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Alphatec Holdings (NASDAQ:ATEC)

Q1 2014 Earnings Conference Call

April 30, 2014 5:00 p.m. ET

Executives

Christine Zedelmayer – IR

Leslie Cross – Chairman and CEO

Michael O'Neill – CFO, VP and Treasurer

Analysts

William Plovanic – Canaccord Genuity

Matt Miksic – Piper Jaffray

Joshua Jennings – Cowen and Company

Mark Landy – Summer Street

Operator

Good day ladies and gentlemen and welcome to the Alphatec Spine’s First Quarter 2014 Earnings Call. (Operator Instructions) As a reminder this conference is being recorded, if you have any objections you may now disconnect at this time.

I would now like to introduce your host for today’s conference, Ms. Christine Zedelmayer, Head of Investor Relations at Alphatec Spine. You may begin the conference.

Christine Zedelmayer

Good afternoon and welcome to Alphatec Spine’s quarterly update conference call to discuss our first quarter 2014 financial and operating results as well as our upcoming CEO transition that we announced earlier this afternoon. This conference call contains forward-looking statements that involve risks and uncertainties including statements regarding the Company’s expectations regarding its financial performance, strategies for revenue growth, development of new products, customer acceptance of the company’s products and overall trends and economic conditions in the Company’s market.

The Company undertakes no obligation to update the information presented on the conference call. Actual results could differ materially from those projected in the forward-looking statements as a result of certain risk factors. For more information about potential factors that affect our business and financial results, we suggest you review our filings with the Securities and Exchange Commission. Throughout the conference call the Company will reference some financial metrics that are derived in accordance with generally accepted accounting principles or GAAP while other metrics are not in accordance with GAAP. This approach is consistent with how management measures the Company’s results internally.

However, non-GAAP results are not in accordance with GAAP and may not be comparable to non-GAAP information provided by other companies. Non-GAAP information should be considered as supplement to and not as a substitute for financial statements prepared in accordance with GAAP. A reconciliation of a non-GAAP information to the corresponding GAAP measures is in the press release that was filed today prior to this conference call.

Now, let me introduce the other members of the Alphatec management team that are here today. Les Cross, Chairman and Chief Executive Officer; Mike O’Neill, Vice President-Finance and Chief Financial Officer, Mike Plunkett, Chief Operating Officer and Ebun Garner, General Counsel.

I will now turn the call over to Mr. Les Cross.

Leslie Cross

Great. Thank you, Christine. Good day everyone and welcome to Alphatec Spine’s conference call to discuss our first quarter operating results and the upcoming leadership changes. This afternoon our comments will build on both press releases issued earlier today.

In the interest of providing ample time to review our results and answer your questions we will keep prepared remarks to a minimum. After my introductory remarks Mike will provide additional details on the first quarter 2014 financial results and provide detail on our outlook and guidance for the remainder of the year.

Well today is a big day for me, when the board asked me two years ago to step out of retirement and lead Alphatec as its CEO I saw a great opportunity and was excited to participate in transforming the company and helping it unleash the values that this company can deliver. Over the past couple of years I have worked carefully and deliberately to build a strong lean foundation for Alphatec that will generate positive momentum in the business and serve as an important platform for the future growth of this company.

During my tenure I'm proud of the results the organization has delivered, the strength of the leadership team we've established and the overall company culture which is the fostered and is embedded throughout the organization worldwide. With the ship now righted [ph] and sailing in the right direction it is opportune time for me to turn over the helm to a solid committed CEO who can take this business to the next level that I know we can achieve. I am excited that we were able to recruit an excellent CEO successor Jim Corbett.

Jim brings demonstrated experience in the medical device industry and most recently as the CEO of Vertos Medical, a medical device spine company focused on minimally invasive treatment of the lumbar spine stenosis. As an experienced CEO and executive, Jim has successfully led such companies as eV3, MicroTherapeutics, Home Diagnostics, Boston Scientific and Baxter Japan. He comes to us with a proven track record of strong global leadership successfully accelerating topline growth and driving operational improvements and bottom-line performance.

As noted in today's press release, Jim will become the President and CEO effective tomorrow, May 1. So we’re all excited here to welcome tomorrow morning.

