costs for the stock options granted during

the years ended December 31, 2011, 2010 and 2009 are as follows:

Year Ended December 31,

2011

2010

2009

Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average expected life (years) . . . . . . . . . . . . . . . . . . . . . . . . .
Volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

F-15

1.2-2.5% 1.9-2.8% 2.0-2.8%
—
6.0-6.2

—
5.8-5.9
56-57% 56-57% 57-58%

—
6.1-6.2

ALPHATEC HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Compensation Costs

The compensation cost that has been included in the Company’s consolidated statement of operations for all

stock-based compensation arrangements is detailed as follows (in thousands, except per share amounts):

Year Ended December 31,

2011

2010

2009

Cost of revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Research and development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales and marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
General and administrative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 180
289
693
1,263

$ 252
185
1,008
1,732

$ 245
965
807
1,554

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$2,425

$3,177

$3,571

Effect on basic and diluted net loss per share . . . . . . . . . . . . . . . . . . . . .

$ (0.03)

$ (0.04)

$ (0.07)

The amounts above include stock-based compensation expense of $0, $0.2 million and $0.5 million during

the years ended December 31, 2011, 2010 and 2009, respectively, related to the vesting of stock options and
awards granted to non-employees under consulting agreements. In addition, $(0.1) million, $(0.2) million and
$0.3 million of compensation expense (credit) is included in the amount above for the years ended December 31,
2011, 2010 and 2009, respectively, relating to the consulting agreement the Company has with Stout Medical
Consulting Group LP (“Stout”). See Note 5.

Income Taxes

The Company accounts for income taxes in accordance with provisions which set forth an asset and liability
approach that requires the recognition of deferred tax assets and deferred tax liabilities for the expected future tax
consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities.
Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be
realized. In making such determination, a review of all available positive and negative evidence must be
considered, including scheduled reversal of deferred tax liabilities, projected future taxable income, tax planning
strategies, and recent financial performance.

The Company recognizes interest and penalties related to uncertain tax positions as a component of the

income tax provision.

F-16

ALPHATEC HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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 or loss
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):

Year Ended December 31,

2011

2010

2009

Numerator:
Loss from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from discontinued operations, net of tax . . . . . . . . . . . . . . . . . . . . . . . . .

$(22,181) $(14,433) $(13,505)
216

—

Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$(22,181) $(14,355) $(13,289)

Denominator:
Weighted average common shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . .
Weighted average unvested common shares subject to repurchase . . . . . . . . . . .

Weighted average common shares outstanding—basic . . . . . . . . . . . . . . . . . . . .
Effect of dilutive securities:

89,165
(368)

79,052
(462)

50,077
(785)

88,798

78,590

49,292

Options, warrants and restricted share awards . . . . . . . . . . . . . . . . . . . . . . .

—

Weighted average common shares outstanding—diluted . . . . . . . . . . . . . . . . . .

88,798

78,590

49,292

Net loss per common share:

Basic and diluted net loss per share from continuing operations . . . . . . . . .
Basic and diluted net income per share from discontinued operations . . . .

Basic and diluted net loss per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

(0.25) $

(0.18) $

—

(0.27)
—

(0.25) $

(0.18) $

(0.27)

As of December 31, 2011, 2010 and 2009, none of the outstanding redeemable preferred stock is convertible

to common stock.

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

thousands):

Options to purchase common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Warrants to purchase common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unvested restricted stock awards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Year Ended December 31,

2011

2010

2009

4,323
94
368

4,785

2,631
—
462

3,093

2,372
425
785

3,582

Recent Accounting Pronouncements

In September 2011, the Financial Accounting Standards Board (“FASB”) amended its goodwill guidance by

providing entities an option to use a qualitative approach to test goodwill for impairment. An entity will be able

F-17

ALPHATEC HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a
reporting unit is less than its carrying value. If it is concluded that this is the case, it is necessary to perform the
currently prescribed two-step goodwill impairment test. Otherwise, the two-step goodwill impairment test is not
required. The amendment will be effective for the Company on January 1, 2012. The Company does not
anticipate that this amendment will have a material impact on its financial position or results of operations.

In 2011, the FASB issued new accounting guidance that requires total comprehensive income, the

3. Acquisitions and Investment

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 the Company’s newly
formed and wholly owned Dutch subsidiary. 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 Scient’x’s 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 all of the outstanding stock of Scient’x
was exchanged, pursuant to a fixed ratio, for 24,000,000 shares of the Company’s common stock. The shares to
be paid by the Company at the closing were reduced to 23,730,644 shares in exchange for the Company paying
certain acquisition 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.

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 was 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-Merton
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 is being recognized as
compensation cost in the Company’s post-combination financial statements over the requisite service period.

F-18

ALPHATEC HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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 amount payable in exchange for reduction in shares, the total purchase price was
as follows (in thousands):

Fair value of Alphatec common stock issued upon closing . . . . . . . . . . . . . . . . . . . . . . . . . .
Fair value of Scient’x Replacement Options attributable to pre-combination service . . . . .
Payable in exchange for reduction in shares to be paid in cash . . . . . . . . . . . . . . . . . . . . . . .

$151,639
1,040
1,618

Total purchase price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$154,297

Under the acquisition method of accounting, the total purchase price was allocated to Scient’x’s net tangible

and intangible assets based on their estimated fair values at the date of the completion of the acquisition.

The following table summarizes the 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Acquired intangibles:

Core technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Developed technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
In-process technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Corporate trademarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Key product trademarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer-related intangible . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Distribution network . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Physician education programs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

10
8
Indefinite
5
9
15
10
10

2,577

3,632
9,552
1,749
1,614
2,179
16,009
1,614
3,095
112,276

Total purchase price allocation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$154,297

The Company allocated $2.6 million to Scient’x net tangible assets assumed and $39.4 million to

identifiable intangible assets acquired. A value of $112.3 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 acquired 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
integration of the acquired business is complete. 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.

The Company increased the value of inventory it acquired from Scient’x to its 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 reversed ratably over 14 months
and was 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.

F-19

ALPHATEC HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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

The Company separated trademarks into the following two categories: corporate trademarks and key
product trademarks. The Company calculated the values of each of these trademark categories 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

Company determined the value of such customer-related intangible 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. The Company determined the value of the intangibles related to the distribution network by
estimating the difference between the present values of expected future net cash flows generated with and
without the distribution network in place.

The Company determined the value of physician education programs value by estimating the costs to

rebuild such programs.

The fair value of the non-controlling interest as of March 26, 2010 was $0.5 million and 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 an assessment of
liabilities arising from these tax matters in each of such jurisdictions, and has recognized provisional amounts in
its accounting for the acquisition of Scient’x for the identified liabilities.

The changes in the carrying amount of goodwill from December 31, 2010 through December 31, 2011 were

as follows (in thousands):

Goodwill recorded for Scient’x acquisition as of December 31, 2010 . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effect of foreign exchange rate on goodwill

$109,997
(1,628)

Balance at December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$108,369

The following unaudited pro forma information presents the consolidated results of operations of the
Company and Scient’x as if the acquisition had occurred on January 1, 2010 (in thousands, except share data):

Revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net loss per share, basic and diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$197,711
(23,466)
(21,131)
(0.24)

$182,945
(6,892)
(8,785)
(0.10)

F-20

Year Ended
December 31,

2011

2010

ALPHATEC HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The pro forma information is not necessarily indicative of what the results of operations actually would have

For the years ended December 31, 2011, 2010 and 2009, the Company incurred transaction costs related to

the acquisition of $0, $3.7 million and $2.6 million, respectively. These costs were expensed as incurred.

For the years ended December 31, 2011, 2010 and 2009, the Company incurred restructuring charges related

to the acquisition of $0.6 million, $2.4 million and $0, respectively. These costs consist of severance payments
and severance-related benefits, rent and other expenses for facilities and the cost of exiting two terminated
European distributor agreements.

The amount of Scient’x revenue included in the Company’s consolidated statement of operations for the
years ended December 31, 2011 and 2010 totaled $32.0 million and $23.8 million, respectively, and the amount
of Scient’x net loss included in the Company’s consolidated statement of operations for the years ended
December 31, 2011 and 2010 totaled $(9.9) million and $(7.0) million, respectively.

