Christine Zedelmayer - Head of Investor Relations Jim Corbett - President, Chief Executive Officer, Director Mike O'Neill - Chief Financial Officer, Vice President, Treasurer.

Matt Miksic - Piper Jaffray William Plovanic - Canaccord Genuity Imran Zafar - Jefferies Glenn Navarro - RBC Capital Markets Josh Jennings - Cowen and Company.

Welcome to the Alphatec Spine's third quarter 2014 earnings call. At this time, all participants are in a listen-only mode until the question-and-answer session. (Operator Instructions). As a reminder this conference call is being recorded. If you have any objections, you may disconnect at this time.

I would like to introduce you to your host for today's conference Christine Zedelmayer, Head of Investor Relations at Alphatec Spine. Please go ahead..

Good afternoon and welcome to Alphatec Spine's quarterly update conference call to discuss our third quarter 2014 financial and operating results as well as to provide an outlook for the remainder of 2014. This afternoon our comments will build on the press release we issued earlier this afternoon.

Before we begin, I would like to remind you that 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 markets.

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.

Now let me introduce the other members of the management team that are here with me today from Alphatec. Jim Corbett, President and Chief Executive Officer, Mike O'Neill, Vice President and Chief Financial Officer and Ebun Garner, General Counsel.

The agenda for today's call will include a business update from Jim, a review of our third quarter financial results from Mike and closing comments from Jim. We will then open up the call for a question-and-answer session. I will now like to turn the call over to Jim Corbett.

Jim?.

Thank you, Christine. Good day everyone and welcome to Alphatec Spine's conference call to discuss our third quarter operating results. As detailed in our press release this afternoon, we have continued to make steady progress in Q3 towards our goal of profitable global growth.

During the quarter, we also completed the first phase of our beta launch of Arsenal, our new spinal fixation system. Feedback continues to be very positive and we believe this will be a key lever for us to achieve our strategic goals in the future.

Later in the call, I will provide you with more insight into the initial beta launch results and our plans for expanding the launch. Q3 2014 consolidated revenue totaled $51 million, representing approximately 2% growth as reported over 2013. Adjusted EBITDA for Q3 was another record for the company, coming in at $8.2 million or over 16% of revenues.

This represents growth of 23% compared to the third quarter of 2013 and approximately 8% growth sequentially. In fact, this represents the third quarter of sequential growth in adjusted EBITDA which is consistent with the strategy that we have laid out previously. Mike will cover the financial results in greater detail in few moments.

As we continue to evolve at Alphatec, we are placing more emphasis on globalization, advancing our products and services in the U.S. and internationally and becoming a more high-performing organization, both in what we do and how to do it.

To support these goals, during the third quarter, I am are pleased to announce that we have added two new members to our executive leadership team. In July, Kristin Machacek Leary joined our team as the Senior Vice President of Global Human Resources. Kristin joins us with over 20 years of global HR experience.

Most recently she was the Vice President of Global Talent for Quintiles. And prior to that has held senior management roles focusing on global talent and executive leadership with Hewlett-Packard and Boston Scientific.

Kristin has worked extensively in emerging and mature markets worldwide specializing in the areas of organizational development, talent and performance management, leadership and HR strategy.

Kristin will be responsible for transforming our company's culture, developing our talent bench across the globe and professionalizing the human resource function. In addition, in late September, Mark Bullivant joined Alphatec as our new Senior Vice President of International.

Mark is an exceptionally strong global leader with over 20 years of experience in the medical device field. He has worked across many functional groups, including sales and marketing, clinical and educational training.

Originally from Australia, Mark has applied his international experience in roles of increasing leadership in multiple organizations such as St. Jude Medical, Othera and Terumo Heart. Mark will be responsible for developing and implementing the overall international growth strategy.

He will be working closely with our international management team and distributors to take our international business to the next level of growth and performance. We are excited to have Kristin and Mark join the Alphatec team and the breadth of business and leadership experience they both bring to the organization.