Jim and I will spend the next three months going through a very thorough transition to ensure that we maintain the momentum that the company has established over the last couple of years. In addition I will remain on as chairman of the Board of Directors and support Jim and the other directors with a special focus on value creation.

Alphatec has reached reach an exciting inflection point in its history. Annual revenues are growing, adjusted EBIT margins are now in the double digits. Our innovation pipeline is delivering new and unique products for patients across the globe and our gross margins are improving.

We have cultivated a strong positive culture throughout the organization and instilled the long-lasting corporate values that underpin the great work that our team of Employees and business partners deliver around the world each and every day. With this foundation of positive momentum it is now time for the organization to evolve to the next level access [ph] and Jim has demonstrated the experience as a seasoned executive in the medical device industry and has shown his experience in driving company growth and we believe this makes him the ideal leader for Alphatec as it continues the journey during this very exciting time in the company's life.

I'm extremely pleased to welcome Jim to the Alphatec family. I’ve got to know him well over the last couple months and I look forward to introducing him to you in due course.

Now let me turn to the business results for the first quarter. Q1 represented a challenging quarter for top line results but despite this we were able to deliver very strong bottom-line results. Q1 ‘14 consolidated revenues totaled $49.2 million, down 1% on a constant currency basis. As we noted on our last call, we anticipate Q1 being a softer quarter for revenue for the year when compared to Q1 2013. This is based on our decision to exit the French commercial market and the lack of revenues contributed from PureGen which we discontinued selling as you remember in the first quarter of 2013.

When revenues are adjusted for these factors, consolidated net revenue grew by approximately 3%. The first quarter was further compounded by the extreme weather conditions across a lot of U.S. However we expect to make up most of this during the remainder of the year.

Adjusted EBITDA for Q1 was a key highlight, coming in at $6.7 million or 13.6% of revenues, up approximately 10% compared to the first quarter of 2013. Given our continued focus on driving down costs and our commitment to lean enterprise we also delivered a 280 basis point improvement in gross margin during the quarter. We are extremely pleased with these results and it shows the strong operational excellence that is really taking roots here at the company even during the quarter with a challenging topline.

Michael will cover the financial results in greater detail in a few moments. However I would like to talk a little more about our business. Our U.S. revenue performance was soft for the first quarter 2014 when compared to a topic [ph] on 2013. U.S. revenues in the first quarter were $32.1 million, down approximately 3% over the first quarter of 2013.

Excluding the effects of the discontinuation of PureGen in early 2013, our U.S. revenues were relatively flat. In addition, our stocking business continues to decline as anticipated according to the industry trends that we all talk about. Year-over-year our stocking business is down by $1 million, however our US hospital non-biologic Implant volume is up by 15% year-over-year. This really can be attributed to the increase adoption of our most recently launched products the NOVEL family, Alphatec Solus and our Zodiac deformity products.

Along with the other orthopedic companies we were relatively negatively impacted by the weather with a higher number than normal procedures canceled during the period. Coupled this with the ongoing industry headwinds related to pricing and reimbursement denials, we are disappointed with this results and will be working diligently with Jim and the team over the coming weeks to develop a solid plan to reinvigorate our topline particularly in the U.S.

As we announced earlier today, we’re already focused on ways to address this. One, near-term solution looking to optimize our U.S. revenue growth is to have our sales and marketing function report directly to the CEO which will actually take place tomorrow.

Our international business continues to deliver strong results. While we had some anticipated softening in our international business as a result of our decision to exit the commercial operations in France, we continue to expect the annualized increase of EBITDA by 6 million to 7 million beginning in the second half of this year which is an important key initiative to drive EBITDA and cash performance.

International net revenues in the first quarter were $17.1 million, down 1.5% compared to the first quarter of 2013, or up almost 3% on a constant currency basis. When this is adjusted for the prior contributions from France and the impact of currency, our international revenues grew by approximately 8% versus the same period in 2013.

Japan continues to represent our largest international business and once again they delivered strong growth – great results in Japan, thank you to the team there. In Q1, Japan delivered a 20% year-over-year growth on an operational basis. Growth continues to come from increased sales as a result of surgeon uptake and adoption of our minimally invasive products, Illico Minimally Invasive and Illico Multi-level as well as the recent adoption of the Novel spacer product family.