Purchase of Minority Interest

During December 2010, Scient’x acquired the noncontrolling interest of its Italian subsidiary from the
noncontrolling party for $0.5 million. The fair value of the non-controlling interest as of the repurchase date was
$0.5 million.

Acquisition of Cibramed

In January 2011, the Company acquired Cibramed Productos Medicos (“Cibramed”), a Brazilian medical
device company. The Company purchased Cibramed to acquire its ANVISA regulatory registration certificates
and its general licenses to conduct business in Brazil. The Company recorded an intangible asset of $0.6 million
for the ANVISA regulatory registration certificates and licenses it purchased. The Company is amortizing this
asset on a straight-line basis over its estimate life of 15 years. No product distribution rights were acquired. The
purchase price of $0.6 million was paid in installments consisting of (i) 60% upon execution of the acquisition
agreement; (ii) 20% due 90 days from the execution of the acquisition agreement and; (iii) 20% due 180 days
from the execution of the acquisition agreement. The Company paid the full purchase price of $0.6 million in
2011.

4. Balance Sheet Details

Accounts Receivable

Accounts receivable consist of the following (in thousands):

Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Allowance for doubtful accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$42,766
(1,055)

$40,931
(1,154)

Accounts receivables, net

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$41,711

$39,777

December 31,

2011

2010

F-21

ALPHATEC HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Inventories

Inventories consist of the following (in thousands):

Raw materials . . . . . . . . . . .
Work-in-process . . . . . . . . . .
Finished goods . . . . . . . . . . .

December 31, 2011

December 31, 2010

Reserve for
excess and
obsolete

$ —
—
(13,174)

Gross

$ 3,715
2,088
53,287

Net

Gross

$ 3,715
2,088
40,113

$ 3,821
2,242
56,602

Reserve for
excess and
obsolete

$ —
—
(11,030)

Net

$ 3,821
2,242
45,572

Inventories . . . . . . . . . . . . . .

$59,090

$(13,174)

$45,916

$62,665

$(11,030)

$51,635

Property and Equipment

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

Useful lives
(in years)

December 31,

2011

2010

Surgical instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Computer equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Office furniture and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Building . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4
7
5
5
various
39
n/a
n/a

Less accumulated depreciation and amortization . . . . . . . . . . . . .

Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 52,690
12,462
3,013
3,578
3,657
71
14
634

$ 53,155
11,697
2,851
3,617
3,534
225
17
509

76,119
(44,643)

75,605
(37,165)

$ 31,476

$ 38,440

Total depreciation expense was $14.8 million, $13.1 million and $8.6 million for the years ended

December 31, 2011, 2010 and 2009, respectively.

F-22

ALPHATEC HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Intangible Assets

Intangibles assets consist of the following (in thousands):

Developed product technology . . . . . . . . . . . . . . . . . . . . . . . . . . .
Distribution rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intellectual property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
License agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Core technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
In-process technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trademarks and trade names . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer-related . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Distribution network . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Physician education programs . . . . . . . . . . . . . . . . . . . . . . . . . . .
Supply agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Less accumulated amortization . . . . . . . . . . . . . . . . . . . . . . . . . . .

Intangible assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Useful lives
(in years)

5-8
3
5
1-7
10
Indefinite
5-9
15
10
10
10

December 31,

2011

2010

$ 22,875
4,531
1,004
14,297
3,489
1,680
3,671
15,476
1,614
2,972
225

$ 23,030
4,148
1,004
5,100
3,548
1,708
3,722
15,792
1,614
3,022
225

71,834
(24,690)

62,913
(19,765)

$ 47,144

$ 43,148

Total amortization expense was $5.1 million, $3.9 million and $3.3 million for the years ended

December 31, 2011, 2010 and 2009, respectively.

The future expected amortization expense related to intangible assets as of December 31, 2011 is as follows

(in thousands):

Year Ending December 31,

2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total future expected amortization expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Add: In-process technology . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 8,466
8,073
4,142
3,905
3,905
16,973

45,464
1,680

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$47,144

F-23

ALPHATEC HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Accrued Expenses

Accrued expenses consist of the following (in thousands):

December 31,

2011

2010

Legal
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restructuring . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Customer credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales milestone . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Royalties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payroll and related . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Litigation settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

249
1,033
123
548
2,344
1,457
1,746
2,409
4,120
6,348
7,000
5,206

$ 1,380
572
208
440
1,381
838
2,034
2,466
4,030
5,060
—
4,121

Total accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$32,583

$22,530

5. License and Consulting Agreements

OsseoFix Spinal 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 reasonable
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 of 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

F-24

ALPHATEC HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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 of 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 of the original consulting agreement were not changed. As the
total cash consideration has been reduced to $0.2 million, the Company recorded the remaining amount that had not
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. 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 had not been established since the final
prototype of the device had not been completed and no alternative future use exists. The agreement includes
milestone payments of $3.6 million consisting of cash and the Company’s 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.

F-25

ALPHATEC HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Between January 2008 and June 2009, the Company entered into three amendments to the OsseoScrew
License Agreement. None of the amendments had material changes to the financial terms of the Osseoscrew
License Agreement.

In December 2009, the Company and PST entered into a fourth amendment to the OsseoScrew License

Agreement. Under the fourth 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 had not been established since the final prototype of the device had not been completed 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 began in 2010 instead of 2009.

In November 2010, the Company and PST entered into a fifth amendment to the OsseoScrew License

Agreement. The fifth amendment includes (i) a milestone payment of a $1.5 million and the issuance of $1.0
million in shares of the Company’s common stock upon market launch in Europe; and (ii) royalty payments
based on net sales of licensed products with minimum annual royalties beginning at the end of 2011. During the
fourth quarter of 2010, the Company recorded an intangible asset of $2.5 million for a milestone payment
required upon market launch in Europe which consisted of the cash payment of $1.5 million and $1.0 million in
shares of the Company’s common stock. The Company is amortizing this asset over seven years, the estimated
life of the product. The total number of shares of common stock, which were issued on December 15, 2010, was
452,488.

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; 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. During the
third quarter of 2010, the Company recorded an intangible asset of $0.2 million for the assets received as this
product is cleared for sale in Europe and technological feasibility is considered to have been achieved. The
Company is amortizing this asset over seven years, the estimated life of the product.

F-26

ALPHATEC HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

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 2013; and (iii) a royalty payment based on net sales of
licensed products. 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.

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”), which provides Alphatec with an exclusive right to distribute Parcell
Spine’s proprietary adult stem cells for the treatment of spinal disorders under either Parcell’s trademarks or
Alphatec Spine’s private label. 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 a pre-clinical study; and (iii) sales milestone payments in cash and the Company’s
common stock. During the first quarter of 2010, the Company recorded an IPR&D charge of $0.5 million for the
initial cash payment. During the third quarter of 2010, the pre-clinical study milestone was achieved and the
Company recorded an IPR&D charge totaling $2.0 million, which consisted of a cash payment of $1.0 million
and the issuance of $1.0 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, additional items subject to risk of completion were necessary to comply with
regulatory requirements and no alternative future use exists. The total number of shares of common stock, which
were issued in accordance with the agreement for the achievement of a development milestone, was 465,116. In
addition, during the third quarter of 2010, the Company recorded an intangible asset of $1.5 million for a
milestone payment required upon market launch when the product became commercially ready for sale which
consisted of a cash payment of $0.5 million and $1.0 million shares of the Company’s common stock. The
Company is amortizing this asset over seven years, the estimated life of the product. The total number of shares
of common stock, which were issued in accordance with the agreement for the achievement of a development
milestone in September 2010, was 476,190.

Asset Purchase Agreement with AlpineSpine, LLC

In April 2010, the Company entered into an Asset Purchase Agreement with AlpineSpine, LLC (the
“AlpineSpine Agreement”) to purchase an anterior cervical plate system, including all of the related intellectual
property and inventory. The financial terms of the AlpineSpine Agreement include: (i) a payment of $0.5 million
in exchange for the assets received in April 2010 related to the anterior cervical plate system; (ii) a milestone
payment after full market launch; 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
2010, the Company recorded an intangible asset of $0.8 million for the assets received as this product is cleared
for sale in the U.S. and technological feasibility is considered to have been achieved and milestone payments
made. During 2011, the Company recorded an additional $0.2 million to the intangible asset for the milestone
payments made. The Company is amortizing the intangible asset over seven years, the estimated life of the
product.

