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ATEC > SEC Filings for ATEC > Form 10-Q on 6-Nov-2012All Recent SEC Filings

Show all filings for ALPHATEC HOLDINGS, INC.

Form 10-Q for ALPHATEC HOLDINGS, INC.


6-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Our management's discussion and analysis of our financial condition and results of operations include the identification of certain trends and other statements that may predict or anticipate future business or financial results that are subject to important factors, such as those set forth in Item 1A "Risk Factors" in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ending December 31, 2011, as well as any updates to those risk factors filed from time to time in our Quarterly Reports on Form 10-Q or Current Reports on Form 8-K.

Overview

We are a medical technology company focused on the design, development, manufacturing and marketing of products for the surgical treatment of spine disorders, with a focus on products that treat conditions that affect the aging spine. We have a comprehensive product portfolio and pipeline that 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.

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, interbody 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 (the U.S., 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.

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.

Restructuring expense. Restructuring expense consists of severance and other personnel costs incurred in connection with the reorganization of the Company's management and those costs associated with exit or disposal activities related to the acquisition of Scient'x.


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

Critical Accounting Policies and Estimates

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

Critical accounting policies are those that, in management's view, are most important in the portrayal of our financial condition and results of operations. Management believes there have been no material changes during the nine months ended September 30, 2012 to the critical accounting policies discussed in the Management's Discussion and Analysis of Financial Condition and Results of Operations section of our Annual Report on Form 10-K for the year ended December 31, 2011.

Results of Operations

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



                                                   Three Months Ended              Nine Months Ended
                                                     September 30,                   September 30,
                                                  2012            2011           2012            2011
Revenues                                        $  46,839       $ 47,619       $ 143,535       $ 148,201
Cost of revenues                                   16,844         17,001          50,773          54,959
Amortization of acquired intangible assets            362            411           1,114           1,223

Gross profit                                       29,633         30,207          91,648          92,019
Operating expenses:
Research and development                            3,216          3,858          11,003          13,653
Sales and marketing                                17,778         19,145          55,843          57,065
General and administrative                          9,758          8,627          28,714          26,707
Amortization of acquired intangible assets            491            545           1,574           1,629
Transaction related expenses                          364             -              364              -
Restructuring expenses                                 -             394              -              993

Total operating expenses                           31,607         32,569          97,498         100,047

Operating loss                                     (1,974 )       (2,362 )        (5,850 )        (8,028 )
Other income (expense):
Interest income                                        33             48             108             103
Interest expense                                     (774 )         (725 )        (5,060 )        (2,292 )
Other income (loss), net                              208            202             (61 )           958

Total other income (expense)                         (533 )         (475 )        (5,013 )        (1,231 )

Loss from continuing operations before taxes       (2,507 )       (2,837 )       (10,863 )        (9,259 )
Income tax benefit                                    (38 )       (1,533 )          (759 )        (3,044 )

Net loss                                        $  (2,469 )     $ (1,304 )     $ (10,104 )     $  (6,215 )


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Three Months Ended September 30, 2012 Compared to the Three Months Ended September 30, 2011

Revenues. Revenues were $46.8 million for the three months ended September 30, 2012 compared to $47.6 million for the three months ended September 30, 2011, representing a decrease of $0.8 million, or 1.6%. The decrease was the effect of an increase in the International region of $0.9 million, offset by a decrease in the U.S. region of $1.7 million.

U.S. revenues were $31.0 million for the three months ended September 30, 2012 compared to $32.7 million for the three months ended September 30, 2011, representing a decrease of $1.7 million, or 5.2%. The decrease was due to a decrease in the sales of instruments and implants ($2.3 million) and a decrease in the sales of Scient'x products ($0.8 million), offset by an increase in sales of Biologics ($1.4 million).

International revenues were $15.8 million for the three months ended September 30, 2012 compared to $14.9 million for the three months ended September 30, 2011, representing an increase of $0.9 million, or 6.1%. The decrease was due to a decrease in Scient'x sales ($1.3 million), offset by increased sales of Alphatec as aging products in the Scient'x portfolio are replaced by Alphatec products ($2.2 million). The increase in revenues is inclusive of $0.9 million in negative exchange rate effect.

