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Item 7. Management’s Discussion and Analysis

2025-02-26 compared with 2024-02-27 · 44 added, 62 removed, 256 unchanged (29% of the section changed)

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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 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 each of the technologies integrated into all of ATEC’s procedural approaches continues to increasingly compel surgeons and sales talent to partner with us.

By applying our unique, 100% spine focus and deep industry know-how, we aim to revolutionize spine surgery through clinical distinction.

The sophisticated approaches that we create from the ground up integrate with our expanding Alpha InformatiX ("AIX") 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 we are perpetually innovating to accomplish our vision 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 each of the technologies integrated into all of 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.

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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.

Recent Developments

Public Offering

On October 27, 2023, we completed an underwritten public offering (the “Public Offering”) of 14,300,000 shares of our common stock at a price of $10.50 per share.

In connection with the Public Offering, we granted the underwriters a 30-day option (the "Green-Shoe") to purchase additional shares of common stock in the offering at the public offering price, less underwriting discounts and commissions.

The net proceeds from the Public Offering and Green-Shoe, were approximately $145.8 million, including the underwriting discounts and commissions and offering expenses paid by us.

We expect to use the net proceeds from the Public Offering to fund general corporate purposes, including working capital, capital expenditures, acquisitions, or research and development.

Asset Purchase Agreement

On April 19, 2023, we entered into an Asset Purchase Agreement with Integrity Implants Inc.

and Fusion Robotics, LLC (collectively, the “Sellers”), whereby we acquired certain assets, liabilities, employees, and contracts in connection with the Sellers’ navigation-enabled robotics platform (“Valence”).

We paid the Sellers cash consideration of $55.0 million for the purchase of Valence.

Underwritten Offering

On April 19, 2023, we completed a registered securities offering (the “Offering”) of 4,285,715 shares of our common stock at a price of $14.00 per share.

The net proceeds from the Offering were approximately $57.5 million, including the underwriting discounts and commissions and offering expenses paid by us.

We used a portion of the net proceeds of the offering to fund the purchase of Valence.

We expect to use the remaining proceeds to fund the costs related to the post-closing integration and research and development activities related to Valence, as well as to fund general corporate purposes, including working capital, capital expenditures, acquisitions, or research and development.

On January 6, 2023, we entered into a $150.0 million term loan credit facility with Braidwell Transaction Holdings, LLC (the “Braidwell Term Loan”).

The Braidwell Term Loan provided for an initial term loan of $100.0 million which was funded on the closing date.

On September 28, 2023, we drew the additional $50.0 million (the “delayed draw term loan(s)” or the “DDTL”).

The Braidwell Term Loan matures on January 6, 2028.

Borrowings under the Braidwell Term Loan bear interest at a rate per annum equal to the Term Secured Overnight Financing Rate for such SOFR business day ("SOFR") subject to a 3% floor, plus 5.75%.

Revenue and Expense Components

The following is a description of the primary components of our revenue and expenses:

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.

We derive our revenue primarily from the sale of spinal surgery implants used in the treatment of spine disorders, as well as from 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.

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Litigation-related expenses are costs incurred for our ongoing and settled litigation.

Amortization of acquired intangible assets.

Amortization expense.

Amortization expense includes amortization of acquired intangible assets and amortization of internally-developed software that has been placed in service.

Amortization of acquired intangible assets consists of intangible assets acquired in business combinations and asset purchases.

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Revenue from products and services

Revenue from international supply agreement

Total revenue

Revenue from products and services increased by $129.3 million, or 27%, during the year ended December 31, 2024, compared to the year ended December 31, 2023.

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Cost of sales increased by $15.2 million, or 9%, during the year ended December 31, 2024, compared to the year ended December 31, 2023.

The increase was primarily due to an increase in product volume and an increase in stock-based compensation.

The increase was primarily due to an increase in product volume offset by a decrease in stock-based compensation.

We have entered into Development Service Agreements for the development of a wide variety of potential products and intellectual property.

Under these agreements, future 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 have been amended to remove the cash option and require settlement in restricted shares of our common stock.

During the year ended December 31, 2023, the vesting conditions of certain of these amended awards were deemed probable, resulting in an increase in stock-based compensation for the year.

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.

Stock-based compensation associated with these awards was higher during the year ended December 31, 2023 as the vesting conditions of certain of these amended awards that met the requirements for presentation within cost of sales were deemed probable at that time.