F-27

ALPHATEC HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

License Agreement with Merlot Orthopedix, Inc.

In July 2010, the Company entered into a License Agreement (the “Merlot Ortho Agreement”) with Merlot

Orthopedix, Inc. (“Merlot Ortho”) that provides the Company with a worldwide license to develop and
commercialize Merlot Ortho’s proprietary intellectual property related to its bone anchorage, interbody stabilizer,
locking mechanism and certain other technologies. The financial terms of the Merlot Ortho License Agreement
include: (i) a cash payment of $0.3 million following the execution of the Merlot Ortho License Agreement; (ii) a
cash payment of $150,000 for materials transferred to Alphatec Spine; (iii) development and sales milestone
payments in cash that could begin to be achieved and paid in 2012; and (iv) a royalty payment based on net sales
of licensed products. During the third quarter of 2010, the Company recorded an IPR&D charge of $0.4 million
for the initial payment and material transfer 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 R Tree Innovations LLC

In September 2010, the Company entered into a License Agreement (the “R Tree License Agreement”) with

R Tree Innovations LLC (“R Tree”) that provides the Company with a worldwide license to develop and
commercialize R Tree’s proprietary intellectual property related to its Epicage interbody fusion device and
related instrumentation. The financial terms of the R Tree License Agreement include: (i) a cash payment of $0.8
million and the issuance of $0.5 million of the Company’s common stock following the execution of the R Tree
License Agreement; (ii) development and sales milestone payments in cash that could begin to be achieved and
paid in 2012; and (iii) a royalty payment based on net sales of licensed products. During the third quarter of
2010, the Company recorded an intangible asset of $1.3 million following the execution of the R Tree License
Agreement. The Company is amortizing this asset over seven years, the estimated life of the product. The total
number of shares of common stock, which were issued in accordance with the R Tree License Agreement on
October 22, 2010, was 228,310.

License Agreement with Vertebration, Inc.

In March 2011, the Company entered into a License Agreement (the “Vertebration Agreement”) with

Vertebration, Inc. (“Vertebration”) that provides the Company with an exclusive license to develop and
commercialize Vertebration’s proprietary licensed technology related to its Xycor implant and related
instrumentation. The Xycor implant has received 510(k) approval for marketing by the United States Food and
Drug Administration (the “FDA”). The financial terms of the Vertebration License Agreement include: (i) a cash
payment of $0.5 million following the execution of the Vertebration License Agreement, of which $0.1 million
will be credited against amounts payable to Vertebration at a future date and $0.1 million will be repaid by
Vertebration in March 2014; (ii) additional cash payments totaling $0.2 million which were paid and expensed in
2011; (iii) development and sales milestone payments in cash that could begin to be achieved and paid in 2012;
and (iv) payments consisting of either: (a) a royalty based on net sales of licensed products or (b) a payment of a
percentage of the Company’s gross margin, with the type of payment dependent on the manner in which the
product was sold, with minimum annual payments beginning in the year after the first commercial sale of a
licensed product. During the first quarter of 2011, the Company recorded an intangible asset of $0.4 million
following the execution of the Vertebration License Agreement. The Company is amortizing this asset over
seven years, the estimated life of the Xycor product.

F-28

ALPHATEC HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

6. Debt

Loan and Security Agreement

In December 2008, the Company entered into a Loan and Security Agreement with SVB and Oxford

Finance Corporation (the “Lenders”), consisting of a $15.0 million term loan and a $15.0 million working capital
line of credit. The term loan carried a fixed interest rate of 11.25% with interest payments due monthly and
principal repayments commencing in October 2009. Thereafter, the Company was required to repay the principal
plus interest in 30 equal monthly installments, ending in April 2012. The working capital line of credit carried a
variable interest rate equal to the prime rate plus either 2.5% or 2.0%, depending on the Company’s financial
performance. Interest-only payments were due monthly and the principal was due at maturity in April 2012.

On March 26, 2010, the Company amended its Loan and Security Agreement, or as amended, (“the Credit
Facility”), with the Lenders. The working capital line of credit was increased by $10 million, to $25 million. In
addition, the Company combined the previously existing term loan facility provided by Oxford to Scient’x with
its existing term loan facility. Commencing in the second quarter 2010, the amended term loan collectively could
not exceed $19.5 million.

The Company’s term loan interest rate was amended to a fixed rate of 12.0%. The Company was required to
repay the principal plus interest in 25 equal monthly installments, ending in April 2012. 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 were due monthly and
the principal was due at maturity in April 2012. The funds from the credit facility were 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. The debt issuance costs
were capitalized and were being amortized over the remaining term of the loan using the effective interest
method.

To secure the repayment of any amounts borrowed under the 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 was 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 was also required to maintain a
cash balance with SVB equal to at least $10 million.

On October 29, 2010, the Company amended and restated the Credit Facility (“the Amended Credit
Facility”). As part of the Amended Credit Facility, Oxford was removed as a co-lender. The Amended Credit

F-29

ALPHATEC HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Facility consisted of a working capital line of credit, which permitted the Company to borrow up to $32 million.
The actual amount available was based on eligible accounts receivable and eligible inventory. The working
capital line of credit carried an interest rate of the greater of 5.5% or the prime rate plus 1.5% as of January 2011,
and during the fourth quarter of 2010 the prime rate plus 3.5%. Interest-only payments were due monthly and the
principal was due at maturity, which occurs in October 2013. The working capital line of credit was intended to
refinance the Company’s existing debt facilities and to support future working capital needs.

Upon execution of the Amended Credit Facility, the Company drew $17.6 million on the working capital

line of credit, resulting in a total line of credit draw of $31.9 million. The funds from the working capital line of
credit were used to pay off the Company’s then-existing term loans with the Lenders totaling $9.5 million and
Scient’x’s then-existing term loan of $5.3 million with Oxford. In addition, the Company paid early termination
and other fees of $0.5 million, a final finance charge of $1.2 million and accrued monthly interest of $0.2 million.
The Company incurred debt issuance costs on the Amended Credit Facility of $0.6 million, which included an
upfront fee of $0.2 million paid to SVB. The debt issuance costs were capitalized and are being amortized over
the term of the loan using the effective interest method. In addition, the Company recorded non-cash interest
expense of approximately $0.5 million to write off its debt issuance costs and debt discount related to its prior
term loans.

To secure the repayment of any amounts borrowed under the Amended Credit Facility, the Company
granted to SVB 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 SVB.

The Amended Credit Facility contained customary lending and reporting covenants, which, among other
things, prohibit the Company from assuming further debt obligations and any liens, unless otherwise permitted
under the Amended Credit Facility. Upon the occurrence of an event of default, which includes the failure to
make payments when due, breaches of representations, warranties or covenants, the occurrence of certain
insolvency events, or the occurrence of an event or change that could have a material adverse effect on the
Company, the interest to be charged pursuant to the Amended Credit Facility will be increased to a rate that is up
to five percentage points above the rate effective immediately before the event of default, and all outstanding
obligations become immediately due and payable.

The Company was also required to maintain compliance with financial covenants consisting of a minimum
adjusted quick ratio and minimum quarterly free cash flow. The minimum adjusted quick ratio is defined as the
sum of the Company’s cash held with SVB and 80% of eligible domestic accounts receivable divided by the
Amended Credit Facility balance. Free cash flow is defined as Adjusted EBITDA (a non-GAAP term defined as
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, less capital expenditures and cash taxes. As of
December 31, 2010, the Company was in compliance with the financial covenants.

In January 2011, the Company executed a first amendment to the Amended Credit Facility with SVB. The
working capital line of credit interest rate was amended to equal the SVB prime rate plus 3.5% during the first
half of 2011, the SVB prime rate plus 3.0% during the third quarter of 2011, the SVB prime rate plus 2.0%
during the fourth quarter of 2011, and the greater of 5.5% or the SVB prime rate plus 1.5% thereafter. In
addition, the adjusted quick ratio covenant was amended to allow for a lower minimum ratio. There was no
change to the minimum quarterly free cash flow covenant requirements.