Moving to our product portfolio, focused innovation especially in the areas of less invasive solutions and biologics continue to be a key strategic driver for delivering the future topline growth. Today we are very pleased to announce the recent product approval that we received during the first quarter of the year which directly supports the strategy I have discussed.

ARSENAL, our new spinal fixation system received 510(k) clearance in March so we are set to go. ARSENAL is designed to enhance the surgical experience by providing the surgeon with a comprehensive system capable of handling the most complex situations. This new system was designed to provide added benefits of the ergonomically designed instruments as well as cutting-edge components that provide a better anatomical bit and flexibility.

Also we will decrease a lot time through faster screw identification system and our delivery system. Given that we just received this clearance for the new system we are in the early stage of a beta launch, planning a full launch which we anticipate will be in the second half of 2014 and continuing into the first half of 2015.

We also launched Corex in the U.S. and Epicage in Brazil. Corex is our minimally invasive product for harvesting of the patient’s own bone which is the gold standard in achieving solid spinal fusion. Utilizing patients’ on natural bone tissue Corex is designed to reduce operating time and blood loss and underside mobility, while supporting improved patient outcomes through a healthy fusion, and it's also a cost efficient system for the hospital.

Epicage, our lumbar in the body system was introduced to over 100 surgeons and 70 distributed team members during our initial launch tour in Brazil. We are excited about the market opportunities in Brazil and Latin America for this and future Alphatec products.

In China we received approval for DiscoCerv, our motion preservation cervical disc prosthesis product. And I'm really excited to announce that the first patient was successfully treated with the product during the quarter. We're excited about these additions to our global portfolio and the ability to provide solutions for patients globally who suffer from spinal disorders.

While these new product approvals and launches will take some time to gain traction in the market, we continue to drive growth and surgeon adoption of these new innovative products that we introduced in 2013, namely Alphatec Solus, our unique in the body fusion device as well as Illico MIS platform BridgePoint which is doing well, Nexus [ph] which is continuing to show good growth. And as I previously mentioned, our key strategic focus for Alphatec last year and continuing to 2014 is on our less for minimally invasive surgical solutions coupled with the positive benefits of biologics to promote healing and spinal fusion. We believe that this is clearly a trend in the industry as it benefits the patients, the hospitals and the surgeons alike and we have some exceptional products already available and coming out to fit very well into what we anticipate to be the fastest-growing segment of the spine market. In fact, our less invasive product portfolio grew 10% during the quarter.

Now turning to operational results. You’ve heard me say many times before Alphatec continues to focus on driving down costs to fuel our profitability. Even though we experienced topline pressure this quarter we were able to drive meaningful leverage and managed our cost structure accordingly to deliver very strong EBITDA margins, in fact, they exceeded 13% of sales.

The restructuring and transition of our French operation continues to go according to plan and we remain on target and are starting to deliver annualized savings which we anticipate to be $6 million to $7 million additional EBITDA which really should start to show up during the second half of the year. This key initiatives coupled with our ongoing operational improvements will help support our longer-term goal of delivering 20% EBITDA margins.

I am extremely – let me try that again, I'm extremely pleased with the results we have delivered operationally during the first quarter. They have shown significant improvement in our bottom line and we have continued to drive efficiencies throughout the business.

So with all that said at this time I would like to turn the call over to Mike O'Neil, our CFO for some additional comments.

Michael O'Neill

Thank you, Les. I will focus the majority of my remarks on the reported operating performance for the first quarter ended March 31, 2014. I will then provide some additional comments with respect to our recently announced debt facility and the ongoing debt service costs associated with Alphatec settlement obligations. Finally I will provide an update on full-year 2014 guidance.

Given the changes in our business when comparing results to prior periods, in 2013 I encourage you to look at the non-GAAP reconciliation tables accompanying our press release for more detailed information. These measures represent important metrics that we use to measure the ongoing operations of our business.

As I go through this review, there are number of adjustments I will need to highlight in order to give you a better understanding of our underlying performance. Moving to gross profit and gross margin. The gross profit for Q1 2014 was $33.3 million or 67.7% of revenue compared to 32.7 million or 64.9% of revenue in Q1 2013. We achieved a 280 basis point improvement in gross margin over the same period in 2013. 220 basis points were attributable to the reduction in cost of revenues as a result of the conclusion of amortization expense associated with the Cross Medical settlement in the fourth quarter of 2013. The remaining 60 basis point improvement was a function of underlying cost improvements as well as favorable variations in regional and product mix.

