Alphatec Holdings, Inc. 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations You should read the following management's discussion and analysis of our financial condition and results of operations in conjunction with our unaudited condensed consolidated financial statements and the related notes thereto that appear elsewhere in this Quarterly Report on Form 10-Q and the audited consolidated financial statements and notes thereto and under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”). In addition to historical information, the following management’s discussion and analysis of our financial condition and results of operations includes forward-looking information that involves risks, uncertainties, and assumptions. Our actual results and the timing of events could differ materially from those anticipated by these forward-looking statements as a result of many factors, such as those set forth under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023, and any updates to those risk factors filed from time to time in our subsequent periodic and current reports filed with the SEC. Overview We are a medical technology company, headquartered in Carlsbad, California, focused on the design, development, and advancement of technology for better surgical treatment of spine disorders. By applying our unique, 100% spine focus and deep, collective industry know-how, we aim to revolutionize the approach to spine surgery through clinical distinction. The sophisticated approaches that we create from the ground up are designed to integrate with our expanding Alpha InformatiX™ product platform to objectively inform surgery and achieve the goals of spine surgery more predictably and more reproducibly. We have a comprehensive product portfolio designed to address the spine’s various pathologies, and are perpetually innovating to accomplish our ultimate vision, which is to be the standard bearer in spine. The application of our team’s deep spine know-how, coupled with a willingness to invest holistically in the technologies integrated into our procedural approaches continues to increasingly compel surgeons and sales talent to partner with us. That adoption-driven validation has been the source of industry-leading market share expansion, which has delivered an approximately 40% revenue compound annual growth rate since our transformation commenced in 2018. We market and sell our products through a network of independent sales agents and direct sales representatives. To deliver consistent, predictable growth, we have added, and intend to continue to add, clinically astute and exclusive sales team members to reach untapped surgeons, hospitals, and national accounts and better penetrate existing accounts and territories. Revenue and Expense Components The following is a description of the primary components of our revenue and expenses: Revenue. We derive our revenue primarily from the sale of spinal surgery implants used in the treatment of spine disorders as well as the sale of medical imaging equipment which is used for surgical planning and post-operative assessment. Spinal implant products include pedicle screws and complementary implants, interbody devices, plates, and tissue-based materials. Medical imaging equipment includes our EOS full-body and weight-bearing x-ray imaging devices, and related services. Our revenue is generated by our direct sales force and independent sales agents. Our products are shipped and invoiced to hospitals and surgical centers. Currently, most of our business is conducted with customers within markets in which we have experience and with payment terms that are customary to our business. We may defer revenue until the time of collection if circumstances related to payment terms, regional market risk or customer history indicate that collectability is not certain. Cost of sales . Cost of sales consists primarily of direct product costs, royalties, service labor hours, and parts. Our product costs consist primarily of raw materials, component parts, direct labor, and overhead. 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. 23 Table of Contents Research and development expenses . Research and development expenses consist of costs associated with the design, development, testing, and enhancement of our products. Research and development expenses also include salaries and related employee benefits, research-related overhead expenses, and fees paid to external service providers and development consultants in the form of both cash and equity. Sales, general and administrative expenses . Sales, general and administrative expenses consist primarily of salaries and related employee benefits, sales commissions and other variable costs, depreciation of our surgical instruments, regulatory affairs, quality assurance costs, professional service fees, travel, medical education, trade show and marketing costs, and insurance expenses. Litigation-related expenses. Litigation-related expenses consist of costs incurred for our ongoing and settled litigation. Amortization of acquired intangible assets. Amortization of acquired intangible assets consists of intangible assets acquired in business combinations and asset acquisitions. Transaction-related expenses. Transaction-related expenses consist of one-time costs associated with business combinations and asset acquisitions. These items may include but are not limited to consulting and legal fees, and other related deal costs. Restructuring expenses . Restructuring expenses are primarily associated with the realignment of our operations and geographical footprint to achieve synergies, in which we incur one-time costs related to exiting and/or relocating our facilities, and personnel related expenses including severance and other costs. Total interest expense and other expense, net . Total interest expense and other expense, net includes interest income, interest expense, gains and losses from foreign currency exchanges and other non-operating gains and losses. Income tax provision. Income tax provision primarily consists of an estimate of federal, state, and foreign income taxes based on enacted state and foreign tax rates, as adjusted for allowable credits, deductions, uncertain tax positions, changes in the valuation of our deferred tax assets and liabilities, and changes in tax laws. 