With that, I will now provide more details about our Q3 performance and an update on our Arsenal beta launch. Our U.S. revenue performance grew steadily in the third quarter of 2014. U.S. revenue in the third quarter was $34.8 million, up more than 3% over the third quarter of 2013. Growth in the U.S.

year-over-year is attributable to increased uptake across our broad portfolio of spinal fusion technologies, as well as our extensive Biologics product suite which grew 18% in U.S. year-over-year.

International net revenues in the third quarter were $16.2 million, representing a decline of approximately 2%, as reported, when compared to third quarter of 2013.

Our international business during the third quarter of 2014 represented 32% of our consolidated revenues and continues to represent a significant lever for future expansion of our business moving forward.

With Mark Bullivant now on board, we have a dedicated internationally experienced leader focused on working closely with our international management team and distributors to develop and execute an international strategy that's focused on both short and long-term success. Moving now to our product portfolio.

Launching new innovative products is a core component of our company's strategy. On our last call, we mentioned that we had initiated the first phase of our U.S. beta launch of our newest innovative spinal fixation system, Arsenal.

The Arsenal system provides a complete solution to treat the most complex degenerative pathologies and was thoughtfully designed to provide operational efficiency and speed, biomechanical strength and surgical simplicity while enhancing the overall experience for the surgeon.

This is a significant launch for Alphatec, and represents the largest launch in the company's history. The Arsenal system is designed to handle a broader array of cases in the thoracolumbar section of the spine and will be entering, what we estimate, to be a $3.5 billion global market.

As a result, we are taking a measured methodical approach to our launch of Arsenal to ensure that we have established the appropriate product capabilities and are able to scale the product launch appropriately to both new and existing customers within the broad thoracolumbar market.

In line with this plan, I am pleased to report that we have successfully completed our initial phase of the Arsenal beta launch. Our key focus for this initial beta release was to assess product capability, functionality and gather clinical feedback.

To support this, we launched 25% of the instrument sets that we intend to have at full launch in early 2015. Successfully completed over 200 clinical cases and initiated development of a novel instrument set utilization and replenishment processes intended to drive overall improvement in asset management and efficiency.

With this initial limited market release, we averaged over 50% of new business versus the existing surgeon customers. As a result of the positive results and increasing product demand from the initial beta launch beginning in early November, we will initiate our second phase of the limited market release.

Our key focus for the second beta release will focus on scalability and developing the processes and systems to expand adoption and uptake. To support this, we will release an additional 25% of the instrument sets intended for the full launch.

Our objective again is to gain over 50% of the uptake from new surgeon users, as opposed to converting existing surgeon customers during this phase. We anticipate completing the second phase of the beta launch late this year and anticipate a full launch in early 2015. We are excited about the future global opportunity for the Arsenal platform.

We believe that Arsenal will be a key platform that should fuel our future pipeline and establish a foundation for innovation in the years to come. As we move forward in the coming months, we will continue to update you on our progress. Now turning to our operational results.

Alphatec has built a strong operational platform over the last couple of years that is expected to provide a solid foundation for delivering profitable growth in the future.

As a result, in the third quarter we were again able to deliver a record adjusted EBITDA margin that exceeded 16% of consolidated revenues and improved 274 basis points over prior year.

We will continue to focus on our lean enterprise implementation, asset utilization and efficiencies as well as global cost savings initiatives with a goal of maintaining this momentum and driving a meaningful leverage in the future.

At this time, I like to invite Mike O'Neill, our Chief Financial Officer, to provide additional comments around our third quarter financial performance and our future outlook for the remainder of 2014.

Mike?.

Thank you, Jim. As Jim already provided the key revenue highlights for the third quarter of fiscal 2014, I will touch briefly on additional background related to our topline results and focus the majority of my comments on the reported operating performance for the third quarter ended September 30, 2014.

I will then provide some comments with respect to our future intentions related to the Deerfield debt facility and conclude with an update on full-year 2014 guidance. Q3 2014 consolidated revenue grew 2%, as reported to $51 million and our U.S. revenue grew 3% to $34.8 million over the prior quarter.