Cost of revenues. Cost of revenues was $16.8 million for the three months ended September 30, 2012 compared to $17.0 million for the three months ended September 30, 2011, representing a decrease of $0.2 million, or 0.9%. The decrease was primarily related to favorable manufacturing and absorption variances ($1.0 million), a reduction in royalty expenses due to lower sales volumes ($0.3 million), and a reduction in milestone expense related to an adjustment of an accrual ($0.7 million) offset by an increase in the reserve for excess and obsolete inventory ($0.8 million) and the amortization expenses associated with the settlement agreement we entered into in December 2011 with Biomet related to royalties on the sales of our polyaxial screws ($1.0 million).

Amortization of acquired intangible assets. Amortization of acquired intangible assets was $0.4 million for the three months ended September 30, 2012 and for the three months ended September 30, 2011. 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 $29.6 million for the three months ended September 30, 2012 compared to $30.2 million for the three months ended September 30, 2011, representing a decrease of $0.6 million, or 1.9%. The decrease was due to a reduction in the cost of revenues ($0.2 million), offset by a decrease in sales volume and variation in product mix ($0.8 million).

Gross margin. Gross margin was 63.2% for the three months ended September 30, 2012 compared to 63.4% for the three months ended September 30, 2011. The decrease of 0.2 percentage points was the result of a reduction in the cost of revenues (0.2 percentage points), offset by an unfavorable variation in product mix (0.4 percentage points).

Gross margin for the U.S. region was 68.9% for the three months ended September 30, 2012 compared to 68.1% for the three months ended September 30, 2011. The increase of 0.8 percentage points was the result of reduced cost of revenues ($1.4 million), offset by a decrease in sales volume and variation in product mix ($2.3 million).

Gross margin for the International region was 52.2% for the three months ended September 30, 2012 compared to 53.2% for the three months ended September 30, 2011. The decrease of 1.1 percentage points was the result of increased cost of revenues ($1.1 million), offset by an increase due to variation in product mix ($1.4 million).

Research and development expense. Research and development expense was $3.2 million for the three months ended September 30, 2012 compared to $3.9 million for the three months ended September 30, 2011, representing a decrease of $0.6 million, or 16.6%. The reduction in expenses was primarily related to a reduction in European research and development activities supporting the Scient'x products ($0.5 million).

Sales and marketing expense. Sales and marketing expense was $17.8 million for the three months ended September 30, 2012 compared to $19.1 million for the three months ended September 30, 2011, representing a decrease of $1.4 million, or 7.1%. The reduction in expenses was primarily related to a reduction in commission expense that is directly related to a decrease in U.S. revenue.

General and administrative expense. General and administrative expense was $9.8 million for the three months ended September 30, 2012 compared to $8.6 million for the three months ended September 30, 2011, representing an increase of $1.1 million, or 13.1%. The increase was primarily related to increased legal expense ($0.5 million), increased expenses related to executive management ($0.3 million), severance costs ($0.7 million), offset by a reduction in International expenses resulting from efficiencies ($0.5 million).

Amortization of acquired intangible assets. Amortization of acquired intangible assets was $0.5 million for the three months ended September 30, 2012 and for the three months ended September 30, 2011. This expense represents amortization in the period for intangible assets associated with general business assets obtained in the Scient'x acquisition.


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Transaction related expenses. Transaction related expenses was $0.4 million for the three months ended September, 30 2012 compared to $0 for the three months ended September 30, 2011. The transaction related expenses were due to legal and professional fees in connection with the Company's asset acquisition of Phygen, LLC.

Interest expense. Interest expense was $0.8 million for the three months ended September 30, 2012 compared to $0.7 million for the three months ended September 30, 2011, representing an increase of $0.1 million.

Other income (expense), net. Other income (expense), net was $0.2 million for the three months ended September 30, 2012 and for the three months ended September 30, 2011. This income represents favorable foreign currency exchange results realized.