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 generally accepted accounting principles in the United States of America. 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, intangible assets, stock-based compensation, and income taxes. We base our estimates on historical experience and on various other assumptions that we believe 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 three months ended June 30, 2024, 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, 2023, filed with the SEC. Results of Operations Total revenue Three Months Ended June 30, Change Six Months Ended June 30, Change (in thousands, except %) 2024 2023 $ % 2024 2023 $ % Revenue from products and services $ 145,573 $ 116,920 $ 28,653 25 % $ 284,050 $ 226,030 $ 58,020 26 % Revenue from products and services increased $28.6 million, or 25%, and $58.0 million, or 26%, during the three and six months ended June 30, 2024, respectively, compared to the same period in 2023. The increase was primarily due to an increase in product volume that was due to the increase in our surgeon user base, continued expansion of our new product portfolio, and increasing adoption of our technology. 24 Table of Contents Cost of sales Three Months Ended June 30, Change Six Months Ended June 30, Change (in thousands, except %) 2024 2023 $ % 2024 2023 $ % Cost of sales $ 42,979 $ 52,379 $ (9,400 ) (18 )% $ 84,105 $ 91,064 $ (6,959 ) (8 )% Cost of sales decreased $9.4 million, or 18%, and $7.0 million, or 8%, for the three and six months ended June 30, 2024, respectively, compared to the same period in 2023. The decrease was primarily due to a decrease in stock-based compensation offset by an increase in product volume. We have entered into Development Service Agreements for the development of a wide variety of potential products and intellectual property. Under these agreements, future royalty payments for product and/or intellectual property rights may be paid in either cash or restricted shares of our common stock at the election of the developer, depending on the terms of the agreement. Certain of these agreements were amended to remove the cash royalty option and require settlement in restricted shares of our common stock. During the three and six months ended June 30, 2023, the vesting conditions of certain of these amended awards were deemed probable. There were no such vesting conditions met during the three and six months ended June 30, 2024 resulting in a decrease in stock-based compensation for the period. Operating expenses Three Months Ended June 30, Change Six Months Ended June 30, Change (in thousands, except %) 2024 2023 $ % 2024 2023 $ % Operating expenses: Research and development $ 19,105 $ 14,571 $ 4,534 31 % $ 37,117 $ 27,831 $ 9,286 33 % Sales, general and administrative 112,731 87,287 25,444 29 % 226,458 178,549 47,909 27 % Litigation-related expenses 2,090 6,908 (4,818 ) (70 )% 6,518 10,100 (3,582 ) (35 )% Amortization of acquired intangible assets 3,836 3,705 131 4 % 7,690 6,588 1,102 17 % Transaction-related expenses — 1,900 (1,900 ) (100 )% (117 ) 1,900 (2,017 ) (106 )% Restructuring expenses 139 29 110 379 % 927 204 723 354 % Total operating expenses $ 137,901 $ 114,400 $ 23,501 21 % $ 278,593 $ 225,172 $ 53,421 24 % Research and development expenses . Research and development expenses increased $4.5 million, or 31%, and $9.3 million, or 33%, for the three and six months ended June 30, 2024, respectively, compared to the same period in 2023. The increase was primarily due to an increase in personnel to support the expansion of our new product portfolio. Sales, general and administrative expenses. Sales, general and administrative expenses increased $25.4 million, or 29%, and $47.9 million, or 27%, during the three and six months ended June 30, 2024, respectively, compared to the same period in 2023. The increase was primarily due to higher compensation-related costs and variable selling expenses associated with the increase in revenue, and our continued investment in building our strategic distribution channel. Additionally, we continued to increase our investment in our sales and marketing functions by increasing headcount to support the growth of our business, as well as necessary administrative support. Litigation-related expenses. Litigation expenses decreased $4.8 million, or 70%, and $3.6 million, or 35%, for the three and six months ended June 30, 2024, respectively, compared to the same period in 2023. The decrease was primarily related to settled litigation matters. Amortization of acquired intangible assets. Amortization expense increased $1.1 million, or 17%, during the six months ended June 30, 2024, compared to the same period in 2023. The increase in amortization of acquired intangible assets is primarily due to amortization of intangible assets acquired in the acquisition of the navigation-enabled robotics platform ("Valence") in April 2023. 25 Table of Contents Transaction-related expenses. Transaction-related expense decreased $1.9 million, or 100%, and $2.0 million, or 106%, during the three and six months ended June 30, 2024, respectively, compared to the same period in 2023. The decrease in transaction-related expenses is due to the Valence acquisition in April 2023. Restructuring expenses. The increase in restructuring expenses for the three and six months ended June 30, 2024 is primarily due to costs associated with the relocation of office facilities in Paris, France. Total interest expense and other expense, net Three Months Ended June 30, Change Six Months Ended June 30, Change (in thousands, except %) 2024 2023 $ % 2024 2023 $ % Other expense, net: Interest expense, net $ (5,815 ) $ (3,892 ) $ (1,923 ) 49 % $ (11,156 ) $ (7,766 ) $ (3,390 ) 44 % Other income, net 156 2,324 (2,168 ) (93 )% 274 3,030 (2,756 ) (91 )% Total other expense, net $ (5,659 ) $ (1,568 ) $ (4,091 ) 261 % $ (10,882 ) $ (4,736 ) $ (6,146 ) 130 % Interest expense, net, increased $1.9 million, or 49%, and $3.4 million, or 44%, during the three and six months ended June 30, 2024, respectively, compared to the