While we are obviously pleased with the performance of our Arsenal spinal fixation system, the beta launch which was initiated in the third quarter contributed only modest revenues for the U.S. business. International net revenues in the third quarter were $16.2 million which represents a decline of 1.8% as reported.

When adjusted for the impact of currency, primarily as a result of the Japanese Yen, international revenue grew up over prior year by approximately 1%. International sales of our less invasive products, including Illico MIS grew 35% year-over-year.

Overall, we are able to achieve consolidated topline growth despite the absence of revenue contributions from France, which accounted for approximately $1.3 million in Q3 of 2013.

It's important to note that while we are driving long-term improvements in our ongoing operating performance and adjusted EBITDA as a result of the French restructuring activities.

When revenues are adjusted for prior year contributions from France, our international business grew approximately 7% versus the same period in 2013, which is traditionally our slowest period of the year.

It should also be noted that a significant percentage of our international revenues are currently driven through stocking distributors, which have a natural unevenness in demand. Our gross profit for Q3 2014 was $36.3 million or 71.2% of revenue compared to $24.2 million or 48.3% of revenue in Q3 2013.

A significant portion of the improvement in gross margin was a result of one-time charges to cost of goods sold in the third quarter of 2013, including the French restructuring and the discontinuation of the Puregen product. One-time charges from the third quarter of 2013 accounted for approximately 18 percentage points of improvement.

Additionally, the elimination of the amortization related to the Cross Medical settlement contributed another two percentage points. The remainder of the improvement, approximately 270 basis points, is primarily attributable to ongoing operational improvements and consolidation of the French supply chain activities into Carlsbad.

These combined improvements were offset by unfavorable variations in regional product mix. U.S. gross margin was 75.8% in Q3 of 2014, compared to 57.3% in Q3 of 2013.

Again a significant portion of this improvement is a result of one-time charges to cost of goods sold related to the discontinuation of Puregen in Q3 2013, as well as the reduction in costs associated with the ending of the Cross Medical amortization.

As a reminder, while the amortization expense associated with Cross Medical has ended, the $1 million per quarter cash payment obligation is not set to expire until the third quarter of 2015. When adjusting for the one-time items in 2013, the underlying U.S. gross margin improved in 2014.

Low depreciation for instrument sets and lower implant deserves reflecting improved asset utilization, in addition to reduce milestone expenses more than offset the impact of product mix.

International gross margins on a reported basis was 61.3% for Q3 of 2014 compared to 29.9% in Q3 of 2013 with a significant portion of the improvement due to one-time charges to cost of the sold related to the French restructuring in the third quarter of 2013.

Excluding these one-time restructuring costs in 2013, we were able to achieve an operational improvements of approximately 390 basis points as a result of ongoing cost and supply chain management directly attributable to our restructuring activities.

Total operating expenses for Q3 2014 were $34.6 million a decrease of 8% or approximately $2.8 million compared to the third quarter of 2013. When compared to prior year, general and administrative expenses in Q3 of 2013 included higher nonrecurring legal expenses.

Favorability in G&A in Q3 of 2014 was offset by increased R&D spending, primarily related to product design and development activities and the beta launch of our Arsenal spinal fixation system, as well as IP R&D expense.

Our ongoing R&D expense profile will continue to reflect the investments associated with our major platform technologies, In addition, we closed some modest technology investments that resulted in IP R&D expense of $500,000.

Adjusted EBITDA, a measure we guide to, again, came in strong for the third quarter at a record $8.2 million or 16 1% of revenues compared to $6.7 million or 13.4% of revenues reported for the third quarter of 2013.

This represents a 23% improvement over prior year and demonstrates the continued commitment to improve profitability across all aspects of our business.

Adjusted EBITDA represents net income or loss excluding the effects of interest, taxes, depreciation, amortization, stock-based compensation and other nonrecurring items, restructuring expenses, in-process research and development and transaction related expenses.

We have completed the activities associated with our French restructuring and estimate that all expenses relating to these activities has been booked. We do not anticipate any further material cost impacts for the remainder of 2014.

