ATEC Alphatec Holdings Inc

Alphatec Holdings, Inc. (“ATEC” or the “Company”) (Nasdaq: ATEC), a provider of innovative spine surgery solutions dedicated to revolutionizing the approach to spine surgery, today announced financial results for the quarter ended June 30, 2019, and recent corporate highlights.

Second Quarter 2019 Financial Highlights

• Total net revenue of $27.3 million; U.S. revenue of $26.1 million, up approximately 28% compared to the second quarter of 2018;
• U.S. gross margin of 72.2%; and
• Cash and cash equivalents of $18.6 million as of June 30, 2019.

Second Quarter-to-Date Commercial, Product, and Organizational Highlights

• Enhanced clinical distinction of portfolio with four new commercial releases: the IdentiTi™ TLIF system, the IdentiTi ALIF system, the InVictus™ MIS Fixation System and the InVictus Open Fixation System;
• Increased contribution from new products to 32% of Q2 2019 U.S. revenue;
• Expanded percentage of revenue driven by strategic distribution network to 88% of U.S. revenue in Q2 2019 compared to 80% in Q2 2018; and
• Increased U.S. revenue per distributor by more than 45% and increased U.S. revenue per case by 15% in Q2 2019 compared to Q2 2018.     

“Through the first half of 2019, execution against our strategic commitments has been solid,” said Pat Miles, Chairman and Chief Executive Officer.  “That execution drove the highest rate of quarterly U.S. revenue growth this company has achieved in the past 10 years.  Based upon our performance in the first half of 2019 we are increasing full-year revenue guidance, which speaks to the impact of spine’s new Organic Innovation Machine.  We are just getting started.”

Comparison of Selected GAAP and Non-GAAP Financial Results for the Second Quarter 2019 to Second Quarter 2018

	Three Months Ended								Change
	June 30, 2019				June 30, 2018				$				%
	(unaudited)				(unaudited)
Revenue from U.S. products	$	26,093			$	20,409			$	5,684			28	%
Gross profit from U.S. products		18,841				15,462				3,379			22	%
Gross margin from U.S. products		72.2	%			75.8	%
Operating Expenses
Research and development	$	3,360			$	2,009			$	1,351			67	%
Sales, general and administrative		24,568				17,538				7,030			40	%
Litigation-related expenses		1,200				2,234				(1,034	)		(46	%)
Amortization of intangible assets		172				187				(15	)		(8	%)
Transaction-related expenses		-				(62	)			62			(100	%)
Restructuring		-				193				(193	)		(100	%)
Total operating expenses	$	29,300			$	22,099			$	7,201			33	%
Operating loss	$	(10,414	)		$	(6,545	)		$	(3,869	)		59	%
Non-GAAP operating loss	$	(4,663	)		$	(2,578	)		$	(2,085	)		81	%
Non-GAAP adjusted EBITDA	$	(3,018	)		$	(989	)		$	(2,029	)		205	%

Revenue from U.S. products for the second quarter 2019 was $26.1 million, up 28% compared to $20.4 million in the second quarter 2018. Revenue growth generated by new product momentum and the strategic distribution channel is increasingly outpacing the continued revenue impacts of transitioning or discontinuing non-strategic distributor relationships.

Gross profit and gross margin from U.S. products for the second quarter 2019 were $18.8 million and 72.2%, respectively, compared to $15.5 million and 75.8%, respectively, for the second quarter 2018. U.S. gross margin was impacted by increased non-cash excess and obsolete write-offs related to legacy products. On a non-GAAP basis, excluding non-cash excess and obsolete charges, U.S. gross margin was 80.6% in the second quarter of 2019, up from 77.5% in the second quarter of 2018.

Total operating expenses for the second quarter 2019 were $29.3 million compared to $22.1 million in the second quarter 2018.  On a non-GAAP basis, excluding restructuring charges, stock-based compensation, transaction-related expenses, litigation-related expenses, restructuring and fair value adjustments, total operating expenses in the second quarter 2019 increased to $25.8 million from $18.5 million in 2018, reflecting increased investments in organic product development to support new product launches and increased selling costs from U.S. revenue growth.

Non-GAAP operating loss which excludes restructuring charges, stock-based compensation, transaction-related expenses, litigation-related expenses, restructuring, fair value adjustments and excess and obsolescence charges, was $4.7 million for the second quarter 2019, compared to a loss of $2.6 million for the second quarter 2018. 