same period in 2023. The increase in interest expense, net, was primarily due to drawing an additional $50.0 million on the Braidwell Term Loan in September 2023 and higher interest rates related to our Revolving Credit Facility and Braidwell Term Loan. Other income, net, decreased $2.2 million, or 93%, and $2.8 million, or 91%, during the three and six months ended June 30, 2024, respectively, compared to the same period in 2023. The change in other income, net, was primarily due to an employee retention credit received during the three months ended June 30, 2023. Income tax provision Three Months Ended June 30, Change Six Months Ended June 30, Change (in thousands, except %) 2024 2023 $ % 2024 2023 $ % Income tax (benefit) provision $ (286 ) $ (50 ) $ (236 ) 472 % $ (355 ) $ (36 ) $ (319 ) 886 % The change in the income tax provision for the three and six months ended June 30, 2024, respectively, compared to the same period in 2023, was primarily related to the recognition of income tax benefits in several jurisdictions. Liquidity and Capital Resources Our principal sources of liquidity are our existing cash and cash equivalents, our Revolving Credit Facility and cash from operations. Our liquidity and capital structure are evaluated regularly within the context of our annual operating and strategic planning process. We consider the liquidity necessary to fund our operations, which includes working capital needs, investments in research and development, investments in inventory and instrument sets to support our customers, as well as other operating costs. Our future capital requirements will depend on many factors including our rate of revenue growth, the timing and extent of spending to support development efforts, the expansion of sales, marketing and administrative activities, the timing of introductions of new products and enhancements to existing products, and the international expansions of our business. As current borrowing sources become due, we may be required to access the capital markets for additional funding. If we are required to access the debt markets, we expect to be able to secure reasonable borrowing rates. As part of our liquidity strategy, we will continue to monitor our current level of spending and cash use as well as our ability to secure additional credit facilities, term loans, or other similar arrangements in light of our spending levels and general financial market conditions. A substantial portion of our operations are in the United States ("U.S."), and most of our net sales have been made in the U.S. Accordingly, we do not have material exposures to foreign currency rate fluctuations from operations. However, as our business in markets outside of the U.S. continues to increase, we will be exposed to foreign currency exchange risk related to our foreign operations. 26 Table of Contents We do not have any material financial exposure to one customer or one country that would significantly hinder our liquidity. We are and may become involved in various legal proceedings arising from our business activities. While we have no material, undisclosed accruals for pending litigation or claims, litigation is inherently unpredictable, and depending on the nature and timing of a proceeding, an unfavorable resolution could materially affect our future consolidated results of operations, cash flows or financial position in a particular period. We assess contingencies to determine the degree of probability and range of possible loss for potential accrual or disclosure in our condensed consolidated financial statements. An estimated loss contingency is accrued in our condensed consolidated financial statements if it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Assessing contingencies is highly subjective and requires judgments about future events because litigation is inherently unpredictable, and unfavorable resolutions could occur. When evaluating contingencies, we may be unable to provide a meaningful estimate due to a number of factors, including the procedural status of the matter in question, the presence of complex or novel legal theories, and/or the ongoing discovery and development of information important to the matters. In addition, damage amounts claimed in litigation against us may be unsupported, exaggerated, or unrelated to reasonably possible outcomes, and as such are not meaningful indicators of our potential liability. We have disclosed all material accruals for pending litigation or investigations in Note 9, Commitments and Contingencies, in the Notes to Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q. Cash and cash equivalents were $99.8 million and $221.0 million at June 30, 2024, and December 31, 2023, respectively. We believe that our existing funds, cash generated from our operations and our existing sources of and access to financing are adequate to satisfy our needs for working capital, capital expenditure and debt service requirements, and other business initiatives we plan to strategically pursue. Summary of Cash Flows Six Months Ended June 30, (in thousands) 2024 2023 Cash (used in) provided by: Operating activities $ (49,832 ) $ (36,196 ) Investing activities (69,512 ) (92,379 ) Financing activities (1,128 ) 145,023 Effect of exchange rate changes on cash (670 ) (124 ) Net (decrease) increase in cash and cash equivalents $ (121,142 ) $ 16,324 Operating Activities We used cash of $49.8 million from operating activities for the six months ended June 30, 2024, which is primarily related to inventory purchases to support the growth of our business and commercial launch of new products, offset by the timing of cash payments and receipts. Investing Activities We used cash of $69.5 million in investing activities for the six months ended June 30, 2024, which is primarily related to the purchase of surgical instruments to support the growth of our business and commercial launch of new products. Financing Activities We used cash of $1.1 million in financing activities for the six months ended June 30, 2024, which is primarily related to cash paid for net tax withholdings associated with employee stock awards offset by net draws on our revolving line of credit. Debt and Commitments As of June 30, 2024, we had $150.0 million outstanding under the Braidwell Term Loan. The outstanding loans under the Braidwell Term Loan bear interest at the sum of Term SOFR plus 5.75% per annum. The Braidwell Term Loan matures on January 6, 2028. As of June 30, 2024, we had $54.9 million outstanding under the Revolving Credit Facility. The outstanding loans under the Revolving Credit Facility bear interest at the sum of Term SOFR plus 3.5% per annum. The Revolving Credit Facility matures on the earlier of September 29, 2027, or 90 days prior to the final maturity date of any of our 2026 Notes. 