Having generated a GAAP operating profit for the second quarter in a row, our GAAP net loss position is primarily a function about our debt structure and the associated interest expense.

GAAP net loss for Q3 2014 was $3 million or negative $0.03 per basic share and negative $0.04 cents diluted, compared to a GAAP net loss of $14.5 million or negative $0.15 per share, basic and diluted, for the third quarter of 2013. Unrestricted cash and cash equivalents were $20.2 million in September 30, 2014.

This compares to the $19 million of unrestricted cash reported at June 30, 2014. In addition, we have $3 million of restricted cash reserved for the ongoing Orthotec settlement obligations.

Today we also announced that the company has initiated a final drawing down of $6 million from the Deerfield credit facility to service the quarterly Orthotec settlement obligations through mid-2016. The significance of mid-2016 timing is that it coincides with the need for the company to refinance its current senior secured debt.

This planned draw would bring the total balance from the Deerfield facility to $26 million.

Based on what we know today regarding our business plan and unanticipated business expenditures through January 2015, the company does not anticipate taking down any additional portion of the remaining $24 million available under the facility and plans to let the facility expire on January 30, 2015.

Under the terms of the Deerfield facility, with this planned draw down of $6 million, we anticipate issuing an additional 1.2 million warrants to Deerfield. The incremental tax interest expense for servicing the additional is approximately $500,000 year.

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 plans of the business. With that, I would now like to provide an update to our forward-looking guidance for 2014.

As we close out the year, the company expects full-year revenues for 2014 to be towards the lower end of the previously established guidance range of $208 million to $212 million. Our fourth quarter thinking has remained quite consistent as the year has unfolded.

Similarly, the company expects full-year 2014 non-GAAP adjusted EBITDA to be towards the lower end of the previously established guidance range of $30 million to $33 million or approximately 19% to 31% over 2013. In summary, we have continued to make positive changes this quarter towards our goal of global profitable growth.

Our gross margins and operating margins are showing tangible improvements and our cash flows reflect this progress. Looking forward to the rest of this year and into 2015, we remain focused on expanding our global business while continuing to drive underlying operational efficiencies that could improve our bottomline and cash flow performance.

With that, I would now like to turn the call back over to Jim..

Thank you, Mike. Indeed we did take positive steps forward this quarter towards our strategy of profitably growing our global business. This quarter we achieved significant growth and earnings in the context of a globally soft procedure quarter for us.

Continued delivery of strong improvements to our bottom line as we did this quarter is fundamental to our pursuit of profitable growth. In addition, during the quarter, we took significant strides forward in the very important beta launch of Arsenal and are seeing product demanded and interest increase in the market.

Having said that, we realized that we still have a lot more work ahead of us. The organization remains focused, committed and energized to executing our corporate strategy with a sense of urgency. Before we open the call for Q&A, I would like to mention two other items.

First, we are excited to once again participate in the upcoming 29th Annual North American Spine Society Meeting in San Francisco, November 12 to 14. We will be hosting a technical exhibit booth in the Moscone Center as well as an educational symposium in a less invasive solutions lab course.

This year, we are very excited to be showcasing Arsenal as well as our road portfolio of spinal fusion products at NASS. We look forward to seeing you there.

Secondly, I would like to thank the global employees and stakeholders who worked so diligently to deliver our third quarter results, including the launch of Arsenal, With that, I would like to turn the call over to the operator to open up the call for any questions you may have..

(Operator Instructions). Our first question comes from the line of Matt Miksic from Piper Jaffray. Your line is now open..

H, guys. Thanks for taking the questions..

Hi, Matt..

So I wanted to ask a question on the international mix first. If you do have a larger than average contribution from oUS, if think about bottom-end of the range of your guidance for the end of the year here, how much of that is FX? How much of that is sort of tone of business? An color you could provide would be helpful..

So I think it reflects the fact that we continue to see a very positive contribution from our Japanese operations, albeit but really we have negative currency effect towards the end of the quarter. It didn't the early part of the quarter.