F-30

ALPHATEC HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

In August 2011, the Company executed a second amendment to the Amended Credit Facility with SVB

(“the Second Amended Credit Facility”). The Second Amended Credit Facility included a waiver for
non-compliance with the minimum quarterly free cash flow covenant for the quarterly period ended June 30,
2011. The working capital line of credit interest rate was amended to equal the greater of 5.5% or the SVB prime
rate plus 2.0% beginning on January 1, 2012. There was no change to the financial covenant requirements. In
conjunction with the Second Amended Credit Facility, the Company paid SVB a fee of $50,000.

In December 2011, the Company executed a third amendment to the Amended Credit Facility with SVB

(“the Third Amended Credit Facility”). The Third Amended Credit Facility included a waiver for
non-compliance with the minimum quarterly financial covenants for the quarterly period ended September 30,
2011 and it also restructured the credit facility terms including future financial covenants.

The Third Amended Credit Facility consists of a $10 million term loan and a working capital line of credit
which permits the Company to borrow up to $22 million. The actual amount available under the line of credit is
based on eligible accounts receivable and eligible inventory.

The term loan carries a fixed interest rate equal to the greater of 8.5% or the SVB prime rate plus 4.5% with

principal plus interest repayments due in 16 equal quarterly installments. The term loan matures October 2015
and the Company is subject to a prepayment penalty if the term loan is repaid prior to maturity. The funds from
the term loan were used to refinance a portion of the line of credit under the Amended Credit Facility.

The working capital line of credit carries an interest rate equal to the SVB prime rate plus 3.5%, which can

In connection with the Third Amended Credit Facility, finance charges totaling $150,000 were waived in
exchange for the issuance of 93,750 warrants to SVB to purchase shares of the Company’s common stock. The
warrants are immediately exercisable, can be exercised through a cashless exercise, have an exercise price of
$1.60 per share and have a ten year term. The Company recorded the value of the warrants of $0.1 million as a
debt discount. The value of the warrants was determined on the date of grant using the Black-Scholes-Merton
valuation method with the following assumptions: risk free interest rate of 1.23%, volatility of 57.4%, a ten year
term and no dividend yield.

Under the Third Amended Credit Facility, the Company is required to maintain compliance with financial
covenants consisting of a quarterly minimum adjusted quick ratio and a quarterly minimum EBITDA level, as
well as a maximum annual capital expenditures limit. The minimum adjust quick ratio is defined as the sum of
the Company’s cash held with SVB and 80% of eligible domestic accounts receivable divided by the Third
Amended Credit Facility balance. The EBITDA definition is consistent with the definition of EBITDA in the
Amended Credit Facility. As of December 31, 2011, the Company was in compliance with the minimum adjusted
quick ratio covenant but was not in compliance with the minimum quarterly EBITDA covenant.

In February 2012, the Company executed a fourth amendment to the Amended Credit Facility (“the Fourth
Amended Credit Facility”). The Fourth Amended Credit Facility included a waiver for such non-compliance for
the quarterly period ended December 31, 2011. The amendment also reduced the maximum amount available on
the working capital line of credit from $22 million to $19.5 million and accelerated one of the quarterly term

F-31

ALPHATEC HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

loan payments of $0.6 million which was due and payable upon execution of the amendment. There was no
change to the financial covenant requirements from those of the Third Amended Credit Facility which are
required to be met for the first quarterly period ended March 31, 2012. In conjunction with the Fourth Amended
Credit Facility, the Company paid SVB a fee of $50,000.

During the year ended December 31, 2011, the Company repaid $17.4 million and drew an additional $2.3

million on the working capital line of credit. The balance of the line of credit as of December 31, 2011 was $16.9
million. Amortization of the debt discount and debt issuance costs and accretion of the finance charge, which
were recorded as non-cash interest expense, totaled $0.4 million, $2.2 million and $0.9 million for the years
ended December 30, 2011, 2010 and 2009, respectively. Interest expense for the term loans and the Company’s
working capital line of credit, excluding debt discount and debt issuance cost amortization and accretion of the
additional finance charge, totaled $2.2 million, $3.5 million and $2.6 million for the years ended December 31,
2011, 2010 and 2009, respectively.

Other Debt Agreements

Alphatec Pacific has a term note payable of $0.6 million 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.

The Company has 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.

In February 2010, the Company executed a note payable to Oracle for the purchase of software and the
related support totaling $0.9 million. The note bears interest at 5.3% and has maturity date of February 2013.
Payments of principal and interest are due every three months.

In March 2011, the Company executed a $0.2 million note payable to a third party for the purchase of

software licenses, bearing interest at a rate of 4.6% and a maturity date of March 2012.

In November 2011, the Company executed financing arrangements totaling $0.9 million for the payment of
premiums on various insurance policies. The financing agreements bear interest at a rate of 3.9% and are payable
through September 2012. In 2010, the Company had financing agreements totaling $1.6 million for the payment
of premiums on various insurance policies. The financing arrangements bear interest at a rate of 4.7% to 5.3%
and were payable from March 2010 through September 2011. Such financing agreements had been fully repaid
as of September 30, 2011.

Scient’x had a conditional interest free loan with OSEO Anvar, a French government agency that provides

F-32

ALPHATEC HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Long-term debt consists of the following (in thousands):

Line of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Term loan, net of debt discount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes payable to Japanese banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital leases (See Note 7) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bond payable to a Japanese bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note payable related to software license purchases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Note payable to OSEO Anvar . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financing agreements for premiums on insurance policies . . . . . . . . . . . . . . . . . . . . . . . . . . .

December 31,

2011

2010

$16,854
9,903
138
233
64
270
—
736

$31,850
—
315
392
151
559
99
816

Total debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total long-term debt

28,198
(4,396)
$23,802

34,182
(1,708)
$32,474

Principal payments on debt are as follows as of December 31, 2011 (in thousands):

Year Ending December 31,

2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unamortized debt discount . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Add: capital lease principal payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less: current portion of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 4,269
19,413
2,505
1,875
—
—

28,062
(97)
233

28,198
(4,396)

Long-term debt, net of current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$23,802

7. Commitments and Contingencies

Leases

During the first quarter of 2008, the Company entered into a lease agreement and sublease agreement in
order to consolidate the use and occupation of its then existing premises into two adjacent facilities, as described
below. The Company also leases certain equipment and vehicles under operating leases which expire on various
dates through 2014, and certain equipment under capital leases which expire on various dates through 2014.

In February 2008, the Company entered into a sublease agreement (the “Sublease”), for office, engineering, and

research and development space. The Sublease term commenced May 2008 and ends on January 31, 2016. The
Company is obligated under the Sublease to pay base rent and certain operating costs and taxes for the building.
Monthly base rent payable by the Company 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. The Company’s rent was abated for months one through seven of the Sublease. At the sublease inception, the
Company paid a security deposit in the amount of approximately $93,500. The Company consolidated all corporate,
marketing, finance, administrative, and research and development activities into this building in May 2008.

F-33

ALPHATEC HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

In March 2008, the Company entered into a lease agreement (the “Lease”) for additional office, engineering,

research and development and warehouse and distribution space. The Lease term commenced on December 1,
2008 and ends on January 31, 2017. The Company is obligated under the Lease to pay base rent and certain
operating costs and taxes for the building. The monthly base rent payable by the Company 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. The Company’s rent was abated for the months two through
eight of the term of the Lease in the amount of $38,480. At the lease inception, the Company paid a security
deposit in the amount of approximately $293,200 consisting of cash and two letters of credit. Following the
Company’s achievement of certain financial milestones, the lessor is obligated to return a portion of the security
deposit to the Company. The lessor provided a tenant improvement allowance of $1.1 million to assist with the
configuration of the facility to meet the Company’s business needs. The Company consolidated all
manufacturing, distribution and warehousing activities into this building in April 2009.

Future minimum annual lease payments under the Company’s operating and capital leases are as follows (in

thousands):

Year ending December 31,

Operating

Capital

2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Less: amount representing interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Present value of minimum lease payments . . . . . . . . . . . . . . . . . . . . . . .
Current portion of capital leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Capital leases, less current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 3,800
3,356
2,525
2,352
1,277
427

$13,737

$167
71
1

—
—
—

239

(6)

233
163

$ 70

Rent expense under operating leases for the years ended December 31, 2011, 2010 and 2009 was $3.7

million, $3.2 million and $2.4 million, respectively.