Non-GAAP adjusted EBITDA in the second quarter was a loss of $3.0 million, compared to a loss of $1.0 million in the second quarter 2018. 

For more detailed information on non-GAAP operating expenses, non-GAAP operating loss and non-GAAP adjusted EBITDA, please refer to the table, “Alphatec Holdings, Inc. Reconciliation of Non-GAAP Financial Measures,” that follows.

Current and long-term debt includes $45.0 million in term debt and $10.7 million outstanding under the Company’s revolving credit facility at June 30, 2019, with cash and cash equivalents of $18.6 million. In March 2019, the Company closed its expanded credit facility with Squadron Medical Finance Solutions, providing for up to $30 million in additional financing, as needed. During the second quarter 2019, the Company drew $10 million against the credit facility.

Updated 2019 Financial Outlook

Full Year 2019	Previous		Updated
	Guidance ($M)	YoY Growth	Guidance ($M)	YoY Growth
U.S. Product Revenue	$94 to $98	12% to 17%	$100 to $104	20% to 24%
International Supply Agreement	$4 to $5	(38%) to (50%)	No change	No change
Total Revenue	$98 to $103	7% to 12%	$104 to $109	13% to 19%

Investor Conference Call

ATEC will present the results via a live webcast today at 1:30 p.m. PT / 4:30 p.m. ET to discuss the results. At that time, please click here to access the live webcast.  An audiocast of the presentation will be also be available domestically at (877) 556-5251 and internationally at (720) 545-0036. The conference ID number is 6098197.

Non-GAAP Financial Information

To supplement the Company’s financial statements presented in accordance with U.S. generally accepted accounting principles (GAAP), the Company reports certain non-GAAP financial measures, including non-GAAP U.S. gross margin, non-GAAP operating expenses, non-GAAP operating loss, and non-GAAP adjusted EBITDA. The Company believes that these non-GAAP financial measures provide investors with an additional tool for evaluating the Company's core performance, which management uses in its own evaluation of continuing operating performance, and a baseline for assessing the future earnings potential of the Company. The Company’s non-GAAP financial measures may not provide information that is directly comparable to that provided by other companies in the Company’s industry, as other companies in the industry may calculate non-GAAP financial results differently, particularly related to non-recurring, unusual items. Non-GAAP financial results should be considered in addition to, and not as a substitute for, or superior to, financial measures calculated in accordance with GAAP. Included below are reconciliations of the non-GAAP financial measures to the comparable GAAP financial measures.

About Alphatec Holdings, Inc.

Alphatec Holdings, Inc., through its wholly-owned subsidiaries, Alphatec Spine, Inc. and SafeOp Surgical, Inc., is a provider of innovative spine surgery solutions dedicated to revolutionizing the approach to spine surgery. ATEC designs, develops and markets spinal fusion technology products and solutions for the treatment of spinal disorders associated with disease and degeneration, congenital deformities and trauma.  The Company markets its products in the U.S. via independent sales agents and a direct sales force.

Additional information can be found at www.atecspine.com.

Forward Looking Statements

This press release contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 that involve risks and uncertainty. Such statements are based on management's current expectations and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. The Company cautions investors that there can be no assurance that actual results or business conditions will not differ materially from those projected or suggested in such forward-looking statements as a result of various factors. Forward-looking statements include the references to the Company’s revenue and growth outlook, planned commercial launches and product introductions, the Company’s strategy in significantly repositioning the ATEC brand, turning the Company into a growth organization and creating future market disruption, and the Company’s future ability to finance its operations. The important factors that could cause actual operating results to differ significantly from those expressed or implied by such forward-looking statements include, but are not limited to: the uncertainty of success in developing new products or products currently in the Company’s pipeline; the uncertainties in the Company’s ability to execute upon its strategic operating plan; the uncertainties regarding the ability to successfully license or acquire new products, and the commercial success of such products; failure to achieve acceptance of the Company’s products by the surgeon community; failure to obtain FDA or other regulatory clearance or approval for new products, or unexpected or prolonged delays in the process; continuation of favorable third party reimbursement for procedures performed using the Company’s products; unanticipated expenses or liabilities or other adverse events affecting cash flow or the Company’s ability to successfully control its costs or achieve profitability; uncertainty of additional funding; the Company’s ability to compete with other products and with emerging new technologies; product liability exposure; an unsuccessful outcome in any litigation in which the Company is a defendant; patent infringement claims; claims related to the Company’s intellectual property and the Company’s ability to meet its financial obligations under its credit agreements and the OrthoTec LLC settlement agreement. The words “believe,” “will,” “should,” “expect,” “intend,” “estimate,” “look forward” and “anticipate,” variations of such words and similar expressions identify forward-looking statements, but their absence does not mean that a statement is not a forward-looking statement. A further list and description of these and other factors, risks and uncertainties can be found in the Company's most recent annual report, and any subsequent quarterly and current reports, filed with the Securities and Exchange Commission. ATEC disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise, unless required by law.