27 Table of Contents As of June 30, 2024, we had $316.3 million outstanding under the 2026 Notes. The 2026 Notes accrue interest at a rate of 0.75%, payable semi-annually in arrears on February 1 and August 1 of each year. Prior to maturity in August 2026, the holders of the 2026 Notes may, under certain circumstances, choose to convert their notes into shares of our common stock. Based on the terms we have the option to pay or deliver cash, shares of our common stock, or a combination thereof, when a conversion notice is received. As of June 30, 2024, we had $4.0 million in other debts that are due in monthly and quarterly installments through maturity in 2027. We have an inventory purchase commitment agreement with a third-party supplier, where we are obligated to meet certain minimum purchase commitment requirements through December 2026. As of June 30, 2024, the remaining minimum purchase commitment under the agreement was $9.8 million. Contractual obligations and commercial commitments As of June 30, 2024, there have been no material changes, outside the normal course of business, in our outstanding contractual obligations from those disclosed within the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023. Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements. Recent Accounting Pronouncements Aside from the changes disclosed in Note 1 to the Notes to Condensed Consolidated Financial Statements (Unaudited) under the heading “Recently Issued Accounting Pronouncements,” if any, there have been no new accounting pronouncements or changes to accounting pronouncements during the six months ended June 30, 2024, as compared to the recent accounting pronouncements described in our Annual Report on Form 10-K for the year ended December 31, 2023, that was filed with the SEC. Forward Looking Statements This Quarterly Report on Form 10-Q incorporates a number of forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including statements regarding: • our estimates regarding anticipated operating losses, future revenue, expenses, capital requirements, uses and sources of cash and liquidity, including our anticipated revenue growth and cost savings; • our ability to achieve profitability, and the potential need to raise additional funding; • our ability to ensure that we have effective disclosure controls and procedures; • our ability to meet, and potential liability from not meeting, any outstanding commitments and contractual obligations; • our ability to maintain compliance with the quality requirements of the U.S. Food and Drug Administration and similar foreign regulatory requirements; • our ability to market, improve, grow, 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 continue to enhance our product offerings, and to commercialize and achieve market acceptance of any of our products or product candidates; • the effect of any existing or future federal, state or international regulations on our ability to effectively conduct our business; • our business strategy and our underlying assumptions about market data, demographic trends, reimbursement trends and pricing trends; • our ability to maintain an adequate global sales network for our products, including to attract and retain independent sales agents and direct sales representatives; • our ability to increase the use and promotion of our products by training and educating spine surgeons and our global sales network; • our ability to attract and retain a qualified management team, as well as other qualified personnel and advisors; 28 Table of Contents • our ability to enter into licensing and business combination agreements with third parties and to successfully integrate the acquired technology and/or businesses; • the impact of global economic and political conditions and public health crises on our business and industry; and • other factors discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 or any document incorporated by reference herein or therein. Any or all of our forward-looking statements in this Quarterly Report on Form 10-Q may turn out to be wrong. They can be affected by inaccurate assumptions and/or by known or unknown risks and uncertainties. Many factors mentioned in our discussion in this Quarterly Report on Form 10-Q will be important in determining future results. Consequently, no forward-looking statement can be guaranteed. Actual future results may vary materially from expected results. We also provide a cautionary discussion of risks and uncertainties under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023, and any updates to those risk factors filed from time to time in our subsequent periodic and current reports filed with the SEC. 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 “believe,” “anticipate,” “plan,” “expect,” “estimate,” “may,” “will,” “should,” “could,” “would,” “seek,” “intend,” “continue,” “project,” and similar expressions are intended to identify forward-looking statements. There are a number of factors and uncertainties 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 “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2023 and any updates to those risk factors filed from time to time in our subsequent periodic and current reports filed with the SEC. 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 3. Quantitative and Qualitati ve Disclosures About Market Risk We have evaluated the information required under this item that was disclosed under Item 7A in our Annual Report on Form 10-K for the year ended December 31, 2023, and there have been no significant changes to this information.