Alphatec Holdings, Inc.

Good afternoon, everyone, and welcome to Alpha Tech's second 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 US GAAP as well as non-GAAP for pro forma measures. Reconciliations of non-GAAP measures to US GAAP can be found in the supplemental financial tables included in the press release, which identify and quantify all excluded items and provide management's view 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.

Good afternoon, everybody. Welcome to the second quarter ATEX conference call. I'm coming up on my three-year anniversary in October and really wanted to share with everyone some of our learnings around the transformation of ATEX. When I arrived, I was told that all we needed to do was transform the sales force and all would be well. The reality is that it's never that simple. In our second investor call, we outlined three commitments that we made to transform ATEC. The first one was how do we create clinical distinction? The second one was how do we compel surgeon adoption? And the third one was how do we revitalize the sales channel? And so when we start to think about creating clinical distinction, what that meant to us is really creating more sophisticated surgical solutions, meaning to create the internal know-how to be able to serve the interest of spine surgery. It is about serving the clinical requirements really better than anyone. With that, we'd be able to then compel surgeon adoption, which means how do we create confidence and predictability? How do we make surgeons buy into or have confidence in the distinction we are generating? The distinction didn't have to be really from an individual product, but rather in how we were addressing our procedures of specific type pathologies. The question was, are we creating the type of confidence that can be reflected in surgeons engaging and more. And then the whole revitalizing the sales channel. This meant how do we attract the best salespeople? It doesn't matter how well we do things internally if it is not reflected in the field. We are revitalizing our sales force with an interest in clinical aptitude. Our people have to be clinically focused. Last, these people are savvy. They know what companies are creating products and procedures that determine a prosperous future. We want them to be clinically adept and totally focused on hate tech, which hopefully becomes the exclusivity approach, which we will earn over time. I'd like to delve into each of our commitments and demonstrate how things have changed. What is important is that we create a methodical approach, which means that our commitments or claims are reflected in metrics. But the first thing you better do is create an organic innovation machine. That is a team of experienced, passionate people curious as to how to improve spine care. We built the fundamentals of that team or the foundation of that team over the past few years and have launched 17 products, which makes up 61% of our sales. I think where others see spine surgery as being commoditized, we see nothing but opportunity. Spine surgery still needs improving, and we intend to work with surgeons to do just that. When we talk about compelling surgeons, most of it gets reflected in earning procedures where there are multiple products used or increasing surgeon confidence where there is an increasing complexity of surgery. In speaking of spine procedural development, we develop products based upon the requirements around the specific approach. You will see a lot of companies apply legacy technologies to new approaches and claim, we've got one of those, but surgeons are compelled by companies willing to design and develop specifically for the approach in pathology. Also, creating a shared interest with surgeons is about designing products beyond only those that are billable. It is about fulfilling the requirements of spine surgery. As a reflection of our progress, things like the number of products used per case, up 27% since Q2 of 17. Cases with more than one product sold, up 46%. When you look at things like average revenue per case, up 47%, that's one that really speaks to confidence. The surgeons have more confidence in the products that we're creating. And then revenue up from top 20 surgeons, up 51%. Number three is about revitalizing the sales channel. I love this one. There becomes a cynicism around sales guys running toward whoever has the highest commission rate. The reality is that they run toward the company with the most promising future. They want to be effectual to the surgeons they call on. I believe that they love being part of something special, and the great ones are a significant resource to their surgeon's success. They create certainty in an uncertain environment. The number one question a salesperson gets is what's new. Well, at ATEC, there's a lot new. What we have seen thus far in our sales transformation is 77% increase in the revenue per distributor with less distributors and the percentage of sales of our strategic channel at 91%. So things are getting better. So when we start to think about creating clinical distinction, I look back over the last few years, and as we created the organic innovation machine, what we created is really unbelievable know-how. There is great know-how at ATEC. It's easy to get consumed with only financial reflection and lose sight of serving the interest of a marketplace. Our job is to serve the interest of spine surgery. We are doing that by serving a process of how we do things. And back in 2018, we acquired foundational technology that enabled us to provide unique information to surgeons. We realized that when we acquired it that we were immediately one of two companies that could create distinction in lateral surgery with automated neurophysiology. The beauty of SAFOP was that we knew the value of what we were providing didn't stop at identifying a nerve with automated EMG in lateral. There were multiple applications beyond lateral. However, the value that we could provide in lateral was unique. It would be both nerve identification as well as discerning nerve health. It is a very big deal. That means that we immediately can do something that no one else can do. The competition will immediately say, we got one of those or we can do that. But the surgeons and salespeople know it's just not true. So moving into 19, we launched 12 plus products, including an integrated SafeOps system with peripherals that integrated with our instruments and implants. This was the start of our effort to proceduralize or build individual approaches. The new products were foundational and it enabled us to begin building a portfolio of products to compel surgeons and attract significant sales talent. The great part was that our team designed in feature sets with our foundational products that are unique and clinically valuable. Clearly, products like Single Step that integrate with Safe-Op is one of them. We move on to 2020. So we hit 2020, and with all of our momentum, we went smack dab into a global pandemic. However, what we don't do is panic. What we do is concentrate on what we know, which is serving the interest of spine surgery, and control what we can as we steward the company as everyone would expect. So what we do is focus on three things. We design and develop new products that we deem to be weaknesses in our cervical portfolio, both the insignia of cervical plate and Invictus Posterior Cervical System will alpha launch in Q3 2020. It seamlessly extends Invictus up to the posterior cervical spine from the lumbar and thoracic region. We also added modularity to Invictus and integrated with our T lip retractor, Sigma, which will launch in Q4. These are things we do very well. So we have great expectation around these products. Lastly, we developed a new lateral single position procedure named PTP, which will launch in Q4. This is a lateral prone trans-soas surgery, whereby once again, everyone will say, we got one of those, and in typical fashion, they don't. We're the team that launched lateral surgery back in 2003. The level of lateral know-how at ATEC is unrivaled. Having previously built the lateral market, it is a space for which we are profoundly familiar. The guy pictured in the loops is Luiz Pimenta. For those of you who may not realize it, he pioneered lateral surgery. He is our chief medical officer. And among he and other spine surgeons with whom we interact are people never satisfied with where spine surgery is today. PTP will be a very significant addition to not just ATEX armamentarium, but the armamentarium of spine surgery. We are several hundred surgeries into our experience, so we are not guessing. More on this as we launch in the fourth quarter. So when we look at the investments that created value over the years, we go back and look at the importance of the people and the portfolio investments in recreating ATEC. It is very clear that we are making progress. As you can see, where we have invested, we've prospered. Where we haven't, we've struggled. The priority of our investment was to create clinical distinction with information and lateral in our first phase. Since Q2 2017, we've grown 61% in the categories of information, lateral, and posterior fixation. In Phase 2, we began to invest in ALIF, PLIF, and TLIF. It is up 34%, and we are just getting started. You will see continued upcoming launches in 20 and 21 in these categories. Lastly, our redesign slash investment program. and all things cervical and biologics is at a very early stage. You will see the fruits of them in 20 and will fully launch in 2021. The point is that we have been very deliberate with our investment thesis. We know the market well and our ability to continue to invest and create clinical distinction is significant. Now on to the scorecard for Q2 2020. The momentum we built is strong and candidly somewhat undeniable. We are up 11% year-over-year, 15% within strategic distribution. We're growing at 25% amongst our top 20 surgeons. 61% of our revenue is new products versus 32 in Q2 of 19 and less than 10% in 2018. The confidence reflected in a 14% year-over-year growth in average revenue per case is significant. It's our seventh consecutive double-digit year-over-year growth quarter, and one that I really like is that we are selling 1.8 average product categories sold per surgery. That means we're starting to combine and proceduralize the portfolio in a way that's creating clinical distinctions. As we look forward, you're going to see profound change, which means we're going to do three things. We're going to create clinical distinction, we're going to compel surgeon adoption, and we're going to revitalize a sales channel. That means that what we're going to do is continue to develop product. We're going to increasingly do things that are more complex. We're going to continue to attract surgeon interest. We're going to continue to advance toward exclusivity with regard to our sales channel, and we're going to continue to expand in under-penetrated geographies. So, clearly, a lot of good things going on and can't be more excited about where we are as a company. And with that, I'll turn it over to Jeff.