Investor/Media Contact:

Tina JacobsenInvestor Relations(760) 494-6790ir@atecspine.com

Company Contact:

Jeff Black Chief Financial Officer ir@atecspine.com 

ALPHATEC HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts - unaudited)
		Three Months Ended								Six Months Ended
		June 30,								June 30,
			2019				2018				2019				2018
	Revenues:
	Revenue from U.S. products	$	26,093			$	20,409			$	49,048			$	39,610
	Revenue from international supply agreement		1,226				1,633				2,826				3,739
	Total revenues		27,319				22,042				51,874				43,349
	Cost of revenues		8,433				6,488				16,420				12,890
	Gross profit		18,886				15,554				35,454				30,459
	Operating expenses:
	Research and development		3,360				2,009				6,829				3,795
	Sales, general and administrative		24,568				17,538				45,568				34,795
	Litigation-related expenses		1,200				2,234				3,823				2,814
	Amortization of intangible assets		172				187				354				364
	Transaction-related expenses		-				(62	)			-				1,480
	Gain on settlement		-				-				-				(6,168	)
	Restructuring expenses		-				193				60				591
	Total operating expenses		29,300				22,099				56,634				37,671
	Operating loss		(10,414	)			(6,545	)			(21,180	)			(7,212	)
	Total other expenses, net		(1,921	)			(1,784	)			(4,040	)			(3,429	)
	Loss from continuing operations before taxes		(12,335	)			(8,329	)			(25,220	)			(10,641	)
	Income tax (benefit) provision		71				(1,265	)			102				(1,723	)
	Loss from continuing operations		(12,406	)			(7,064	)			(25,322	)			(8,918	)
	Loss from discontinued operations		(30	)			(12	)			(82	)			(74	)
	Net loss	$	(12,436	)		$	(7,076	)		$	(25,404	)		$	(8,992	)
	Net loss per share, basic and diluted:
	Continuing operations	$	(0.26	)		$	(0.21	)		$	(0.55	)		$	(0.32	)
	Discontinued operations		(0.00	)			(0.00	)			(0.00	)			(0.00	)
	Net loss per share, basic and diluted	$	(0.27	)		$	(0.21	)		$	(0.55	)		$	(0.33	)
	Shares used in calculating basic and diluted net loss per share		46,880				34,030				45,957				27,656
	Stock-based compensation included in:
	Cost of revenue	$	28			$	11			$	56			$	33
	Research and development		293				129				533				13
	Sales, general and administrative		2,030				1,008				3,374				1,721
		$	2,351			$	1,148			$	3,963			$	1,767

	ALPHATEC HOLDINGS, INC.
	CONDENSED CONSOLIDATED BALANCE SHEETS
	(in thousands)
		June 30,			December 31,
		2019			2018
		(Unaudited)
	ASSETS
	Current assets:
	Cash	$	18,570		$	29,054
	Accounts receivable, net		13,642			15,095
	Inventories, net		32,605			28,765
	Prepaid expenses and other current assets		10,904			2,380
	Current assets of discontinued operations		225			242
	Total current assets		75,946			75,536
	Property and equipment, net		15,090			13,235
	Right-of-use asset		2,170			-
	Goodwill		13,897			13,897
	Intangibles, net		26,054			26,408
	Other assets		222			347
	Noncurrent assets of discontinued operations		53			54
	Total assets	$	133,432		$	129,477
	LIABILITIES AND STOCKHOLDERS' EQUITY
	Current liabilities:
	Accounts payable	$	8,178		$	4,399
	Accrued expenses		20,831			22,316
	Current portion of long-term debt		286			3,276
	Current portion of lease liability		1,173			-
	Current liabilities of discontinued operations		538			621
	Total current liabilities		31,006			30,612
	Total long term liabilities		64,662			57,688
	Redeemable preferred stock		23,603			23,603
	Stockholders' equity		14,161			17,574
	Total liabilities and stockholders' equity	$	133,432		$	129,477