Litigation

On February 12, 2010, a complaint was filed in the U.S. District Court for the Central District of California,

by Cross Medical Products, LLC, (“Cross”) (a subsidiary of Biomet, Inc.), Cross Medical Products, LLC v.
Alphatec Spine, Inc., Case No. 8:10-cv-00176-MRP -MLG, alleging that the Company breached a patent license
agreement with Cross by failing to make certain royalty payments allegedly due under the agreement. Cross was
seeking payment of prior royalties allegedly due from the Company’s sales of polyaxial screws and an order
from the court regarding payment of future royalties by the Company. In its complaint, Cross alleged a material
amount of damages were due to it as a result of the Company’s alleged breach of the patent license agreement.

In January 2011, the Company filed a complaint in the U.S. District Court for the Southern District of
California against Biomet, Inc., alleging that Biomet’s TPS-TL products infringe one of the Company’s patents.

F-34

ALPHATEC HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

On December 30, 2011, the Company reached a global settlement agreement of the pending lawsuits with

Biomet and Cross. Under the terms of the settlement, all parties obtained a release of all claims that were the
subject of the disputes. No party has admitted liability in connection with the settlement. The settlement also
includes an amendment to the April 23, 2003 License Agreement.

As part of the settlement, the Company agreed to pay Cross an initial payment of $5 million. In addition to

the initial payment, the Company will make thirteen quarterly payments of $1 million beginning on August 1,
2012, with each subsequent payment due three months thereafter until the final payment is made in August 2015.
The cash obligations totaling $18 million will be paid as follows: $7 million in 2012, $4 million in 2013,
$4 million in 2014 and $3 million in 2015. In addition, pursuant to the settlement, the parties have exchanged
covenants not to sue for patent infringement with respect to products that each respective company had on the
market as of December 30, 2011.

The Company allocated the settlement amount to the historical settlement element and the future license

element utilizing the relative fair values of past and future royalties due from the Company’s sales of polyaxial
screws. The Company recorded an intangible asset of $8 million for the value allocated to the future license right.
The fair value of the license agreement is considered to be the benefit derived from the perpetual right to exploit
such license in connection with the sale of products, calculated using the estimated discounted cash flows and
future revenue projections. The intangible asset will be amortized based on the higher of the percentage of usage
or on a straight-line basis over the estimated useful life of the license of approximately 2 years.

In addition to the license agreement intangible asset of $8 million, the Company recorded litigation
settlement expense for $9.8 million, which represents the allocated value of the settlement and past royalties
element. A liability for the present value of the payment obligation of $17.8 million was recorded as of
December 31, 2011. The amount due in 2012 of $7 million was recorded in current liabilities and the remaining
$10.8 million was recorded in other long-term liabilities on the accompanying consolidated balance sheet. In
January 2012, the Company made the initial $5 million payment to Cross Medical.

In 1998, 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 a contractual dispute
and a $9 million judgment was entered against Eurosurgical by a California court. At the same time, a federal
court in California declared Eurosurgical liable to Orthotec for $30 million in connection with an intellectual
property dispute. In 2006, Eurosurgical’s European assets were ultimately acquired by Surgiview, SAS, or
Surgiview, in a sale agreement 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 denied Orthotec’s
motion, indicating that Orthotec had not carried its burdens of proof. Orthotec chose to not proceed with a further
hearing in September 2007. In May 2008, after the acquisition of Scient’x by HealthpointCapital in 2007,
Orthotec sued Scient’x, Surgiview, HealthpointCapital and former certain Scient’x directors (who also serve on
our board) in a new action in California state court. In addition, at the same time, a similar action was filed in
New York against HealthpointCapital and two former directors of Scient’x (who also serve on our board). In
April 2009, the California court dismissed this matter on jurisdictional grounds, and Orthotec appealed such
ruling. In December 2010, the California Court of Appeal issued a decision that affirmed in part and reversed in
part the trial court’s decision dismissing the entire California action based on lack of personal jurisdiction. The
Court of Appeal affirmed the trial court’s ruling that Orthotec failed to establish personal jurisdiction over all
parties except Surgiview, finding that the trial court could exercise jurisdiction over that entity. In November
2009, the New York court dismissed Orthotec’s claims based on collateral estoppel, and Orthotec appealed this

F-35

ALPHATEC HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

ruling. In March 2011, the state appeals court in New York reversed the lower court’s decision to dismiss
Orthotec’s claims, and the New York matter is proceeding with HealthpointCapital and certain former Scient’x
directors (who also serve on our board) as the only defendants. While the Company intends to vigorously defend
against 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 Orthotec 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 USA 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 USA engaged in improper activities related to consulting payments to
surgeon customers. The relators in the complaint were the principals of the plaintiff in the DAK Surgical matter
discussed above. Under the FCA, the United States Department of Justice, Civil Division, (“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 the Company
nor Scient’x USA have been subpoenaed by any governmental agency in connection with this review. The
Company believes that Scient’x USA’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.

F-36

ALPHATEC HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

relating to the Scient’x transaction and the Company’s financial guidance following the closing of the
acquisition. The complaint seeks unspecified monetary damages, attorneys’ fees, and other unspecified relief.
The Company believes the claims are without merit and intends to vigorously defend itself against this
complaint; however no assurances can be given as to the timing or outcome of this lawsuit.

On August 25, 2010, an alleged shareholder of the Company’s filed a derivative lawsuit in the Superior

At December 31, 2011, the probable outcome of any of the aforementioned litigation matters cannot be

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.

8. Redeemable Preferred Stock and Stockholders’ Equity

Redeemable Preferred Stock

The Company issued shares of redeemable preferred stock in connection with its initial public offering in

June 2006. As of December 31, 2011, the redeemable preferred stock carrying value was $23.6 million and there
were 20 million shares of redeemable preferred stock authorized. The redeemable preferred stock is not
convertible into common stock but is redeemable at $9.00 per share, (i) upon the Company’s liquidation,
dissolution or winding up, or the occurrence of certain mergers, consolidations or sales of all or substantially all
of the Company’s assets, before any payment to the holders of the Company’s common stock, or (ii) at the
Company’s option at any time. Holders of redeemable preferred stock are generally not entitled to vote on

F-37

ALPHATEC HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

matters submitted to the stockholders, except with respect to certain matters that will affect them adversely as
class, and are not entitled to receive dividends. The carrying value of the redeemable preferred stock was $7.11
per share at December 31, 2011 and 2010.

The redeemable preferred stock is required to be shown in the Company’s financial statements separate
from stockholders’ equity and any adjustments to its carrying value to its redemption value up to its redemption
value of $9.00 per share will be reported as a dividend.

Private Placement

In June 2009, the Company entered into a subscription agreement with one of its existing shareholders,
HealthpointCapital Partners II, LP. The Company sold 3,937,007 shares of its common stock at a price of $2.54
per share in a private placement (the “Placement”) for an aggregate purchase price of approximately $10.0
million. The Company paid approximately $0.1 million for transaction fees related to the Placement and received
aggregate net proceeds of approximately $9.9 million. The Company recorded the transaction fees as a reduction
to additional paid in capital.

Public Offering of Common Stock

In April 2010, the Company completed a public offering of an aggregate of 18,400,000 shares of its
common stock in an underwritten public offering (the “Offering”). The shares were sold at an offering price per
share of $5.00, 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 net proceeds to the Company were approximately $43.1 million after
deducting underwriting discounts and commissions and expenses payable by the Company. The Company did
not receive any proceeds from the sale of shares of common stock by the Selling Stockholder.

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 “Subscription Agreements Offering”). The net
proceeds to the Company from the Subscription Agreements Offering, after deducting expenses, were
approximately $6.5 million. The Subscription Agreements Offering was made pursuant to a registration
statement on Form S-3 and closed on February 12, 2010.

9. Stock Benefit Plans and Stock-Based Compensation

In 2005, the Company adopted its 2005 Employee, Director, and Consultant Stock Plan (the “2005 Plan”).

The 2005 Plan allows for the grant of options and restricted stock awards to employees, directors, and consultants
of the Company. The 2005 Plan has 7,900,000 shares of common stock reserved for issuance. The Board of
Directors determines the terms of the restricted stock and the term of each option, option price, number of shares
for which each option is granted, whether restrictions will be imposed on the shares subject to options, and the
rate at which each option is exercisable. Options granted under the 2005 Plan expire no later than 10 years from
the date of grant (five years for incentive stock options granted to holders of more than 10% of the Company’s
voting stock). Options generally vest over a four or five year period and may be immediately exercisable upon a
change of control of the Company. The exercise price of incentive stock options may not be less than 100% of
the fair value of the Company’s common stock on the date of grant. The exercise price of any option granted to a

F-38

ALPHATEC HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

10% stockholder may be no less than 110% of the fair value of the Company’s common stock on the date of
grant. At December 31, 2011, approximately 865,000 shares of common stock remained available for issuance
under the 2005 Plan.