Operating expenses

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Litigation-related expenses

Amortization of acquired intangible assets

Amortization expense

Transaction-related expenses

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Research and development expenses increased by $10.6 million, or 15%, during the year ended December 31, 2024, compared to the year ended December 31, 2023.

The increase was primarily due to an increase in personnel to support the expansion of our new product portfolio and an increase in stock-based compensation associated with Development Service Agreements (as described above), as the vesting conditions of certain of these amended awards, that met the requirements for presentation within research and development, were deemed probable during the year.

Sales, general and administrative expenses.

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Refer to Note 7 of our Notes to Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for further information regarding litigation matters.

Amortization of acquired intangible assets.

The increase of amortization of acquired intangible assets is primarily due to the amortization of intangible assets acquired in the Valence acquisition.

Amortization expense.

Amortization expense increased $2.0 million, or 14%, during the year ended December 31, 2024, compared to the year ended December 31, 2023.

The increase in amortization expense is primarily due to amortization of intangible assets acquired in the acquisition of Valence in April 2023 and internally-developed software placed in service during 2024.

Transaction-related expenses.

The increase in transaction-related expenses for the year ended December 31, 2023 is primarily due to the closing of the Valence acquisition.

Transaction-related expenses decreased $1.9 million, or 90%, during the year ended December 31, 2024, compared to the year ended December 31, 2023.

The decrease in transaction-related expenses is due to the Valence acquisition in April 2023.

Restructuring expenses .

The decrease in restructuring costs for the year ended December 31, 2023 is due to cost rationalization efforts that were completed during the year ended December 31, 2022.

Restructuring expenses increased $2.5 million, or 352%, during the year ended December 31, 2024, compared to the year ended December 31, 2023.

The increase in restructuring expenses is primarily due to costs associated with the relocation of office facilities in Paris, France, and severance and related tax costs incurred in connection with cost rationalization efforts.

Total interest and other expense, net

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(in thousands, except %)

Interest and other income, net:

Other expense, net:

Interest expense, net

Other income, net

Total interest and other income, net

The increase in interest expense, net, during the year ended December 31, 2023, compared to the year ended December 30, 2022, was primarily due to interest on our revolving credit facility and Braidwell Term Loan which were executed in September 2022 and January 2023, respectively.

The change in other income, net, compared to the same in 2022, was primarily due to an employee retention credit received during the year ended December 31, 2023.

Other (expense) income, net

Total other expense, net

Interest expense, net, increased $8.2 million, or 50%, during the year ended December 31, 2024, compared to the year ended December 31, 2023.

The increase in interest expense, net, was primarily due to drawing an additional $50.0 million on the Braidwell Term Loan in both September 2023 and October 2024.

Other (expense) income, net, increased $4.1 million, or 133%, during the year ended December 31, 2024, compared to the year ended December 31, 2023.

The increase in other (expense) income, net, was primarily due to foreign currency rates and recognition of an employee retention credit during the year ended December 31, 2023.

Income tax provision

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(in thousands, except %)

Income tax provision

Income tax provision (benefit)

Income tax provision for the year ended December 31, 2024 was negligible and remained consistent compared to the year ended December 31, 2023.

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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.

We consider the liquidity necessary to fund our operations, which includes working capital needs, investments in research and development, investments in our sales channel and expansion, 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.

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continues to increase, we will be exposed to foreign currency exchange risk related to our foreign operations.

We do not have any material financial exposure to one customer or one country that would significantly hinder our liquidity.

We do not have any material financial exposure to one customer or one country, outside the U.S., that would significantly hinder our liquidity.

We are and may become involved in various legal proceedings arising from our business activities.

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Investing Activities

We used cash of $142.0 million in investing activities for the year ended December 31, 2023, which is primarily related to the acquisition of Valence and purchase of surgical instruments to support the commercial launch of new products and growth of our business.

We used cash of $93.1 million in investing activities for the year ended December 31, 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

Financing activities provided net cash of $356.9 million for the year ended December 31, 2023, which is primarily related to net proceeds from the Braidwell Term Loan, the Revolving Credit Facility, and the equity offerings described above, offset by payment of outstanding OCEANEs, defined below.

Financing activities provided net cash of $56.2 million for the year ended December 31, 2024, which is primarily related to proceeds from our term loan and net draws on our revolving line of credit.