Income tax benefit. Income tax was a benefit of $0.0 million for the three months ended September 30, 2012 compared to a benefit of $1.5 million for the three months ended September 30, 2011. The income tax benefit consists primarily of income tax benefits related to operations in France and a settlement with the French tax authorities. The income tax benefit is partially offset by a valuation allowance on the French deferred tax assets, income tax expense for various other foreign jurisdictions, state income taxes, and the tax effect of changes in deferred tax liabilities associated with tax deductible goodwill.

Nine Months Ended September 30, 2012 Compared to the Nine Months Ended September 30, 2011

Revenues. Revenues were $143.5 million for the nine months ended September 30, 2012 compared to $148.2 million for the nine months ended September 30, 2011, representing a decrease of $4.7 million, or 3.1%. The decrease was primarily the result of the U.S. region.

U.S. revenues were $96.4 million for the nine months ended September 30, 2012 compared to $101.1 million for the nine months ended September 30, 2011, representing a decrease of $4.7 million, or 4.6%. The decrease was due to decrease in the sales of instruments and implants ($6.4 million) and a decrease in the sales of Scient'x products ($2.3 million), offset by an increase in sales of Biologics ($4.0 million).

International revenues were $47.1 million for the nine months ended September 30, 2012 and for the nine months ended September 30, 2011. The decrease was the result of a decrease in Scient'x sales ($5.2 million), offset by increased sales of Alphatec as aging products in the Scient'x portfolio are replaced by Alphatec products ($5.2 million). The result is inclusive of $1.8 million in unfavorable exchange rate effect.

Cost of revenues. Cost of revenues was $50.8 million for the nine months ended September 30, 2012 compared to $55.0 million for the nine months ended September 30, 2011, representing a decrease of $4.2 million, or 7.6%. The decrease was primarily related to lower product costs due to a decrease in sales volume and variation in product mix ($1.3 million), favorable manufacturing and absorption variances ($3.8 million), a reduction to inventory adjustments ($1.6 million), a reduction in instrument depreciation expense ($0.3 million), a reduction in royalty and milestone expenses due to the cancellation of certain agreements, lower sales volumes and an adjustment to accruals ($1.5 million), and a decrease in inventory step-up expense related to the Scient'x acquisition ($0.8 million), offset by an increase in the reserve for excess and obsolete inventory ($1.9 million) and the amortization expenses associated with the settlement agreement we entered into in December 2011 with Biomet related to royalties on the sales of our polyaxial screws ($3.2 million).

Amortization of acquired intangible assets.Amortization of acquired intangible assets was $1.1 million for the nine months ended September 30, 2012 compared to $1.2 million for the nine months ended September 30, 2011. 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 $91.6 million for the nine months ended September 30, 2012 compared to $92.0 million for the nine months ended September 30, 2011, representing a decrease of $0.4 million, or 0.4%. The decrease was due to a reduction in cost of revenues ($3.0 million), offset by a decrease in sales volume and variation in product mix ($3.4 million).

Gross margin. Gross margin was 63.9% for the nine months ended September 30, 2012 compared to 62.1% for the nine months ended September 30, 2011. The increase of 1.8 percentage points was the result of a reduction in the cost of revenues (1.5 percentage points) and a favorable variation in product mix (0.3 percentage points).

Gross margin for the U.S. region was 69.3% for the nine months ended September 30, 2012 compared to 67.7% for the nine months ended September 30, 2011. The increase of 1.6 percentage points was the result of reduced cost of revenues ($4.3 million), offset by a decrease in sales volume and a negative variation in product mix ($5.9 million).


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Gross margin for the International region was 52.8% for the nine months ended September 30, 2012 compared to 50.1% for the nine months ended September 30, 2011. The increase of 2.7 percentage points was the result of a favorable variation in product mix ($2.6 million), offset by increased cost of revenues ($1.3 million).