I think that we are obviously looking, certainly with Mark's arrival, although I am not going to ask him to contribute right away, we are looking for some contribution from the international regions around the world. I don't think the plans that we have in Q4 are any different than what we have previously been thinking..

Okay. That's helpful. The other question was on the way you are balancing cash investment, inventory investment in this rollout of Arsenal versus your goal of driving more cash flow and EBITDA obviously. You did a pretty good job here in the quarter.

But as you head into next quarter, next year, maybe give us a sense, qualitatively or quantitatively what the impacts of rolling out a new system like this is? I am understanding, of course, it's also an important growth driver..

Yes. You know, I think Matt, you are describing the balance really quite the way we see it. One reason we rolled it out in basically four 25% increments was the first increment is designed to validate and verify that we basically have it right. And we learned a lot during the beta launch.

And it caused us to make some adjustments, but none that were very significant, that we will describe as highly significant, but they were still important. As we move into the second phase and then the third and fourth phase, one of the reasons we are taking this approach is, we want to be able to fully consume everything that we launch.

And so it won't help us to a lot of inventory on the shelf because it takes the process of initiating a new customer or converting a present customer, it takes some time and effort. And so we staged it almost precisely for the balancing reason you are describing.

So we will be rolling out over the next two to four months in a way that will allow us to maintain a high monthly utilization of each instrument set and keep them fully utilized. And that of course causes the cash offset, as I think you are identifying.

Am I answering your question?.

Yes. No, that's very helpful. And then I guess finally, you know, with this new rollout, how should we think about your bandwidth for other new products? Either to come up here at NASS or coming into next year? I know this is big launch for the company, one of the kind of if guess in the tank here..

Well, you know, we of course have products under development pipeline, but the breadth of Arsenal and the opportunity associated with it, I think is going to keep us occupied well into 2015. And we will have some product launches along the way. But it remains the single biggest opportunity.

So as they say, focus on the big opportunities and we will let the smaller ones follow. So of our bandwidth is adequate for what we have in mind, but we will stay very focused..

Great. Thanks for taking the questions..

You bet..

Thank you. Our next question comes from the line of William Plovanic from Canaccord Genuity. Your line is now open..

Great. Thanks, good evening.

Can you hear me okay?.

Very well..

We can, Bill..

Excellent. So a couple questions here. Just first is, you have now exited France.

What are your distribution plans for France, going forward?.

Well, part of our exit from France involved both an operational and a commercial exit. That's somewhat a social law tissue with how we went about it in France. Later next year, we will have the opportunity to reenter if we choose and we right now don't have specific plans to talk about it at present, but we will be getting back in to France someday..

Okay.

How would you characterize your growth internationally? Excluding France versus the rest of Europe, Asia and the rest of world, what type of growth were you seeing in what geographies?.

So I think without getting too specific, our European business, apples-to-apples, excluding France, then we are quite comfortable with what the growth rate we saw there. As a reminder, for the rest of our businesses in Latin America or in Asia, Middle East, they are exclusively stocking distributors.

So there is some unevenness in terms of the order patterns that we have. Obviously as it relates to registrations, if there were registrations that were worthy of note, we would have spoken about them. So I think it's uneven but I have been anticipating, I think a much broader application of the Alphatec portfolio as we think about the future..

Okay and lastly just on the U.S. business. Your biologics continues to do extremely well. It looks like just kind of parsing up some numbers, your domestic business, metal business was probably flat sequentially and I am just trying to get a little color around, it was probably flat year-over-year, if you look at the growth numbers.

What's impacting the U.S. business? Is this the last of the stocking distributors in the U.S. kind of washing out and all the pod business you used to do? Or what's really going on? And just trying to figure out when we kind of hit the floor and a ground base to runoff of and grow off of? Thank you..

You know, Bill, that was like four questions. So let me try and position it as we see it. Actually although we were, I would describe, a touch, a little bit soft in the quarter, we actually, on a consecutive basis, for example, price played it, less rolled than it has than any time in the last two years.