Debt and Commitments

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(1) Represents interest expense from our debt that we expect to pay in the future.

(2) Includes our headquarters building lease that commenced in February 2021.

(2) Includes inventory purchase commitments of $8.8 million.

(4) Represents cash repayments of government sponsored COVID relief initiatives at EOS.

(3) Represents other debt.

Off-Balance Sheet Arrangements

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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 and intangible assets, stock-based compensation and income taxes.

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.

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Revenue Recognition

We recognize revenue from product sales in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Revenue from Contracts with Customers (“Topic 606”).

This standard applies to all contracts with customers, except for contracts that are within the scope of other standards, such as leases, insurance, collaboration arrangements, and financial instruments.

We recognize revenue from product sales in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification Revenue from Contracts with Customers (“Topic 606”).

This standard applies to all contracts with customers, except for contracts that are within the scope of other standards, such as leases.

Under Topic 606, an entity recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration that the entity expects to receive in exchange for those goods or services.

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We only apply the five-step model to contracts when it is probable that we will collect the consideration we are entitled to in exchange for the goods or services that we transfer to the customer.

Sales are derived primarily from the sale of spinal implant products, imaging equipment, and related services to hospitals and medical centers through direct sales representatives and independent sales agents.

Sales are derived primarily from the sale of spinal implant products, imaging equipment, and related services to hospitals and medical centers.

Revenue is recognized when obligations under the terms of a contract with customers are satisfied, which occurs with the transfer of control of products to customers, either upon shipment of the product or delivery of the product to the customer depending on the shipping terms, or when the products are used in a surgical procedure (implanted in a patient).

Revenue from the sale of imaging equipment is recognized as each distinct performance obligation is fulfilled and control transfers to the customer, beginning with shipment or delivery, depending on the terms.

Revenue from other distinct performance obligations, such as maintenance on imaging equipment, and other imaging related services, is recognized in the period the service is performed, and makes up less than 10% of our total revenue.

Revenue is measured based on the amount of consideration expected to be received in exchange for the transfer of the goods or services specified in the contract with each customer.

In certain cases, we offer the ability for customers to lease our imaging equipment primarily on a non-sales type basis, but such arrangements are immaterial to total revenue in the years presented.

We generally do not allow returns of products that have been delivered.

Costs incurred by us associated with sales contracts with customers are deferred over the performance obligation period and recognized in the same period as the related revenue, except for contracts that complete within one year or less, in which case the associated costs are expensed as incurred.

Costs incurred by us associated directly with sales contracts with customers are deferred over the performance obligation period and recognized in the same period as the related revenue, except for contracts that complete within one year or less, in which case the associated costs are expensed as incurred.

Payment terms for sales to customers may vary but are commensurate with the general business practices in the country of sale.

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When we sell a product or service with a future performance obligation, revenue is deferred on the unfulfilled performance obligation and recognized over the related performance period.

Generally, we do not have observable evidence of the standalone selling price related to our future service obligations; therefore, we estimate the selling price using an expected cost plus a margin approach.

The transaction price is allocated using the relative standalone selling price method.

Generally, we estimate the selling price of promised services included in the equipment sales price using an expected cost plus a margin approach and/or the separately observable price of such service, if available.

The transaction price for a contract’s various performance obligations is allocated using the relative standalone selling price method.

The use of alternative estimates could result in a different amount of revenue deferral.

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Most of our inventory is comprised of finished goods, and we primarily utilize third-party suppliers to produce our products.

Specialized implants, fixation products, and biologics are determined by utilizing a standard cost method, which includes capitalized variances, which approximates the weighted average cost.

Imaging equipment and related parts are valued at weighted average cost.

Specialized implants, fixation products, biologics, and imaging equipment are determined by utilizing a standard cost method, which includes capitalized variances, which approximates the weighted average cost.

Component parts related to the imaging equipment are valued at weighted average cost.

Inventories are stated at the lower of cost or net realizable value.

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Valuation of Intangible Assets

Our intangible assets are comprised primarily of purchased technology, customer relationships, trade name, trademarks, and in-process research and development.

Our intangible assets are comprised primarily of purchased technology, internally developed software, customer relationships, trade name, trademarks, and in-process research and development.

We make significant judgments in relation to the valuation of intangible assets resulting from business combinations and asset acquisitions.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis