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ATEC > SEC Filings for ATEC > Form 10-Q on 12-Nov-2013All Recent SEC Filings

Show all filings for ALPHATEC HOLDINGS, INC.

Form 10-Q for ALPHATEC HOLDINGS, INC.


12-Nov-2013

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, our Annual Report on Form 10-K for the year ending December 31, 2012, and any updates to those risk factors filed from time to time in our Quarterly Reports on Form 10-Q. Overview
We are a medical technology company focused on the design, development, manufacturing and marketing of products for the surgical treatment of spine disorders. 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 surgical procedures. Our principal product offerings are focused on the global market for orthopedic spinal disorder solutions. Our "surgeons' culture" enables us to respond to the changing needs of surgeons through collaboration with spinal surgeons to conceptualize, design and co-develop a broad range of products. We own and operate an in-house manufacturing facility that provides us with a unique competitive advantage, and enables us to rapidly deliver solutions to meet the critical needs of surgeons and patients. 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 spinal 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, 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 and surgical centers. In general, except for those countries where we have a direct sales force (the U.S., Japan, France, Italy, and the United Kingdom), we use independent distributors that purchase our products and market them to surgeons. A majority of our business is conducted with customers within markets in which we have experience and with payment terms that are customary to our business. If we offer payment terms greater than our customary business terms or begin operating in a new market, revenues are deferred until the earlier 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, milestones, depreciation of our surgical instruments, and the amortization of purchased intangibles. We manufacture substantially all of the non-tissue-based 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, social plan benefits and related taxes, facility closing costs, manufacturing transfer costs and contract termination incurred in connection with the reorganization of the Scient'x operations in France.


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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 provision (benefit). Income tax provision (benefit) 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 unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures. On an on-going basis, we evaluate our estimates and assumptions, including those related to revenue recognition, allowances for accounts receivable, inventories, goodwill and intangible assets, stock-based compensation and income taxes. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumption conditions.
Critical accounting policies are those that, in management's view, are most important in the portrayal of our financial condition and results of operations. Management believes there have been no material changes during the nine months ended September 30, 2013 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, 2012.
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,
                                         2013           2012           2013           2012
Revenues                             $   50,196     $   46,839     $  151,659     $  143,535
Cost of revenues                         25,532         16,844         61,303         50,773
Amortization of acquired intangible
assets                                      432            362          1,289          1,114
Gross profit                             24,232         29,633         89,067         91,648
Operating expenses:
Research and development                  3,028          3,216         10,376         11,003
Sales and marketing                      18,149         17,778         55,804         55,843
General and administrative               11,443          9,758         34,018         28,714
Amortization of acquired intangible
assets                                      741            491          2,255          1,574
Transaction related expenses                  -            364              -            364
Restructuring expenses                    4,045              -          4,045              -
Total operating expenses                 37,406         31,607        106,498         97,498
Operating loss                          (13,174 )       (1,974 )      (17,431 )       (5,850 )
Other income (expense):
Interest income                               2             33              4            108
Interest expense                         (1,048 )         (774 )       (2,670 )       (5,060 )
Other income (expense), net                 210            208           (840 )          (61 )
Total other income (expense)               (836 )         (533 )       (3,506 )       (5,013 )
Loss from continuing operations
before taxes                            (14,010 )       (2,507 )      (20,937 )      (10,863 )
Income tax provision(benefit)               500            (38 )          883           (759 )
Net loss                             $  (14,510 )   $   (2,469 )   $  (21,820 )   $  (10,104 )


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Three Months Ended September 30, 2013 Compared to the Three Months Ended September 30, 2012
Revenues. Revenues were $50.2 million for the three months ended September 30, 2013 compared to $46.8 million for the three months ended September 30, 2012, representing an increase of $3.4 million, or 7.2%. The increase was primarily comprised of of $2.7 million related to sales in the U.S. region and an increase of $0.6 million in the International region.
U.S. revenues were $33.7 million for the three months ended September 30, 2013 compared to $31.0 million for the three months ended September 30, 2012, representing an increase of $2.7 million, or 8.8%. The increase was due to growth in the sales of implants and instruments ($3.9 million) and Biologics ($0.5 million), offset by thedecline in the sales of Puregen, driven by the voluntary removal from the market ($1.7 million).
International revenues were $16.5 million for the three months ended September 30, 2013 compared to $15.9 million for the three months ended September 30, 2012, representing an increase of $0.6 million, or 4.0%. The increase was primarily due to sales of Alphatec implants and instruments while sales of Scient'x product remained relatively constant. The increase in revenue is inclusive of $1.6 million in unfavorable exchange rate effect.
Cost of revenues. Cost of revenues was $25.5 million for the three months ended September 30, 2013 compared to $16.8 million for the three months ended September 30, 2012, representing an increase of $8.7 million, or 51.6%. The increase was primarily the result of one-time charges for increased inventory and instrument reserves related to the restructuring of the Scient'x organization ($4.5 million), the obsolescence of the Puregen inventory ($3.5 million) and the obsolescence of certain inventory related to an interbody fusion MIS product ($1.0 million). In addition to these charges, there was a decrease related to lower product costs as a result of sales volume and variation in product mix ($0.4 million) and a decrease in inventory reserves and adjustments ($0.5 million), offset by an increase in royalty and milestone expenses due to change in product mix ($0.6 million).