We feel very strong about how Arsenal's going to provide a growth vehicle for us. Yes, you are right. The biologics grew very strongly. And all in all, I think that our U.S. business, our view was quite solid for the quarter in terms of how we want the business to run.

We are making choices that are designed to keep profits slightly ahead of revenue as our primary objective. So we do make those choices and we are going to continue to make those choices and they will affect our growth a bit, but they, as you can tell, each of the last two quarters you absolutely see that choice being reflected in our profitability..

Okay, that's all I had. Thank you..

Thank you. Our next question comes from the line of Imran Zafar from Jefferies. Your line is now open..

Hi, good afternoon. Thank you for taking my question. I wanted to first ask about the recent trends in the U.S. business.

You have seen overall growth, pretty reasonable growth and I wonder if you can just help us contextualize where the growth is coming from? Is it simply higher revenue per surgery? Is it more penetration of your existing surgeon? Is it extension of the surgeon base? I guess what I am trying to get at is, what impact Arsenal could have in terms of driving growth acceleration, given your commentary around new customers being a majority of volumes there early on?.

Yes. So where we see our U.S. business? There is two or three relevant ways to think about it. Number one, what you see in biologics reflects us selling into the procedure deeper. We have a very broad product line and biologics is typically the last product used in a procedure or often is. And that reflects that strategy.

With respect to the go forward growth, I think we have mentioned the fact that we are very carefully rolling out Arsenal such that we don't just go out and cannibalize our existing business. We use it as an opportunity to grow.

And walking in to a surgeon who has not previously done business with you before and having them choose to use a new system that is used in several levels, typically during this limited market release, we had cases that would go from two to 10 levels. So I mean just really that's not something that a surgeon takes lightly.

And when we think about it, the fact that 50% plus of the cases we did were with new surgeons and we are in the early phase of the launch.

We think that does give us a bit of a bellwether towards what we can expect going forward, which is that this will provide us access to physicians who previously didn't find our products in their eyes what they wanted exactly. And the reaction to Arsenal has been very positive.

So the reason we are balancing it is, one hand we have customers who want to convert from the Zodiac, which they have been using for some time. And at the same time, we have a product that's very attractive to new customers. So we are balancing it. We are able to do it.

So we were fully consumed during the limited market release during the last several weeks in terms of utilization expectations for a set. So we are feeling quite, I would say, optimistic about the potential for Arsenal in the coming six quarters, for example..

Okay, thanks, and then I think I heard you say that you saw some volume softness in the quarter. Any particular reason for that beyond seasonality? Was it the broader market? Was it sales force churn? Any detail you could offer beyond that comment would be helpful..

Yes. We didn't really see any actual trend other than it was just slightly soft. There wasn't any material changes in our sales channel. No material losses in any distributors or sales agents. So it's just a slight, just a softness across the board, not any specific reason we could identify..

Okay and then last question on pricing.

Any changes to the trends you are seeing on implant pricing in the third quarter relative to just in the first half of the here?.

You know we have seen the recent industry reviews that have been published by several. And I think we are operating within the middle the curve of how those reports were presented. So nothing outstanding for us in terms of expectations on present..

Okay. That's it. Thank you very much..

Thank you..

Thank you. Our next question comes from the line of Glenn Navarro from RBC Capital Markets. Your line is now open..

Hi, thank you. Good afternoon. Two questions. First, biologics clearly standout in the quarter in the U.S. up 18%. Jim, how sustainable is that? Is this something that you think can achieve low double digits into 2015? That's my first question. And then for Mike, when I look at the P&L, the gross margin as a standout came in better than expected too.

How sustainable is that? Should we thinking gross margin going forward north of 70%? Thanks..

Well, hi, Glenn. Two questions, right. So when we think about, let me start with Biologics. Without giving guidance on it, the answer is yes, we think it continues to be a growth vehicle for us. There is still quite -- we have a broad portfolio, as we have shared with you previously.

We compete in nearly every segment of biologics and we continue to take on new customers. We continue to become more effective at selling through the full product line in the cases that we participate in. So we think it continues to be a growth vehicle for us in the coming year. Regarding gross margin improvement, gross margin is very complex.