Stock Options

A summary of the Company’s stock option activity under the 2005 Plan and related information is as

follows (in thousands, except as indicated and per share data):

Outstanding at December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4,410
1,369
(55)
(1,007)

Outstanding at December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4,717

Weighted
average
exercise
price

$3.46
$2.80
$1.87
$3.38

$3.31

Options vested and exercisable at December 31, 2011 . . . . . . . . . . . . .

1,999

$3.87

Options vested and expected to vest at December 31, 2011 . . . . . . . . .

4,395

$3.35

Weighted
average
remaining
contractual
term
(in years)

8.34
—
—
—

7.71

6.48

7.61

Aggregate
intrinsic
value

$1,088
—
—
—

$ 107

$ 105

The weighted-average grant-date fair value of stock options granted during the years ended December 31,

2011, 2010 and 2009 was $1.48, $1.95 and $1.79, respectively. The aggregate intrinsic value of options at
December 31, 2011 is based on the Company’s closing stock price on that date of $1.72 per share.

As of December 31, 2011, there was $3.2 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 2.6 years. The total intrinsic value of options exercised for the year ended December 31, 2011 and
2010 was $0.1 million and $0.1 million, respectively. The total intrinsic value of options exercised was
immaterial for the year ended December 31, 2009.

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-Merton 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 is being 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.

In November 2010, the Company exchanged 330,549 options that were issued to Scient’x optionees for a
reduced number of options at the then current Alphatec common stock price. The ratio of options exchanged was

F-39

ALPHATEC HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

calculated so that the fair value of the new options was equal to the fair value of the previously issued options
resulting in no incremental stock compensation expense. The Company granted 193,144 options with an exercise
price of $2.31.

Restricted Stock Awards

The following table summarizes information about the restricted stock awards activity (in thousands, except

as indicated and per share data):

Unvested at December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Awarded . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Unvested at December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Weighted
average
grant
date fair
value

$3.26
$2.61
$3.60
$ —

$2.61

Weighted
average
remaining
recognition
period
(in years)

1.89

3.22

268
270
(177)
—

361

The table above does not include the 101,944 shares of restricted stock granted to Stout in March 2008. The

weighted average fair value per share of awards granted during the years ended December 31, 2011, 2010 and
2009 was $2.61, $2.60 and $3.81, respectively.

Warrants

In December 2011, in connection with the Third Amended Credit Facility, finance charges totaling
$150,000 were waived in exchange for the issuance of 93,750 warrants to SVB to purchase shares of the
Company’s common stock. The warrants are immediately exercisable, can be exercised through a cashless
exercise, have an exercise price of $1.60 per share and have a ten year term. The Company recorded the value of
the warrants of $0.1 million as a debt discount. The value of the warrants was determined on the date of grant
using the Black-Scholes-Merton valuation method with the following assumptions: risk free interest rate of
1.23%, volatility of 57.4%, a ten year term and no dividend yield.

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-Merton 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 September 2009, 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 113,388 shares of its
common stock to the Lender. The net value of the shares issued was $530,000. Following this exercise, warrants
to purchase 285,714 shares of common stock were outstanding as of December 31, 2009.

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.

F-40

ALPHATEC HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Treasury Stock

On August 31, 2009, pursuant to a settlement agreement with the claimants in a lawsuit filed against the

Company, the Company issued 114,766 shares of its common stock, valued at a price per share of $4.35, to the
claimants. The resale of such shares was not covered by a registration statement. As required by the settlement
agreement, nine 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 claimants. The Company recorded the fair value of the forfeited
shares of $0.1 million as treasury stock. As per the agreement, through the third quarter of 2010, the Company
reviewed the fair value of the $0.5 million equity issuance on a quarterly basis to determine if additional
accounting was warranted based on a fluctuation in the Company’s stock price. Based on this review, the
Company recorded a fair value adjustment totaling $0.3 million to decrease litigation expense.

Common Stock Reserved for Future Issuance

Common stock reserved for future issuance consists of the following (in thousands):

Stock options outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Awards outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Warrants outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Authorized for future grant under 2005 Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

December 31,
2011

4,717
361
94
865

6,037

10. Income Taxes

The components of the (benefit) provision for income taxes are presented in the following table (in

thousands):

Current:

Year Ended December 31,

2011

2010

2009

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total current (benefit) provision . . . . . . . . . . . . . . . . . . . . . . . . . . . .

4
222
(388)

(162)

4
158
(271)

(109)

$ —

(34)
135

101

Deferred:

Federal
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Total deferred (benefit) provision . . . . . . . . . . . . . . . . . . . . . . . . . . .

163
8
(4,516)

(4,345)

162
(30)
(2,077)

(1,945)

116
25
(115)

Total (benefit) provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$(4,507)

$(2,054)

$ 127

F-41

ALPHATEC HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The (benefit) provision for income taxes differs from the amount of income tax determined by applying the

applicable U.S. statutory federal income tax rate to pretax income as a result of the following differences:

Federal statutory rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments for tax effects of:

State taxes, net
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deemed foreign dividend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transaction costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax rate adjustment
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

December 31,

2011

2010

(35.0)% (35.0)%

(0.7)% (0.8)%
1.8% 4.4%
3.6% 3.1%
(1.2)% (3.4)%
10.3% —
8.0%
—
(0.5)% 4.4%
(3.8)% 3.2%
8.7% 3.6%

(16.8)% (12.5)%

Significant components of the Company’s deferred tax assets and liabilities as of December 31, 2011 and

2010 are as follows (in thousands):

Deferred tax assets:

Allowances and reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Inventory reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net operating loss carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment
Stock-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Legal settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income tax credit carryforwards . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

December 31,

2011

2010

978
532
6,648
26,989
—
669
6,670
1,277

551
3,335
7,943
20,275
327
676
—
826

43,763
(35,211)

33,933
(32,655)

Total deferred tax assets, net of valuation allowance . . . . . . . . . . . . . . . . .

8,552

1,278

Deferred tax liabilities:

. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Property and equipment
Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

494
9,790
845

Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

11,129

—
7,705
742

8,447

Net deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ (2,577)

$ (7,169)

The realization of deferred tax assets may be dependent on the Company’s ability to generate sufficient
income in future years in the associated jurisdiction to which the deferred tax assets relate. As of December 31,
2011, a valuation allowance of $35.2 million has been established against the net deferred tax assets as

F-42

ALPHATEC HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

realization is uncertain. Deferred tax liabilities associated with tax deductible goodwill cannot be considered a
source of taxable income to support the realization of deferred tax assets because the reversal of these deferred
tax liabilities is considered indefinite. At December 31, 2011, such amounts represent $0.8 million. The
additional net deferred tax liabilities are related to acquired Scient’x net deferred liabilities.

At December 31, 2011, the Company has unrecognized tax benefits of $4.2 million of which $3.7 million

will affect the effective tax rate if recognized when the Company no longer has a valuation allowance offsetting
its deferred tax assets.

The following table summarizes the changes to unrecognized tax benefits for the years ended December 31,

2011, 2010 and 2009 (in thousands):

Balance at January 1, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions based on tax positions related to the current year . . . . . . . . . . . . . . .
Reductions as a result of tax positions taken . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reductions as a result of lapse of applicable statute of limitations . . . . . . . . . .

$1,920
305
(34)
(75)

Balance at December 31, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions based on tax positions related to the prior year . . . . . . . . . . . . . . . . .
Additions based on tax positions related to the current year . . . . . . . . . . . . . . .
Additions based on tax positions related to the acquisition of Scient’x . . . . . .
Reductions as a result of lapse of applicable statute of limitations . . . . . . . . . .
Reductions as a result of foreign exchange rates and other . . . . . . . . . . . . . . . .

Balance at December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additions based on tax positions related to the prior year . . . . . . . . . . . . . . . . .
Additions based on tax positions related to the current year . . . . . . . . . . . . . . .
Reductions as a result of positions taken . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reductions as a result of lapse of applicable statute of limitations . . . . . . . . . .
Additions as a result of foreign exchange rates and other . . . . . . . . . . . . . . . . .