Great. Thank you, Pat, and good afternoon, everybody. Just a few quick minutes on the financial results, first with revenue. Again, as Pat mentioned, we are expanding our revenue per case. We saw very strong momentum, particularly going into the last month of the quarter. June was the second highest month of volume in the company's history. And again, as expected, we continue to see the international headwind under our supply agreement that's winding down as anticipated. And as Pat mentioned, as you start to really dig into the growth metrics here, 11% growth in U.S. revenue still reflects headwinds from our legacy distribution. That was down 23%, so strategic grew 15%. And when you look at our performance and our year-over-year growth of 11%, even in a down market, we grew off a very strong second quarter 2019 comp where we saw 28% year-over-year growth a year ago. So that speaks to continued momentum in the sales channel. When you look at gross margin, again, the story is the same, although we're beginning to get a lot more clarity on the path toward our margins at scale. As expected, we saw E&O drag from legacy products, so that continues. Last year in 2019, it had about an 800 basis point impact on margin. For the first half of 2020, it's more along 600 basis points. Historically, we've seen it more in the 300 to 400 basis points. So this speaks to future margin improvement opportunities as we scale our gap margins in the mid to high 70s are well in sight. We take a look at high level at the P&L. Again, we're making continued investments, expanding the portfolio, investing in the sales channel. In late Q1, when the pandemic first hit, We took immediate actions to shore up spend. And we did that with an eye toward not compromising key product development initiatives. We're well on track still to release 8 to 10 new products in 2020. But at the same time, we're able to avoid workforce reductions and keep the ATEC team intact. In fact, we continue to make a number of key hires while deferring spend where it made sense. While Q2 is probably not representative of near-term expense profile, It's definitely an indication of our ability to pull the appropriate cash levers when we're required to do so. Again, a segue into the balance sheet. When you take a look at our balance sheet, we ended Q2 with more than $55 million in cash and available draws on our squadron line. That provides us runway through mid-2021. Our term debt with squadron does not begin to amortize until the third quarter of 2022. We also just entered into a one-year repayment holiday on our $1.1 million quarterly obligation to Orthotec. So when you take a look at our cash burn profile, more than 50% of our operating cash for the last four quarters was really to support CapEx for new product launches. In Q2, it was nearly 60%. So as we start to think about financing these, it's really about making the capital investments required to drive continued growth. The shelf filing and the ATM we put in place today is intended to give us ultimate flexibility to access capital markets when it makes sense for us to do so. Before I wrap it up and turn it back over to Pat, just a little bit of commentary and a look at our historical P&L. Again, when you look at our revenue, our annualized U.S. revenue run rate from strategic distribution in the first half of 2020 has actually doubled We've made investments we committed to make in product portfolio and sales channel, which has driven the revenue performance we also committed to. We've also held the line on G&A, so what you're seeing in the SG&A line is truly an investment in the sales channel. The operating leverage will come over time. For now, our focus is making the right strategic investments to build predictable and sustainable top-line growth. With that, I'll turn it over to Pat to wrap up.