U.S. gross margin was 71.9% in Q1 2014 compared to 67.8% in Q1 2013 demonstrating continued underlying performance improvements as well as the reduction in costs associated with the ending of the Cross Medical amortization. It should be noted that while the amortization expense associated with Cross Medical has ended the 1 million per quarter payment obligation is not set to expire until the third quarter of 2015.

International gross margins on a reported basis grew 59.8% for Q1 2014 compared to 59.4% in Q1 2013, with ongoing cost improvements and positive regional mix partially offset by regional reimbursement pressures. As we’ve continued to highlight we do not anticipate seeing improvements attributable to our French manufacturing restructuring in cost of goods sold until the third quarter. So we are pleased with ongoing performance improvements relative to our cost of goods sold.

Total operating expenses for Q1 2014 were 38 million, an increase of 3.9 million compared to the first quarter of 2013. Excluding OrthoTec trial related expenses of 4.8 million and French restructuring costs of $800,000 incurred in the first quarter of 2014, our underlying operating expenses of 32.4 million were down 5% when compared to the 34.1 million in Q1 of 2013. This reflects significant reductions in general and administrative costs as well as international commercial costs where we are beginning to see reductions in expense associated from our French commercial restructuring.

The slight increase in R&D spend associated with pre-beta launch instrument development for our new medical screw system. The operating expense reconciliation is included in the non-GAAP condensed consolidated statements of operations table in our financial schedule accompanying today's press release.

Adjusted EBITDA, a measure we guide to, came in quite strong for the first quarter at 6.7 million, or 13.6% of revenues compared to the 6.1 million or 12.1% of revenues reported for the first quarter of 2013. This represents approximately a 10% improvement over the prior year and demonstrates that we are seeing the ongoing performance improvements rolled through our operating results in terms of gross profit and operating expenses.

Adjusted EBITDA represents net income or loss excluding the effects of interest, taxes, depreciation, amortization, stock-based compensation and other nonrecurring items such as trial related litigation expenses, restructuring expenses, IT R&D and transaction related expenses.

For the first quarter adjusted EBITDA excludes 4.8 million of trial related litigation expense associated with the OrthoTec trial, and $800,000 of French restructuring expenses outlined in the reconciliation of non-GAAP financial measure tables of our financial schedules accompanying the press release. Going forward we will not have any additional OrthoTec trial related costs.

When we announced our French restructuring in the fall of 2013, we anticipated the total cost of restructuring including inventory and instrument write offs to be approximately 15.5 million. Through March 31, 2014 we expect 4.9 million in inventory and instrument write offs and 10.4 million in restructuring costs associated with severance plans and other facility closing costs. We now anticipate that the total cost of the restructuring will be 16.6 million with an impact in Q2 of 2014 of 800,000 and 400,000 in Q3 of 2014.

From the beginning of the restructuring process we have indicated that we would see $6 million to $7 million of annual adjusted EBITDA improvements beginning in the third quarter of 2014. Our forward-looking projections confirm that these estimates are still very valid.

Net loss when adjusted for litigation and restructuring previously mentioned, as well as other non-GAAP adjustments resulted in income of $500,000 for the first quarter of 2014, or one penny per share basic compared to a non-GAAP net profit of 100,000 or 0.00 penny per share basic for the first quarter of 2013.

Cash and cash equivalents were 23.8 million at March 31, 2014. This compares to the 21.3 million of cash reported at December 31, 2013. In addition we have 17.8 million of restricted cash reserved for the ongoing OrthoTec settlement obligations. The restricted cash reflects an initial draw down on the Deerfield credit facility of 20 million that we previously announced in March. These funds were used to pay the upfront portion of the settlement which was 17.5 million plus the first instalment of the quarterly settlement payments of 1.1 million each which begin in the fourth quarter of this year.

Total OrthoTec settlement obligations in 2014 are 18.6 million. For 2015 onwards settlement obligations are 4.4 million per year until the 49 million settlement obligations has been satisfied.

We generated positive operating cash flow of over 3 million in Q1 of 2014. Coupled with ongoing performance improvements and the positive impact of the French restructuring in the second half of the year, we are very focused on driving cash flow improvements across the business, as our French severance plan obligations peak in the second quarter of 2014.