Amortization of acquired intangible assets. Amortization of acquired intangible assets was $0.4 million for each of the three months ended September 30, 2013 and September 30, 2012. This expense represents amortization in the period for intangible assets associated with product related assets obtained in acquisitions.
Gross profit. Gross profit was $24.2 million for the three months ended September 30, 2013 compared to $29.6 million for the three months ended September 30, 2012, representing a decrease of $5.4 million, or 18.2%. The decrease was due to an increase in the cost of revenues resulting from the restructuring ($4.5 million), product obsolescence ($4.5 million) and an increase in other cost of revenues ($0.2), offset by an increase in sales volume ($2.7 million) and a variation in product mix ($1.1 million).
Gross margin. Gross margin was 48.3% for the three months ended September 30, 2013 compared to 63.3% for the three months ended September 30, 2012. The decrease of 15.0 percentage points was due to an increase in the cost of revenues resulting from the restructuring (9.1 percentage points) and product obsolescence (9.1 percentage points), offset by a favorable variation in pricing and product mix (2.2 percentage points) and reduction in other cost of revenues (1.0 percentage points).
Gross margin for the U.S. region was 58.6% for the three months ended September 30, 2013 compared to 68.9% for the three months ended September 30, 2012. The decrease of 10.3 percentage points was due to an increase in the cost of revenues resulting from product obsolescence (13.5 percentage points), offset by a favorable variation in pricing and product mix (2.4 percentage points) and reduction in other cost of revenues (0.8 percentage points).
Gross margin for the International region was 27.1% for the three months ended September 30, 2013 compared to 52.2% for the three months ended September 30, 2012. The decrease of 25.0 percentage points was due to an increase in the cost of revenues resulting from the restructuring (27.6 percentage points), offset by a favorable variation in pricing and product mix (1.2 percentage points) and reduction in other cost of revenues (1.4 percentage points).
Research and development expense. Research and development expense was $3.0 million for the three months ended September 30, 2013 compared to $3.2 million for the three months ended September 30, 2012, representing a decrease of $0.2 million, or 5.8%. The decrease was primarily related to the variations in the timing of the cycle for development and testing.
Sales and marketing expense. Sales and marketing expense was $18.1 million for the three months ended September 30, 2013 compared to $17.8 million for the three months ended September 30, 2012, representing an increase of $0.4 million, or 2.1%. The increase was due to additional expense created by the recently enacted medical device excise tax.
General and administrative expense. General and administrative expense was $11.4 million for the three months ended September 30, 2013 compared to $9.8 million for the three months ended September 30, 2012, representing an increase of $1.7 million, or 17.3%. The increase was primarily related to legal expenses associated with litigation.


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Amortization of acquired intangible assets. Amortization of acquired intangible assets was $0.7 million for the three months ended September 30, 2013 compared to $0.5 million for the three months ended September 30, 2012, representing an increase of $0.3 million, or 50.9%. This expense represents amortization in the period for intangible assets associated with general business assets obtained in acquisitions.
Transaction related expenses. Transaction related expenses was $0.0 million for the three months ended September 30, 2013 compared to $0.4 for the three months ended September 30, 2012. The transaction related expenses were due to legal and professional fees in connection with our asset acquisition of certain assets of Phygen, LLC.
Restructuring expenses. Restructuring expenses was $4.0 million for the three months ended September 30, 2013 compared to $0.0 million for the three months ended September 30, 2012. On September 16, 2013, we announced that Scient'x had begun a process to significantly restructure its business operations in France in an effort to improve operating efficiencies and rationalize its cost structure. The restructuring includes an expected reduction in Scient'x's workforce and closing of the manufacturing facilities in France. We recorded restructuring costs of $4.0 million for the three months ended September 30, 2013 and we estimate that we will record total costs, including employee severance, social plan benefits and related taxes, facility closing costs, manufacturing transfer costs and contract termination costs of approximately $11.0 million associated with this restructuring. We expect to complete all the activities associated with the restructuring activities by the end of the second quarter of 2014, a substantial portion of which will be paid by then. Interest expense. Interest expense was $1.0 million for the three months ended September 30, 2013 and $0.8 million for the three months ended September 30, 2012 representing an increase of $0.3 million, or 35.4%. Interest expense consisted primarily of interest related to loan agreements and lines of credit and the associated amortization expenses related to loan costs. Other income (expense), net. Other income (expense), net was income of $0.2 million for the three months ended September 30, 2013 and the three months ended September 30, 2012. The income was primarily due to favorable foreign currency exchange results realized in 2013 due to having U.S. denominated assets and liabilities on our foreign subsidiaries books as compared to 2012.
Income tax provision (benefit). Income tax provision (benefit) was $0.5 million for the three months ended September 30, 2013 compared to a benefit of $0.0 million for the three months ended September 30, 2012. The income tax provision in 2013 consists primarily of income tax provisions related to state income taxes, the tax effect of changes in deferred tax liabilities associated with tax deductible goodwill, and operations in foreign jurisdictions where we operate. The income tax benefit in 2012 consists primarily of 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, 2013 Compared to the Nine Months Ended September 30, 2012
Revenues. Revenues were $151.7 million for the nine months ended September 30, 2013 compared to $143.5 million for the nine months ended September 30, 2012, representing an increase of $8.1 million, or 5.7%. The increase was comprised of $2.8 million related to sales in the U.S. region and $5.3 million related to sales in the International region.

U.S. revenues were $99.2 million for the nine months ended September 30, 2013 compared to $96.4 million for the nine months ended September 30, 2012, representing an increase of $2.8 million or 2.9%. The increase was due to growth in the sales of implants and instruments ($4.8 million) and Biologics ($2.1 million), offset by the decline in the sales of Puregen, driven by the voluntary removal from the market ($4.1 million).
International revenues were $52.4 million for the nine months ended September 30, 2013 compared to $47.1 million for the nine months ended September 30, 2012, representing an increase of $5.3 million, or 11.3%. The increase was primarily due to sales of Alphatec implants and instruments while the sales of Scient'x product remained relatively constant. The increase in revenue is inclusive of $4.4 million in unfavorable exchange rate effect. Cost of revenues. Cost of revenues was $61.3 million for the nine months ended September 30, 2013 compared to $50.8 million for the nine months ended September 30, 2012, representing an increase of $10.5 million, or 20.7%. The increase was primarily the result of one-time charges for increased inventory and instrument reserves related to the restructuring of the Scient'x organization ($4.5 million), the obsolescence of the Puregen inventory ($3.5 million) and the obsolescence of certain inventory related to an interbody fusion MIS product ($1.0 million). In addition to these charges, there is an increase related to higher product costs as a result of sales volume and variation in product mix ($2.2 million) and an increase in depreciation and amortization ($0.4 million), offset by a decrease in inventory reserves and adjustments ($1.1 million).


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Amortization of acquired intangible assets. Amortization of acquired intangible assets was $1.3 million for the nine months ended September 30, 2013 compared to $1.1 million for the nine months ended September 30, 2012. This expense represents amortization in the period for intangible assets associated with product related assets obtained in acquisitions.
Gross profit. Gross profit was $89.1 million for the nine months ended September 30, 2013 compared to $91.6 million for the nine months ended September 30, 2012, representing a decrease of $2.6 million, or 2.8%. The decrease was due to an increase in the cost of revenues resulting from the restructuring ($4.5 million), product obsolescence ($4.5 million), an unfavorable variation in product mix ($0.6 million), offset by an increase in sales volume ($6.5 million) and a decrease in other cost of revenues ($0.5). Gross margin. Gross margin was 58.7% for the nine months ended September 30, 2013 compared to 63.9% for the nine months ended September 30, 2012. The decrease of 5.1 percentage points was due to an increase in the cost of revenues resulting from the restructuring (3.0 percentage points), product obsolescence (3.0 percentage points) and an unfavorable variation in pricing and product mix (0.4 percentage points), offset by a reduction in other cost of revenues (1.3 percentage points).
Gross margin for the U.S. region was 65.3% for the nine months ended September 30, 2013 compared to 69.3% for the nine months ended September 30, 2012. The decrease of 4.0 percentage points was due to an increase in the cost of revenues resulting from product obsolescence (4.6 percentage points), offset by a favorable variation in pricing and product mix (0.1 percentage points) and reduction in other cost of revenues (0.5 percentage points).
Gross margin for the International region was 46.3% for the nine months ended September 30, 2013 compared to 52.8% for the nine months ended September 30, 2012. The decrease of 6.4 percentage points was due to an increase in the cost of revenues resulting from the restructuring (8.7 percentage points) and an unfavorable variation in pricing and product mix (0.3 percentage points), offset by a reduction in other cost of revenues (2.6 percentage points). Research and development expense. Research and development expense was $10.4 million for the nine months ended September 30, 2013 compared to $11.0 million for the nine months ended September 30, 2012, representing a decrease of $0.6 million, or 5.7%. The decrease was primarily related to the variations in the timing of the cycle for development and testing.
Sales and marketing expense. Sales and marketing expense was $55.8 million for the nine months ended September 30, 2013 and $55.8 million for the nine months ended September 30, 2012, representing a decrease of $0.0 million, or 0.1%. The additional expense created by the recently enacted medical device excise tax ($1.1 million) had been offset by a reduction in selling expenses.
General and administrative expense. General and administrative expense was $34.0 million for the nine months ended September 30, 2013 compared to $28.7 million for the nine months ended September 30, 2012, representing an increase of $5.3 million, or 18.5%. The increase was primarily related to increased legal fees associated with litigation ($3.1 million), increased expenses related to executive management and consulting costs ($1.0 million), and the expenses resulting from the Phygen acquisition ($1.5 million), offset by a reduction in taxes other than income ($0.3 million).
Amortization of acquired intangible assets. Amortization of acquired intangible assets was $2.3 million for the nine months ended September 30, 2013 compared to $1.6 million for the nine months ended September 30, 2012, representing an increase of $0.7 million, or 43.3%. This expense represents amortization in the period for intangible assets associated with general business assets obtained in acquisitions.
Transaction related expenses. Transaction related expenses was $0.0 million for the nine months ended September 30, 2013 compared to $0.4 millionfor the nine months ended September 30, 2012. The transaction related expenses were due to legal and professional fees in connection with the Company's asset acquisition of Phygen, LLC.
Restructuring expenses. Restructuring expenses was $4.0 million for the nine months ended September 30, 2013 compared to $0.0 million for the nine months ended September 30, 2012. On September 16, 2013, we announced that Scient'x had begun a process to significantly restructure its business operations in France in an effort to improve operating efficiencies and rationalize its cost structure. The restructuring includes an expected reduction in Scient'x's workforce and closing of the manufacturing facilities in France. We recorded restructuring costs of $4.0 million for the nine months ended September 30, 2013 and we estimate that we will record total costs, including employee severance, social plan benefits and related taxes, facility closing costs, manufacturing transfer costs and contract termination costs of approximately $11.0 million associated with this restructuring. We expect to complete all the activities associated with the restructuring activities by the end of the second quarter of 2014, a substantial portion of which will be paid by then.


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Interest expense. Interest expense was $2.7 million for the nine months ended September 30, 2013 and $5.1 million for the nine months ended September 30, 2012, representing a decrease of $2.4 million, or 47.2%. Interest expense consisted primarily of interest related to loan agreements and lines of credit and the associated amortization expenses related to loan costs. 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 expense was $0.8 million for the nine months ended September 30, 2013 compared to $0.1 million for the nine months ended September 30, 2012, representing an increase in expense of $0.8 million. The increase was primarily due to unfavorable foreign currency exchange results realized in 2013 due to having U.S. denominated assets and liabilities on our foreign subsidiaries books as compared to 2012.
Income tax provision (benefit). Income tax provision (benefit) was $0.9 million for the nine months ended September 30, 2013 compared to a benefit of $0.8 million for the nine months ended September 30, 2012. The income tax provision in 2013 consists primarily of income tax provisions related to state income taxes, the tax effect of changes in deferred tax liabilities associated with tax deductible goodwill and operations in foreign jurisdictions where we operate. The income tax benefit in 2012 consists primarily of 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 . . .

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