Research and development expense. Research and development expense was $11.0 million for the nine months ended September 30, 2012 compared to $13.7 million for the nine months ended September 30, 2011, representing a decrease of $2.7 million, or 19.4%. The decrease was primarily related to reduced European research and development activities to support the Scient'x products ($1.5 million), reduced personnel expenses in the U.S. ($0.5 million), and reduced activity due to the variation in the timing of the cycle for development and testing ($0.7 million).

Sales and marketing expense. Sales and marketing expense was $55.8 million for the nine months ended September 30, 2012 compared to $57.1 million for the nine months ended September 30, 2011, representing a decrease of $1.2 million, or 2.1%. The reduction in expenses was primarily related to a reduction in commission expense that is directly related to a decrease in U.S. revenue.

General and administrative expense. General and administrative expense was $28.7 million for the nine months ended September 30, 2012 compared to $26.7 million for the nine months ended September 30, 2011, representing an increase of $2.0 million, or 7.5%. The increase was primarily related to increased legal expense ($1.1 million), increased expenses related to executive management ($1.1 million), severance costs ($0.7 million), offset by a reduction in IT related expenses ($0.5 million) and a reduction in International expenses expense resulting from efficiencies ($0.5 million).

Amortization of acquired intangible assets. Amortization of acquired intangible assets was $1.6 million for the nine months ended September 30, 2012 and the nine months ended September 30, 2011. This expense represents amortization in the period for intangible assets associated with general business assets obtained in the Scient'x acquisition.

Transaction related expenses. Transaction related expenses was $0.4 million for the nine months ended September, 30 2012 compared to $0 for the nine months ended September 30, 2011. The transaction related expenses were due to legal and professional fees in connection with the Company's asset acquisition of Phygen, LLC.

Restructuring expense. Restructuring expense was $0 for the nine months ended September 30, 2012 compared to $1.0 million for the nine months ended September 30, 2011. The restructuring expenses were due to severance and other personnel costs incurred in connection with restructuring activities in the United States and Europe in 2011.

Interest expense. Interest expense was $5.1 million for the nine months ended September 30, 2012 compared to $2.3 million for the nine months ended September 30, 2011, representing an increase of $2.8 million. Interest expense for the nine months ended September 30, 2012 includes loss on extinguishment of debt costs of $2.9 million related to the refinancing of the term note and revolving credit facility with Silicon Valley Bank consisting of $2.3 million of early termination fees and $0.6 million for the write-off of capitalized deferred debt offering costs.

Other income (expense), net. Other income (expense), net was ($0.1 million) for the nine months ended September 30, 2012 compared to $1.0 million for the nine months ended September 30, 2011, representing a decrease of $1.1 million. The decrease was due to unfavorable foreign currency exchange results realized in 2012 as compared to favorable results in 2011.

Income tax benefit. Income tax was a benefit of $0.8 million for the nine months ended September 30, 2012 compared to a benefit of $3.0 million for the nine months ended September 30, 2011. The income tax benefit consists primarily of income tax benefits related to operations in France and a settlement with the French tax authorities partially offset by a valuation allowance on the French deferred tax assets, income tax expense for various other foreign jurisdictions, state income taxes and the tax effect of changes in deferred tax liabilities associated with tax deductible goodwill.

Non-GAAP Financial Measures

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

Adjusted EBITDA represents net income (loss) excluding the effects of interest, taxes, depreciation, amortization, stock-based compensation and other non-recurring income or expense items, such as in-process research and development expense and acquisition related transaction and restructuring expenses. Severance expenses of $0.7 million are included in restructuring and other expenses for the three and nine months ended September 30, 2012. 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.


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The following is a reconciliation of adjusted EBITDA to the most comparable GAAP measure, net loss, for the three and nine months ended September 30, 2012 and 2011 (in thousands):

                                                 Three Months Ended September 30,               Nine Months Ended September 30,
                                                   2012                    2011                   2012                    2011
Net loss                                      $        (2,469 )       $        (1,304 )     $        (10,104 )       $       (6,215 )
Stock-based compensation                                1,000                     480                  2,210                  1,928
. . .
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