2,116
39
1,480
1,097
(256)
(55)

4,421
73
399
(59)
(649)
12

Balance at December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$4,197

The Company believes it is reasonably possible it will reduce its unrecognized tax benefits by

approximately $0.2 million within the next 12 months.

The Company and its subsidiaries are subject to federal income tax as well as income tax of multiple state
and foreign jurisdictions. With few exceptions, the Company is no longer subject to income tax examination by
tax authorities in major jurisdictions for years prior to 2007. However, to the extent allowed by law, the taxing
authorities may have the right to examine prior periods where NOLs and tax credits were generated and carried
forward, and make adjustments up to the amount of the carryforwards. The Company is not currently under
examination by the IRS or state and local tax authorities, however, a subsidiary of Scienti’x’s 2008 and 2009 tax
years are currently under audit by the French tax authorities.

The Company recognizes interest and penalties related to uncertain tax positions as a component of the
income tax provision. As of December 31, 2011, accrued interest and penalties were $0.1 million and this amount
primarily relates to the uncertain tax positions of the acquired Scient’x operations and state positions. During the
year ended December 31, 2011, there were significant changes in the accrued interest and penalties related to the
release of uncertain tax positions of the acquired Scient’x operations.

F-43

ALPHATEC HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

At December 31, 2011, the Company had federal and state net operating loss carryforwards of $43.0 million
and $51.7 million, respectively, expiring at various dates through 2031. At December 31, 2011, the Company had
federal and state research and development tax credits of $1.9 million and $1.7 million, respectively. The federal
research and development tax credits expire at various dates through 2031, while the state credits do not expire.
The Company had foreign net operating loss carryforwards of $36.1 million beginning to expire in 2014.
Utilization of the net operating loss and tax credit carryforwards may become subject to a substantial annual
limitations due to ownership change limitations that could occur in the future as provided by Section 382 of the
Internal Revenue Code of 1986, as amended, as well as similar state and foreign provisions. These ownership
changes may limit the amount of the net operating loss and tax credit carryforwards that can be utilized annually
to offset future taxable income. An ownership change occurred during June 2006 in connection with the initial
public offering. The annual limitation as a result of that ownership change did not result in the loss or substantial
limitation of net operating loss or tax credit carryforwards. There have been no subsequent ownership changes
through December 31, 2011.

11. 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 years ended December 31, 2011, 2010 and 2009, the Company operated in two geographic
regions, the U.S. and International which consists of locations outside of the U.S. In the International geographic
segment, sales in Japan for the years ended December 30, 2011, 2010 and 2009 totaled $23.9 million, $13.7
million and $23.0 million, respectively, which represented greater than 10 percent of the Company’s
consolidated revenues for the years than ended December. For the years ended December 31, 2011, 2010 and
2009, sales in other individual countries included in International did not exceed 10 percent of consolidated
revenues.

Revenues attributed to the geographic location of the customer were as follows (in thousands):

United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
International . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$133,824
63,887

$119,880
51,730

$104,531
16,087

Total consolidated revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$197,711

$171,610

$120,618

Year Ended December 31,

2011

2010

2009

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

United States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
International

$198,578
168,114

$208,175
168,841

Total consolidated assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$366,692

$377,016

December 31,

2011

2010

F-44

ALPHATEC HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

12. Related Party Transactions

For the years ended December 31, 2011, 2010 and 2009, the Company incurred costs of $0.1 million, $0.3
million and $0.2 million, respectively, to Foster Management Company and HealthpointCapital, LLC for travel
and administrative 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
HealthpointCapital Partners II, L.P., which are the Company’s principal stockholders.

For the year ended December 31, 2009, the Company incurred costs of $0.2 million for legal services paid

on behalf of HealthpointCapital, LLC in connection with the Brodke litigation.

In June 2009, the Company entered into a subscription agreement with HealthpointCapital Partners II, L.P.
The Company sold 3,937,007 shares of its common stock at a price of $2.54 per share in a private placement for
an aggregate purchase price of approximately $10.0 million. The Company paid approximately $0.1 million for
transaction fees and received aggregate net proceeds of approximately $9.9 million.

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 into a 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 years ended
December 31, 2011, 2010 and 2009, the Company incurred costs of $0.2 million each year for advisory services
provided by Dr. Hochschuler.

In November 2009, the Company purchased real property in Connecticut from one of its Vice Presidents.
The purchase was transacted at a third-party appraised price of $0.4 million. The Company subsequently engaged
a real-estate firm to manage and sell the property. The Company incurred expenses related to the sale of the
property of $0.1 million.

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 paid 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.

Indemnification Agreements

The Company has entered into indemnification agreements with certain of its directors. The indemnification

agreements require the Company to indemnify these individuals to the fullest extent permitted by Delaware law
and to advance expenses incurred by them in connection with any proceeding against them with respect to which
they may be entitled to indemnification by us. In addition, each of Scient’x and Surgiview has agreed to
indemnify its officers and directors in connection with activities undertaken by such individuals on behalf of their
respective companies. For the year ended December 31, 2011, the Company paid approximately $0.5 million in
connection with the indemnification obligations of Scient’x and Surgiview, all of which was related to the
Orthotec matter. (See Note 7)

F-45

ALPHATEC HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

13. Retirement Plan

The Company maintains an employee savings plan that qualifies as a deferred salary arrangement under
Section 401(k) of the Internal Revenue Code. Under the savings plan, participating employees may contribute a
portion of their pre-tax earnings, up to the Internal Revenue Service annual contribution limit. Additionally, the
Company may elect to make matching contributions into the savings plan at its sole discretion of up to 4% of
each individual’s compensation. Match amounts are vested after one year of service. The Company’s total
contributions to the 401(k) plan were $0.5 million, $0.4 million and $0.3 million for the years ended
December 31, 2011, 2010 and 2009, respectively.

14. Discontinued Operations and Restructuring Activities

Discontinued Operations

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 one of its wholly owned subsidiaries, 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 the Company a total purchase price of $0.5 million, of which
$0.3 million was paid in 2010, $0.1 million was paid in 2011 and the remaining $0.1 million will be paid
thereafter in two annual installments. A gain of $0.2 million was recorded on the sale of IMC Co. by the
Company during the second quarter of 2010.

The amount of IMC Co. revenue and pretax income reported in discontinued operations for the years ended

December 31, 2010 and 2009 is as follows (in thousands):

Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$3,109

$11,538

Income from continuing operations before income taxes . . . . . . . . .
Income tax provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Income from discontinued operations, net of tax . . . . . . . . . . . . . . .

$ 120
42

332
116

216

Year Ended December 31,

2010

2009

Restructuring Activities

As a result of the acquisition of Scient’x, the Company elected to consolidate Scient’x’s operations in the

United States, close its United States facility and move its operations to the Company’s corporate location in
Carlsbad, California. This consolidation was completed by April 30, 2010. Restructuring expenses also consist of
severance and other personnel costs related to the reorganization of the Company’s management. For the years
ended December 31, 2011 and 2010, the Company incurred total restructuring expenses of $1.1 million and $2.4
million, respectively. The balance in the restructuring liability as of December 31, 2011 and 2010 was $0.1
million and $0.2 million, respectively.

F-46

ALPHATEC HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

15. Subsequent Events

Debt Agreement

In February 2012, the Company executed a fourth amendment to the Amended Credit Facility which

included a waiver from SVB for non-compliance with the minimum quarterly EBITDA covenant for the
quarterly period ended December 31, 2011. The waiver also reduced the maximum amount available on the
working capital line of credit and accelerated a term loan payment (see Note 6).