As a result of the new debt facility and the anticipated drawdowns in 2014 we anticipate that the incremental interest cost of servicing the new debt in 2014 will be in the range of 1.3 million to 1.5 million. We are confident that the cost of servicing this debt is well within the company's capacity to manage without diminishing our ability to meet the ongoing operating plan for the business.

As we move forward we have the opportunity within our existing mid cap debt structure to expand the current borrowing base that underpins our revolver line of $10 million. In addition to this, the new Deerfield facility allows the company to allocate up to $15 million to be drawn down for general purposes and gross cash capital if the company so chooses.

The company has the flexibility to determine the amount of debt burden it is willing to absorb and it has until December to determine the final amount to be drawn down on the new Deerfield agreement. It is important to note that the company is under no obligation to draw down the full 50 million of the new facility. And we will not assume any more active debt to service that is necessary to effectively operate the business and meet the settlement obligations.

As of March 31, 2014 the company has combined credit facilities that amount to 121.5 million of which we have drawn a total of 73.8 million or 61%.

With respect to the warrants that were issued with the Deerfield debt facility, the company is accounting for them as the liability rather than by the equity method through the balance sheet. Simply put, once the initial value of the warrant has been established in Q1 2014, the ongoing fair value fluctuations will be reflected in the P&L each quarter through other income and expense.

Quarterly valuations are subject to a number of assessments including the van preventing stock price which suggests valuation of the warrants to our GAAP net income or loss to a considerable potential volatility. As of March 31, 2014 the initial valuation of the warrants was 10.3 million with $100,000 of fair value gain recognized in the P&L this quarter.

In connection with the two initial issuances of warrants to Deerfield, today we filed a registration statement on Form S3 with the SEC that covers the resale of 10.25 million shares of common stock underlying stock warrants. As a reminder, we issued 6.25 million warrants upon the execution of the Deerfield facility and additional 4 million warrants when we drew down 20 million on the facility. The exercise price per share is a $1.39. At this point none of the warrants have been exercised but we are obligated to file this document as per the registration rights agreement that we entered into with Deerfield. This registration statement is limited to the shares related to the Deerfield warrants.

With that, I’d now like to provide an update to our forward-looking guidance for 2014 and how that fits into our strategy for 2014 and our longer-term goals. As we mentioned on our last call, we anticipated that Q1 would be sequentially down from Q4 2013 and would likely represent our lowest quarter for the year.

Given our softer than anticipated performance in the US in Q1, we are taking the necessary actions to recover our momentum and replan our US sales forecast for the remaining nine months of the year. Based on our revised plan, we are reiterating our full-year guidance for 2014. We anticipate that our full-year revenues for ‘14 will be in the range of 208 million and 215 million, representing approximately 1.6 to 5% growth over 2013 on an as reported basis.

When adjusted for the prior year's contributions from commercial operations in France, this represents 4.5%to 8% growth. We continue to anticipate first half, second half avenues to be more weighted towards the back half of the year attributable to continued growth of recently introduced new products as the year unfolds. Similarly we are reaffirming our guidance for non-GAAP adjusted EBITDA to be in the 30 million to 33 million or approximately 19% to 31% growth over 2013, and representing approximately 14.4% to 15.3% of revenue.

Our forward-looking guidance for 2014 continues to be consistent with our stated longer-term objectives of growing revenues that’s twice the rate of the market and target adjusted EBITDA margin of approximately 20% of annual revenues driven primarily by the continued expansion of our gross margins and leveraging our operating expense profile.

In summary, given the challenging topline results in the US this quarter, we’re pleased with our underlying operational efficiencies and continued fiscal discipline, to enable us to deliver improvements to adjusted EBITDA as well as in our overall gross margins. We've made great strides as an organization over the past couple of years and we look forward to driving our topline and continuing to execute our business plans as we move through this year and beyond.

And now for the final time, it’s my privilege as the resident Tommy Bastin [ph] to hand the call back over to Les.

Leslie Cross

Well, I think you choked up much. Thank you, Mike. Thank you very much. Thank you. As I look back on my 10 years as the CEO of Alphatec what I am most proud of the talented team of people here at Alphatec. The employees and now business partners worldwide, the business capabilities that we’ve delivered to build together the results that we have delivered together, with the strong foundation that we’ve built, I believe we have the right vision and strategies in place to expand our global business and continue to establish long-term stakeholder value.

