On February 1st, 2023, Alphatec Holdings (Nasdaq: ATEC) granted its executives significant restricted stock units (RSU’s) as well as a number of price-vested RSU’s.
These grants stood out for three reasons: the grants were made in advance of the release of Q4 financials, the cadence of the award was inconsistent with previous grant dates, and the compensation mix of the grant was different from previous grants.
Proper company procedure would be to grant yearly awards to executives the day after the annual financial results are released. ATEC was slated to report their Q4 results on February 28th, 2023, but the grants in question were made on February 1st, 2023. This is typically frowned upon, since the executives would likely have full knowledge of insider information relating to those results.
Secondly, the cadence of the grants relative to previous grants is also suspect. The table below outlines historic grants to the company’s CEO.
Notice that ATEC’s grant dates in 2021 and 2022 typically fall in the third week of February. The 2023 grant instead occurs approximately three weeks before the typical granting schedule, which is peculiar. In addition, there is very little variation in the earnings release dates, which makes the changing grant dates even more perplexing. (We will revisit the 2019 and 2020 grants later on).
Lastly, the 2023 grant had a significant portion of price-vested RSU’s, which hasn’t occurred since the company’s 2020 grant. At the time of the 2023 grant, ATEC’s stock price was $13.25, which is significantly lower than the grant hurdle price of $24.00. This is an incredibly aggressive hurdle for executives.
Based on the above disclosures, we decided to read through the company’s most recent proxy statement (April 28, 2022) and look through previous grants to see if there are any other governance clues we could pick up on.
In the table previously shown, we purposely didn’t mention the grants that occurred in 2019 and 2020. In our opinion, those grants are an explicit indication of management taking advantage of grant dates to enrich themselves.
The 2019 grant was aggressive in terms of price hurdle, as well as total amount of price-vested RSU’s, and it specifically didn’t include any regular RSU’s. The hurdle price was struck at a 30% premium to the grant date stock price, which executives would never agree to unless they thought they were highly-likely to exceed it. In addition, executives tend to heavily prefer time-vested RSU’s, as they are easier to achieve. It should come as no surprise that over the ensuing 6 months, ATEC’s stock price steadily climbed to ~$7.00, which was significantly higher than the grant price hurdle of $5.36.
The 2020 grant was also unusual in terms of timing and price hurdle. The grant date was three weeks earlier than the 2019 grant, and it also happened to coincide with the lows in the stock market that occurred during the Covid-19 pandemic. The 2020 grant also occurred before Q4 earnings were released, whereas the 2019 grant occurred after Q4 earnings were released. Lastly, the grant price hurdle was set at $7.52, which was 100% higher than the current stock price during the grant date. It should come as no surprise that over the ensuing 6 months, ATEC’s stock price steadily climbed to ~$9.50, which was significantly above the grant price hurdle required.
Reading through ATEC’s proxy, there are a few items that stand out from a governance perspective. Patrick Miles, ATEC’s CEO, owns 7% of the shares outstanding and is also Chairman of the board. A Chairman title provided to the current CEO is a red flag, as it suggests that he has undue influence over the executive team and the board.
We also note that two entities own a combined 29% of the shares, which would yield significant influence. One of these major shareholders also has the ability to nominate up to two directors, so long as their ownership is at least 12.5%. In 2022, this specific shareholder exercised this right and nominated two directors to the thirteen person board.
Lastly, when grants are in question, we like to study the compensation committee members to a closer degree. The compensation committee comprises three individuals: Mr. Woods (Chair), Ms. McGinnis and Mr. Blackford.
Mr. Woods’ background is intriguing because he was a founding partner of a private equity firm, a partner at an investment bank and a Managing Director of a large financial institution. His lengthy tenure in private equity and investment banking signal that Mr. Woods would be very skilled at rewarding management through non-obvious ways.
Mr. Blackford’s profile also stands out due to his long history (2009-2016) at NuVasive, a medical device company headquartered in San Diego. ATEC’s current CEO, Miles Patrick, also held roles at NuVasive from 2001-2017. It is important to note that both directors held executive-level roles at NuVasive, which would mean that they worked closely on a day-to-day basis.
Conjecture/ implication based on disclosures: Based on the above disclosures, we believe that ATEC’s CEO has significant influence over the board, and specifically the compensation committee. It has been shown that ATEC has been willing to bend the rules when it comes to timing previous grants, as well as altering the mix in price-vested compensation. We believe that the grant made on February 1st, 2023 is a signal that executives believe that the stock is significantly undervalued.