16. Quarterly Financial Data (Unaudited)

The following financial information reflects all normal recurring adjustments, which are, in the opinion of
management, necessary for a fair statement of the results of the interim periods. Summarized quarterly data for
fiscal 2011 and 2010 are as follows (in thousands, except per share data):

Selected quarterly financial data:
Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross profit
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total operating expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loss from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income (loss) from discontinued operations, net of tax . . . . . . . . . . . . .
Net loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . .
Basic and diluted net loss per common share (1)

Year ended December 31, 2011

1st
Quarter

2nd
Quarter

3rd
Quarter

4th
Quarter

$49,720
31,951
34,313
(1,867)
—
(1,867)
(0.02)

$50,862
29,861
33,165
(3,044)
—
(3,044)
(0.03)

$47,619
30,207
32,569
(1,304)
—
(1,304)
(0.01)

$ 49,510
24,911
41,399
(15,966)
—
(15,966)
(0.18)

Year ended December 31, 2010

1st
Quarter

2nd
Quarter

3rd
Quarter

4th
Quarter

$35,322
23,574
27,135
(4,666)
(44)
(4,710)
(0.09)

$45,424
28,833
31,890
(3,101)
122
(2,979)
(0.04)

$44,846
28,927
32,402
(3,790)
—
(3,790)
(0.04)

$ 46,018
31,483
33,179
(2,876)
—
(2,876)
(0.03)

(1) Basic and diluted net loss per share is computed independently for each of the quarters presented. Therefore,

the sum of the quarterly per share amounts will not necessarily equal the total for the year.

F-47

ALPHATEC HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS

Allowance
for
Doubtful
Accounts (1)

Reserve for
Excess and
Obsolete
Inventories (2)

(In thousands)

Balance at December 31, 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Write-offs and recoveries, net

Balance at December 31, 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Write-offs and recoveries, net

Balance at December 31, 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Write-offs and recoveries, net

333
5
(20)

318
945
(109)

1,154
1,094
(1,193)

11,169
1,927
(4,451)

8,645
2,781
(396)

11,030
4,564
(2,420)

Balance at December 31, 2011 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 1,055

$13,174

(1) The provision is included in selling expenses.
(2) The provision is included in cost of revenues.

F-48

[THIS PAGE INTENTIONALLY LEFT BLANK]

Stock Performance

The following graph compares the cumulative total stockholder return data (through December 31, 2011) for
our common stock since June 2, 2006 (the date which our common stock was first registered under Section 12 of
the Exchange Act) to the cumulative return over such period of (i) The NASDAQ Stock Market Composite Index
and (ii) The NASDAQ Medical Equipment Index. The graph assumes that $100 was invested on the date on
which we completed our initial public offering of our common stock, in the common stock and in each of the
comparative indices. The graph further assumes that such amount was initially invested in our common stock at
the price at which such stock was first offered to the public by us on the date of its initial public offering. The
stock performance on the following graph is not necessarily indicative of future stock performance.

$160

$140

$120

$100

$80

$60

$40

$20

12/06

12/07

12/08

12/09

12/10

12/11

Alphatec Holdings, Inc

NASDAQ Composite

NASDAQ Medical Equipment

*$100 invested on 12/31/06 in stock or in index, including reinvestment of dividends.

Corporate Information

Section 16 Officers

Corporate Headquarters

Securities Counsel

Les Cross
Chairman and Chief Executive Officer

Dirk Kuyper
President, Global Commercial
Operations

Michael O’Neill
Chief Financial Officer,
Vice President and Treasurer

Patrick Ryan
Chief Operating Officer

Ebun S. Garner, Esq.
General Counsel,
Senior Vice President and Secretary

Board of Directors

Les Cross
Chairman and Chief Executive Officer,
Alphatec Spine, Inc.

Mortimer Berkowitz III
President and Managing Director,
HealthpointCapital, LLC

John H. Foster
Chairman and Managing Director,
HealthpointCapital, LLC

Stephen E. O’Neil
Founder and Principal, The O’Neil Group

Mintz, Levin, Cohn, Ferris, Glovsky and
Popeo, P.C.
One Financial Center
Boston, MA 02111
www.mintz.com

Independent Registered Public
Accounting Firm

Ernst & Young LLP
4370 La Jolla Village Drive
Suite 500
San Diego, CA 92122
www.ey.com

Notice of Annual Meeting
Thursday, June 21, 2012
2:00 pm PT
Alphatec Spine, Inc.
Corporate Headquarters
5818 El Camino Real
Carlsbad, CA 92008

Alphatec Spine, Inc.
5818 El Camino Real
Carlsbad, CA 92008
Telephone: 760.431.9286
Fax: 760.431.9132
www.alphatecspine.com

Stockholder Information

Investor Relations
Alphatec Spine, Inc.
5818 El Camino Real
Carlsbad, CA 92008
Telephone: 760.494.6610
Fax: 760.930.2513
Email: investorrelations@
alphatecspine.com

Stock Transfer Agent

Computershare, Inc.
480 Washington Blvd.
Jersey City, NJ 07310
Shareholder Communication Center:
800.356.2017
www.computershare.com

Stock Symbol

The common stock of Alphatec Holdings, Inc. is traded on the NASDAQ Global Select
Market under the ticker symbol “ATEC”.

Annual Report on Form 10-K

R. Ian Molson
Former Deputy Chairman of the Board,
Molson, Inc.

A copy of Alphatec Spine’s annual report to the U.S. Securities and Exchange
Commission on Form 10-K is available without charge online at www.alphatecspine.com
or upon written request to the Investor Relations Department (listed above).

Stephen H. Hochschuler, M.D.
Founder and Chairman,
Texas Back Institute

James R. Glynn
Former President, CFO and Director,
Invitrogen Corp.

Rohit M. Desai
Founder, Chairman and President,
Desai Capital Management Incorporated

Dirk Kuyper
President, Global Commercial
Operations, Alphatec Spine, Inc.

Siri S. Marshall
Former General Counsel,
General Mills, Inc.

Forward Looking Statements
We caution you that statements included in this annual report that are not a description of historical facts are forward-
looking statements that involve risks, uncertainties, assumptions and other factors which, if they do not materialize or
prove correct, could cause our results to differ materially from historical results or those expressed or implied by such
forward-looking statements. Forward looking statements include references to Alphatec Spine’s 2012 business prospects;
the growth rate of the spine market related to aging and elderly patients; new product development and market success
of those products; reductions in the Company’s manufacturing costs and operating expenses; and geographic expansion.
The important factors that could cause actual operating results to differ significantly from those expressed or implied by
such forward-looking statements include, but are not limited to; the uncertainty of success in developing new products
or products currently in Alphatec Spine’s pipeline; the successful global launch of the company’s new products and
the products in its development pipeline including Alphatec Solus, Trestle Luxe, Avalon and Epicage; failure to achieve
acceptance of Alphatec Spine’s products by the surgeon community; failure to obtain FDA clearance or approval for
new products, or unexpected or prolonged delays in the process; Alphatec Spine’s ability to develop and expand its
U.S. and/or global revenues; continuation of favorable third party payor reimbursement for procedures performed using
Alphatec Spine’s products; unanticipated expenses or liabilities or other adverse events affecting cash flow or Alphatec
Spine’s ability to successfully control its costs or achieve profitability; uncertainty of additional funding; Alphatec Spine’s
ability to compete with other competing products and with emerging new technologies; product liability exposure;
patent infringement claims and claims related to Alphatec Spine’s intellectual property. Please refer to the risks detailed
in Alphatec Spine’s SEC reports, including the attached Annual Report on Form 10-K and in our periodic filings including
quarterly reports on Form 10-Q and reports on Form 8-K with the Securities and Exchange Commission. Our public filings
with the Securities and Exchange Commission are available at www.sec.gov and on our website at www.alphatecspine.
com. We do not intend to update any forward-looking statement to reflect events or circumstances arising after the date
on which it was made.

Alphatec, Alphatec Spine, , Solutions for the Aging Spine, Aspida ALIF, Avalon, Illico SE, Zodiac, Trestle, Solanas,
OsseoFix+, Alphatec Solus, Trestle Luxe, AmnioShield, Novel, OsseoFix, OsseoScrew, Epicage, HeliFix, AlphaGRAFT
ProFuse, Arc and GLIF, Bone’x, Discocerv, ISOBAR Evolution, Novel, PureGen, PCB Evolution, Samarys, SCS, Structural
Allografts/VIP, TTL-IN, Xenon and Zodiac are trademarks or registered trademarks of Alphatec Spine, Inc., or its affiliates.
ELA is a trademark of Parcell Laboratories. © 2012 Alphatec Spine, Inc. All rights reserved.

Corporate Headquarters
5818 El Camino Real, Carlsbad, CA 92008
www.alphatecspine.com
Customer Service
Toll Free: 800.922.1356
Local: 760.431.9286
Fax: 800.431.9722