Alphatec Holdings, Inc.

Good afternoon, everyone, and welcome to Alpha Tech's first quarter 2020 financial results and recent corporate highlights announcement. We would like to remind everyone that participants on the call will make forward-looking statements. These statements are based on current expectations and are subject to uncertainties that could cause actual results to differ materially. These uncertainties are detailed in documents filed regularly with the SEC. During this call, you may hear the company refer to reported amounts. which are in accordance with the U.S. GAAP as well as non-GAAP or PERFORMA measures. Reconciliation of non-GAAP measures to U.S. GAAP can be found in the supplemental financial tables included in the press release which identify and qualify all excluded items and provide management's views of why this information is useful to investors. Joining us on the call today will be ATEX Chairman and CEO Pat Miles, and CFO Jeff Black. Now I will turn the call over to Pat Miles, Chairman and CEO of Alphatec Spine.

Thanks, Michelle. Thanks, everyone, for joining the call. Before I get into the presentation, I want to take a minute with some prepared remarks really to the ATEX family, because I know many are listening in. So first of all, I want to say thanks for your continued engagement and productivity over the past two months. I am so proud of how we've supported each other during this crisis through the donation of paid sick time or foregoing base salary for stock to preserve cash for payroll or the extreme focus by everyone on driving the business forward despite being separated. I can tell you that business has pushed ahead. Regulatory filings have continued. Alpha evaluations have been completed. Surgeries have been fully supported. Recruitment of key talent and customers hasn't missed a beat. I believe we'll exit this challenge stronger than where we entered it, which is what distinguishes great companies. You've been committed to our mission, and we're completely committed to you. You can expect to see an increasing presence in the workplace starting soon as our surgery volume and project work continues to pick up. But it will happen in a methodical way, clearly to ensure that everyone is safe. With respect to our outlook on the business, I could not be more bullish. We saw strong momentum going into the crisis, which is reflected in our Q1 results. And while we have certainly been impacted by COVID, the interest from our expanding surgeon community and distribution channel is absolutely palpable. I'm encouraged by signs of recovery in surgical volumes, and while it's way too early to predict when we'll see full recovery, I am confident it will come back strong. We have taken critical steps necessary to strengthen our balance sheet and secure our runway. We've made strategic decisions to pull back spend in certain areas, but with a keen focus on preserving our most valuable asset, our employee base, and maintaining momentum on key development initiatives. We recently secured an additional $35 million commitment from Squadron Capital, extending the runway we need to focus on moving the business forward. We remain unwavering in our commitment to bring innovation to a market that needs it, and we have a team and the resources to make that happen. So I just wanted to make sure I didn't miss anything before I jumped into the Q1 2020 scorecard. So clearly the company has strong momentum. When you start to see things like 27% year-over-year revenue growth, you have to be optimistic. Additionally, 56% of that was from new product, which compared to 22% a year ago in Q1 and really less than 10% in fiscal year 18. 34% revenue growth was seen within our strategic distribution. And strategic distribution is a reminder of the guys who are going to go the distance with us. You also saw 15% year-over-year average revenue per case growth. And what that speaks to really is the confidence in our new devices and our business. And that's up 30% from Q118. We talk a lot about convoy sales, meaning how many product categories sell into surgery, and we continue to see that tick up. It was 1.7 in Q1. And really, this is our sixth consecutive double-digit year-over-year revenue growth in a quarter. And so when we go through our business update, the areas that we're going to talk about really is our focus as it relates to revenue momentum, The status of EOS, the balance sheet, and really where we see the spine market going. And so I guess first and foremost is one thing that you'll hear us remind you of is our business is in the operating room. And one thing that we have a pension for is focus. And our priorities really remain the same is is we're going to continue creating clinical distinction. We're going to continue to compel surgeon adoption, and we're going to continue to revitalize our sales force. And really, we did that in Q1. And so what you'll see out of us this year is you're still going to see 8 to 10 releases in 2020 of new products. The design meetings continued in earnest virtually. So the surgeons made time for us. A lot of them were candidly thrilled to engage with us over this period of a slowdown as well. Regulatory submissions continued. So as it relates to our capacity to create clinical distinction, I will tell you the momentum is palpable. As it relates to compelling surgeon adoption, we continue to evaluate our alpha products, and we continue to see more and more products used per procedure. And so it's very gratifying to see SafeOp used with our retractors, used with our fixation system or inner body systems. And so you're really starting to see the procedural strategy come into fruition. Also revitalizing our sales force. I got to tell you, the recruiting is going exceedingly well. Savvy distributors know that the future of spine is at ATEC. And so it's been entertaining to see the volume of distributors that have come our way. And oftentimes their focus is, how can I best serve my customer? And when they ask themselves that question, we're clearly the solution that a lot of distributors run to. We're also trying to elevate the aptitude of our sales force during the slowdown with a number of online calls and whatnot to engage them and keep them versed in terms of what we're doing clinically. So transitioning over to EOS, clearly we've changed directions as it relates to what we're doing there. So really proposing alternative collaborations. So we still believe in the clinical thesis that really drove the transaction. But we do believe that there's been a material adverse event resulting in our terminating the decision. If you really kind of delve in and channel check, you'll realize that the near-term focus from hospitals is in preparedness and cash generation from elective surgery. And our concern was it really pushed out the The acquisition of capital equipment. But again, back to the original comment, it hasn't undermined our clinical confidence in the collaboration. And so what we're doing is we're exploring other collaborative type of arrangements that really meets both companies' strategic needs. And so I would say that's a big change. to jump over into what's going on from our view in the spine market. I got to tell you, everybody has opined on this, and I'm not sure that we're going to provide you any new information. We're totally encouraged by the recovery, but it's still way too early to make any concrete judgment. So we see spine surgery starting to come back, and we see the enthusiasm around elective procedures. The one thing that we know is that hospitals need to generate revenue, and the way they generate revenue is through elective surgery. And probably the closest thing to non-elective surgery in orthopedics is spine. And so we're seeing an expedient return to procedural volumes. But again, don't want to get into a long discussion based upon the volume of uncertainty that still exists. So with that, I will turn it over to Jeff Black to review the financials. Thank you, Pat.