We have a huge opportunity to continue to advance our mission of providing patient and physician inspired solutions for patients with spinal disorders. Our leadership team and many, many dedicated employees of Alphatec Spine remain focused on managing the business today and continue to lay the necessary foundation for success tomorrow.

I would like to acknowledge and thank the employees and business partners, it has been a great pleasure to have worked with you over the last couple of years. The Alphatec team’s hard work and commitment and ability to change and grow has enabled us to deliver annual improvements and improved business results. I am really excited about working with Jim to continue this journey and unlock the value I know it’s in this company and I'm really looking forward to working with the whole leadership team and help drive this company to success.

So thank you and let’s turn it over to questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of William Plovanic from Canaccord Genuity.

William Plovanic – Canaccord Genuity

So a couple of questions here, first of all just on the stocking business in the quarter, what is that running quarterly right now?

Michael O'Neill

We are less than 4 million a quarter right now.

William Plovanic – Canaccord Genuity

And then as we look at that, obviously you expect that to continue to stay flat or go down going forward?

Michael O'Neill

It’s going – drift down as the year proceeds and I will point out that the stocking business is not all businesses that are subject to classification, we have legitimate stocking distributors that take final [ph] product.

William Plovanic – Canaccord Genuity

And then switching over, if you look at pricing what was the impact of pricing in the US in the quarter?

Michael O'Neill

Mid-single digits on our core hospital metal implant and [indiscernible] business.

William Plovanic – Canaccord Genuity

And I tell you don't look at the stocking business that way, it's solid, there's no change in pricing in that piece of business?

Michael O'Neill

It’s pretty much contract pricing, Bill. So it tends -- we don't have any new contract that came in the Q1, we probably have less contracts now.

William Plovanic – Canaccord Genuity

Okay and then to switch over just in terms of the guidance, has the new CEO worked with you at all in establishing this updated guidance?

Michael O'Neill

Jim, actually he doesn’t arrive here until tomorrow and so he has s not been involved in the guidance discussion yet.

William Plovanic – Canaccord Genuity

Okay and then lastly, just Les, pleasure working with you for the second time around. And then just – as you come to your timeframe here just wondering if why -- the decision and why such a short transition?

Leslie Cross

Well, first of all thanks for your kind words, Bill. We started this journey of transitioning towards the end of last year and in fact, met Jim early this year and what happened was the OrthoTec verdict kind of put it on hold, until we found a solution to that I don't think that it would have been fair to bring in a new CEO. So once we came up with the right solution for that, then Jim was ready to step in but I just want to say, we’ve really been thinking about this, been very thoughtful, very thorough search process, really over about four months period. But sadly the verdict got in the way of the transformational happening a little earlier.

Operator

Our next question comes from the line of Matt Miksic from Piper Jaffray.

Matt Miksic – Piper Jaffray

I wanted to focus for a minute Mike if I could on the drawdowns in the credit facility and warrants that come with that. So just so I understand that we've been filing it, -- I think we understand that revaluation expense to be operating line but if you can give us a sense of – I am sorry if I missed this, been juggling a couple of calls here. But where we should expect, with some precision the share count to go as you progress through the year?

Michael O'Neill

So we’ve drawn down 10.25 -- the warrants that have been issued, 6.25 million on the consummation of the deal, and 4 million on the 20 million draw down. So there are 10 million warrants that are associated with the company's ability to draw down up to $50 million. So we drew down $20 million for the first tranche. So it's essentially 40% of the 10 million, so that’s how we came up with the 4 million warrants that we now consider the draw warrants. So 10.25 warrants valued at the end of March 31, actually $10.4 million, so we had a slight charge in P&L.

Matt Miksic – Piper Jaffray

Slight charge in the P&L and the impact on the share count is just – goes up by 10.5 million or am I not understanding this correctly?

Michael O'Neill

The shares --the warrants are right to purchase 10.25 million shares, no warrant has been exercised yet, so our share count potentially at this point could go up by 10.25 million.

Matt Miksic – Piper Jaffray

Were they to be exercised?

Michael O'Neill

Were they to be exercised.