There is manufacturing costs. There is reserves you take for of all kinds of different reasons, when you have an instrument business, like we do.

Suffice it to say, however, that we have a really rather comprehensive effort to continue to improve our cost position, continue to be more efficient, continue to limit the inventory losses we might have occurred in the past. We really have a very diligent process to continue to be better.

So you know when you try and combine that with what happens in the market on selling price and all those types of things, I think you can expect to see us improve our cost position. How that gets reflected in future quarters is really harder to predict but I think we are in a place where we were pleased with this quarter's improvement over prior.

We now will strive to do better..

Okay..

Hi, Glenn, this is Mike. Just also, when you look at the last four quarters for the U.S., 74.4%, 72%, 71.8%, 75.8%, yes Q3 was good. No doubt about it. For many of the reasons that Jim's alluded to.

I do not think that that's the new low watermark, I think is the point I would leave you with, is that there is a lot of moving parts that happened here, but I think we have demonstrated over four quarters consistently above 70% in the U.S. A lot of that can be influenced by mix of our business.

But we have made the ongoing operational improvements and we are seeing that over an extended period of time. We expect that to continue, whether it's a step function change from Q3 of 2014, I would say, not. But whether the overall picture for 2014 into 2015 is an improvement picture of the gross margins, I would say, yes..

Okay, great. Thanks, guys..

(Operator Instructions). Our next question comes from the line of Josh Jennings from Cowen and Company. Your line is now open..

Hi. Thanks, gentlemen. Just two quick ones for me. One, first just looking into 2015, I know you are not giving guidance but you have done a nice job laying out how Arsenal is going to contribute.

Can you talk about some of the other product line drivers for 2015? Where you expect to see some products adding growth?.

It's a good question. I would rather answer it with a little bit of framework for you, because it's complex. We have a broad product portfolio that is on the market in the U.S. Our growth is going to be driven, though, by the consequence of products and new markets.

So if you think about it this way, there are countries in European Union in the quarter of seven to 10 where we currently do not play. And so entering those markets will produce growth for us.

We are currently awaiting, although we do not project timing and therefore not revenue with, we believe were in the final stages of approval on many of our products in China and will expand our China footprint significantly in terms of product offering. So that will be another geographical expansion for us is.

In terms of Brazil, we have almost an identical product portfolio expansion, which is very full, where we literally expect approval anytime. If it happened today, I wouldn't be surprised and if it happens in three months, I won't be surprised. So we haven't incorporated that into the our early plans.

So for us, we see, in the global marketplace, a number of growth opportunities and one of the reasons we invested and are strengthening our management team, was to be able to really have the focus to execute on it. So in the U.S., I think in the coming year, we are going to talk about our Arsenal and biologics.

We do have many other products, but those are the ones that deliver the growth for us. I think when you go internationally, it's a matrix of new market entrants.

Is that helpful?.

Very helpful. Thanks and just my last one. I wanted to follow up, you are speaking.

I know you have mentioned that you have got some product development in the pipeline, but maybe you can just talk about where the holes are in your portfolio? And I know you don't want to give out specifics about internal development or actual external business development initiatives.

But can you tell us where you feel your portfolio is weak and where that can strengthen over next in 18 to 24 months? Thanks a lot..

Well, I think, you know, our goal, we define ourselves as spinal fusion technology company and I think you will see us continue to do really two things. In biologics, we will continue to stay abreast of that rapidly changing market and we will product entrants into our portfolio.

And also we actually participate in nearly all segments of spinal fusion in terms of fixation stabilization and we will be upgrading some of those and we do have them in the pipeline. We haven't planned yet our public communication of that and I think we will just continue to get more confidence in our timing before we do that..

Great. Thanks so much..

Thank you. I am not showing any further questions on the phone queue. I would now like to turn the call back over to Jim Corbett for any closing remarks..

Well, first of all, thank you all of you for attending. I think that concludes the questions and our time for today. Thank you again for your interest and your questions..

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a great day..