And spend a couple minutes just starting on a key focus area, and that's our balance sheet. We think it's important to start with that and specifically speak to the cash runway. So we ended the first quarter with $27.5 million in cash. We made a draw in early April on our existing credit facility with Squadron, so we ended the quarter with $47.5 million in cash on a pro forma basis. We also recently executed a commitment letter for a $35 million expansion of the facility with Squadron. A part of those proceeds will pay off our revolver with mid-cap, and the remaining will be available to draw as needed. We've also extended the maturity of the entire credit facility by two years to 2025. We've removed all financial covenants. We expect to close this financing by the end of May. We absolutely believe this is the right financing at the right time for us, provides the runway we need to execute on our growth plans. We've also made some decisions on cost containment across the organization. Again, as Pat mentioned, with an eye toward preserving the employee base and maintaining key product development initiatives. And finally, we think it's important to note that in Q1, our cash burn was elevated over prior quarters. really due to transaction-related and litigation expenditures recall that litigation was atypically high in Q4 related to our patent litigation. So we saw that cash impact in the first quarter. On to revenue, we saw 34% year-over-year growth from our strategic distribution channel. Importantly, as Pat mentioned, this is a mix of not just increases in surgical volume but more case complexity. and a continued increase in the products per case, which is driving revenue per case higher. And our legacy distribution channel continues to perform at a level where we actually above a level we expected to be at this point. Gross margin is held steady as expected. We continue to see a bit of a margin drag from excess and obsolescence on legacy products. We expect this to continue through 2020 as we continue to transition to new products. We'll start to see this normalize in 2021. And once E&O normalizes, our variations in gross margin will primarily be driven by product mix, but we continue to believe that midterm will maintain margins in the mid-70% range. A little bit about the P&L and OpEx. Our non-GAAP OpEx profile remains consistent year over year, again, in line with our expectations as we continue to make investments in new product development and build out our strategic sales channel. I think, importantly, we continue to hold the line on G&A. It's essentially been flat for the last 12 quarters and below 2017 run rates when we started the strategic pivot of the company.