Matt Miksic – Piper Jaffray

Again I apologize if you mentioned this, I heard you talking about the schedule of drawdowns, are we expecting another drawdowns before the end of the year?

Michael O'Neill

We don’t have to make that decision right now, we’ve drawn down sufficient monies to cover the 2014 OrthoTec obligations. We will evaluate as we go through the year because we need to determine by the end of the year the maximum amount that we want to draw down against the Deerfield facility. It doesn’t really roll into ’15. So we need to make that determination by the end of this year.

Matt Miksic – Piper Jaffray

And then so if we put a – the amount that you drew down, how much – if you have a sense of – just sort of I am trying to understand is how much additional cash you have on hand and how important was this draw down – we’re all looking to be as gentle at this thing as you can be I think and that’s –

Michael O'Neill

So part of the prepared remarks there was to really try to identify what we have pulled down, which combined facilities is about $73 million, of total availability of $121 million. Within our revolver we have the opportunity of our asset base expense to hold another 10 million and we have a maximum of 15 million from Deerfield that we could pull down the general purpose needs for the company. So we have the flexibility to pull down more, I think the discussion right now is as we approach the end of the year, how much more do we want to pull down to satisfy the operating needs of the business? I think the reality is that as we get through the French restructuring cash expense as we get into the operating needs of the business and our capital those decisions are in front of us but I think I can safely say we don’t see ourselves pulling down the entire facilities.

Matt Miksic – Piper Jaffray

And then maybe one on just the business, I think I already have the sense of the answer, but I love to hear you talk about, if there has been any flow-through of all of this activity, the settlement, the cash, the credit facility, maybe the sense a month or two ago that you’re going to be more cash constrained than that you are at the moment with these facilities in place? And have you seen any concerns about disruptions or loss of distributors or de-focusing of the sales force or anything like that?

Leslie Cross

Not widespread, I mean definitely there was concern within the company when the verdict first was issued. I think Mike and I and even did a good job communicating with the team but it certainly has been a distraction during the quarter. It possibly could have been part of the reason for the US slowness. But since then we have actually dozen employee and the salesmen the distributors survey. And everyone's back on track now that is behind this. In fact, it's the best result we’ve ever had for new employee survey. So I think there was a distraction, that had to be but certainly behind this now.

Matt Miksic – Piper Jaffray

And then finally, maybe the third time I am apologizing here but did you carveout any or call out any particular weather or seasonal or selling day impacts in the quarter – seems to have a different mix here?

Leslie Cross

We did, we definitely saw some impact from the weather in the Midwest and in the Northeast. I don't think it was, I mean if you look at our numbers relative to prior year and relative to our plan, it was not the biggest reason for the miss. We had a general sense of biologics was down because of PureGen year-over-year, stocking was down given that we had anticipated that. But I don't think – it would be fair for us to characterize the miss as all weather-related.

Matt Miksic – Piper Jaffray

And anything more than just a seasonal sequential Q4 to Q1 dynamic that you normally see or –

Michael O'Neill

It was slightly exaggerated.

Matt Miksic – Piper Jaffray

Which I guess is in line with some of other folks who spend -- bigger Q4 than smaller Q1 –

Michael O'Neill

We didn’t really have selling day issue.

Leslie Cross

As you mentioned, throw in the distraction of the judgment, on top of all of the normal events and weather, I think this at all tends to add up to where the quarter was a little bit slow but we’re very comfortable that we can -- until Jim gets a look at it, we’re comfortable that we can recover and certainly we have a plan from our sales team, I would expect to recover most of this.

Operator

Our next question comes from the line of Josh Jennings from Cowen and Company.

Joshua Jennings – Cowen and Company

I wanted to focus – more focus first on just EBITDA performance and margin performance in the quarter, in the setting of some US results [indiscernible] expected, just in terms of where you were from the internal plan on the margin and EBITDA performance, then looking out to the rest of the year and looking for both an uptick on the margin side and EBITDA side with restructuring that was – the French business, how should we thinking of this $30 million to $33 million full year guidance for EBITDA, not to guess [ph] you should have changed that guidance, so early in the year but just in terms of the level of concern that’s now baked in?