ALPHATEC HOLDINGS, INC.
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
(in thousands - unaudited)
			Three Months Ended								Six Months Ended
			June 30,								June 30,
				2019				2018				2019				2018
	Operating expenses			29,300				22,099				56,634				37,671
	Adjustments:
	Stock-based compensation			(2,323	)			(1,137	)			(3,907	)			(1,734	)
	Contingent consideration fair value adjustment			-				(100	)			(289	)			(100	)
	Litigation-related expenses			(1,200	)			(2,234	)			(3,823	)			(2,814	)
	Restructuring			-				(193	)			(60	)			(591	)
	Transaction-related expenses			-				62				-				(1,480	)
	Gain on settlement			-				-				-				6,168
	Non-GAAP operating expenses		$	25,777			$	18,497			$	48,555			$	37,120
			Three Months Ended								Six Months Ended
			June 30,								June 30,
				2019				2018				2019				2018
	Operating loss, as reported		$	(10,414	)		$	(6,545	)		$	(21,180	)		$	(7,212	)
	Add back significant items:
	Stock-based compensation			2,351				1,148				3,963				1,767
	Contingent consideration fair value adjustment			-				100				289				100
	Litigation-related expenses			1,200				2,234				3,823				2,814
	Restructuring			-				193				60				591
	Transaction-related expenses			-				(62	)			-				1,480
	Excess & obsolete charges			2,200				354				4,175				1,272
	Gain on settlement			-				-				-				(6,168	)
	Non-GAAP operating loss			(4,663	)			(2,578	)			(8,870	)			(5,356	)
	Operating loss, as reported		$	(10,414	)		$	(6,545	)		$	(21,180	)		$	(7,212	)
	Depreciation			1,473				1,457				3,076				3,049
	Amortization of intangible assets			172				132				354				426
	EBITDA			(8,769	)			(4,956	)			(17,750	)			(3,737	)
	Add back significant items:
	Stock-based compensation			2,351				1,148				3,963				1,767
	Contingent consideration fair value adjustment			-				100				289				100
	Litigation-related expenses			1,2a00				2,234				3,823				2,814
	Restructuring			-				193				60				591
	Transaction-related expenses			-				(62	)			-				1,480
	Excess & obsolete charges			2,200				354				4,175				1,272
	Gain on settlement			-				-				-				(6,168	)
	Non-GAAP adjusted EBITDA		$	(3,018	)		$	(989	)		$	(5,440	)		$	(1,881	)

ALPHATEC HOLDINGS, INC.
RECONCILIATION OF GEOGRAPHIC SEGMENT REVENUES AND GROSS PROFIT
(in thousands, except percentages - unaudited)
		Three Months Ended								Six Months Ended
		June 30,								June 30,
			2019				2018				2019				2018
	Revenues by source
	Revenue from U.S. products	$	26,093			$	20,409			$	49,048			$	39,610
	Revenue from international supply agreement		1,226				1,633				2,826				3,739
	Total revenues	$	27,319			$	22,042			$	51,874			$	43,349
	Gross profit by source
	Revenue from U.S. products	$	18,841			$	15,462			$	35,235			$	30,229
	Revenue from international supply agreement		45				92				219				230
	Total gross profit	$	18,886			$	15,554			$	35,454			$	30,459
	Gross profit margin by source
	Revenue from U.S. products		72.2%				75.8%				71.8%				76.3%
	Revenue from international supply agreement		3.7%				5.6%				7.7%				6.2%
	Total gross profit margin		69.1%				70.6%				68.3%				70.3%
	RECONCILIATION OF GAAP TO NON-GAAP GROSS PROFIT AND GROSS MARGIN FROM U.S. PRODUCTS
(in thousands, except percentages - unaudited)
		Three Months Ended								Six Months Ended
		June 30,								June 30,
			2019				2018				2019				2018
	GAAP-based gross profit from U.S. products	$	18,841			$	15,462			$	35,235			$	30,229
	Add: non-cash excess and obsolete charges		2,200				354				4,175				1,272
	Non-GAAP gross profit from U.S. products	$	21,041			$	15,816			$	39,410			$	31,501
	GAAP-based gross margin from U.S. products		72.2%				75.8%				71.8%				76.3%
	Add: non-cash excess and obsolete charges		8.4%				1.7%				8.5%				3.2%
	Non-GAAP gross margin from U.S. products		80.6%				77.5%				80.3%				79.5%