Michael O'Neill

So I think when we developed the EBITDA guidance for the year, obviously our French restructuring had been announced, it was certainly well down the execution path. And I think all we have seen as an organization in the intervening month or so, or 6 weeks since we published our annual guidance is a reconfirmation that the French plans are going very much in line what we had expected. One, so the reason we reconfirmed is we still feel very comfortable with the EBITDA projection based on what we can see internally. I think we had a good quarter on a not so positive topline. We would like to see that to continue but we are also going into the final aspects of our French restructuring. And so we still have some heavy lifting in front of us. And I think it would be inappropriate for us to get too carried away at this point.

Joshua Jennings – Cowen and Company

And then just in terms of strength in the international business and in Japan, I am not sure if you mentioned this in your prepared remarks, with Japan reimbursement revisions [indiscernible] impacts we expect in the back half –

Michael O'Neill

The state mandatory reimbursement adoption was part of the Japanese plans in the beginning of the year and it’s still a part of the Japanese plan as we go forward. So obviously the kind of growth that we saw in Q1 will moderate I think as the year progresses. So we need to factor that in. Overall if you can strip away the French commercial restructuring which is about $5.5 million to $6.5 million year-over-year, we are seeing improvements in our core European businesses, and frankly we're looking forward to registration approvals in China and Brazil with the Alphatec products, so we think and provide some upside to our plan and not go into the plan right now. So I feel pretty good that the international team is focused – we’re focusing on some of our core markets and we’re deploying the Alphatec business into those markets. I think probably of note all of our shipments Scient'x and Alphatec products now come from Carlsbad. So my product [ph] team has complete responsibility for global shipments now and we’ve executed that transition pretty much flawlessly from a customer service perspective. So I feel pretty good that international is performing well.

Joshua Jennings – Cowen and Company

And then just last on the product portfolio, Les, you commented on focus on invasive surgical technology as well as biologics, I was just hoping you could just quickly review kind of where you are on biologics, how the biologics business is performing and then what’s in the pipeline and then how you are taking up now the franchise?

Leslie Cross

Absolutely, so biologics obviously in the first quarter felt the impact of the discontinuation of the PureGen but actually they are performing well through their internal plan. They have added a profuse chip product to the line which is really accelerating profuse growth. Corex is certainly opening some doors for the biologic group. So it will continue to grow. The products that you are going to see coming out in the first half of the year really are going to be our new medical screw system – sorry the second half of the year but that is a complete system that will do the generation of the entire works, so that’s pretty exciting. Auto lock [ph] which was the Biogen Pedicle screw system will be coming out but really we will be expanding around the Illico system of minimally invasive surgery in the second half of the year once we get the Pedicle screw system out.

Operator

Our next question comes from the line of Mark Landy with Summer Street.

Mark Landy – Summer Street

I guess, like Mike stays long enough, you can ask him to rank all the CEOs, right?

Michael O'Neill

Well the next one is going to be the best.

Mark Landy – Summer Street

Mike, just look a little at R&D picked up in the quarter, is that going to be a peak for the year or are you going to run R&D a little harder a year than you did last year?

Michael O'Neill

We are into the burn rate on development for our Pedicle screw system. So I am not capitalizing data set because there is a high likelihood that it’s going to be modified and revised. So it’s a little high right now in the first half of the year as we get through some of that understanding, it will moderate in the back half of the year.

Mark Landy – Summer Street

And then can I – if you can maybe just give us a sense of the US market, you commented the growth was there – but can you give us a sense between lumbar and cervical what you guys saw and how those two markets behave for you guys are growing relative to the competition?

Michael O'Neill

I guess I would say we probably saw more reimbursement push backs in lumbar in Q1 than we did on the cervical side. I think there has been some pushback on the cervical side for the PEEK in the bodies as opposed to the biologics. So we definitely felt some of that. So I guess internally we tend to look at cervical as higher growth category than lumbar. But having said that, when you're introducing products like Solus for a company our size, the newest technologies tend to make more of the difference. So we may not really be a proxy for the category given some of the focuses of the new products.

Leslie Cross

So operator there are no further questions at this time. We will end the call. Thank you for those kind words from my friends that I have worked with for many years and I am sure I will see you around. And we look forward to reporting – I look forward to hearing to Jim reports the results of Q2, but I will probably show up and say a few words. But thanks for your time and attention today. We really appreciate it.

Operator

Ladies and gentlemen, thank you for attending today’s conference. This does conclude today’s program. You may all disconnect. Everyone have a wonderful day.

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