Alphatec Holdings Q1 Revenue Remains Solid Despite Pandemic

Alphatec Holdings Inc. experienced a profitable first-quarter, even with the global COVID-19 pandemic shutting down elective surgeries and wreaking havoc on national economies.
 
Recent Corporate Highlights
Increased contribution from new products to 56 percent of Q1 2020 U.S. revenue up from 22 percent in Q1 2019 and 48 percent in Q4 2019;
Grew Q1 2020 revenue per case by 15 percent over Q1 2019;
Continued progress transforming the sales network with Q1 2020 U.S. revenue growth from strategic distribution up 34 percent compared to Q1 2019 and significant sales talent additions in key geographies;
Completed three U.S. Food and Drug Administration 510(k) new product regulatory submissions; and
Secured an additional $35 million capital commitment from Squadron Capital.
 
“During the first quarter, we saw continued solid business momentum,” said Pat Miles, chairman and CEO. “While that momentum was interrupted by circumstances outside of our control, we will navigate through the current challenges with the same focus and execution that has driven our success to date. We are bringing clinical distinction to a market that yearns for it by fulfilling our commitment to launch eight to 10 new products this year and continuing to expand our sales network with savvy distributors who know that the future of spine innovation is at ATEC.  This company has faced and overcome a lot of adversity over the last few years. We are confident that we have the proven team and resilient culture to not only weather this crisis, but to emerge as the leader in spine innovation.”
 
Total revenue was $30.1 million; revenue from U.S. products for the first quarter 2020 was $29.1 million, up 27 percent compared to $23 million in the first quarter 2019. Revenue growth was generated by new products and the strategic distribution channel, which continues to drive increases in average revenue per case and the number of product categories sold per case.
 
Gross profit and gross margin from U.S. products for the first quarter 2020 were $21 million and 72.1 percent, respectively, compared to $16.4 million and 71.4 percent, respectively, for the first quarter 2019. U.S. gross margin continues to be impacted by 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 78 percent in the first quarter 2020, compared to 80 percent in the first quarter 2019. The year-over-year decrease in non-GAAP gross margin was attributable to non-cash amortization and product mix.
 
Total operating expenses for the first quarter 2020 were $38.8 million compared to $27.3 million in the first quarter 2019. On a non-GAAP basis, excluding stock-based compensation, fair value adjustments, litigation-related expenses, restructuring and transaction-related expenses, total operating expenses increased to $28.5 million from $22.8 million in 2019, reflecting increased selling costs related to U.S. revenue growth, as well as increased investments in organic product development to support new product launches.
 
Non-GAAP adjusted operating loss, which excludes stock-based compensation, fair value adjustments, litigation-related expenses, restructuring, transaction-related expenses and excess and obsolescence charges, was $5.6 million for the first quarter 2020, compared to a loss of $4.2 million for the first quarter 2019. 
 
Non-GAAP adjusted EBITDA, which excludes stock-based compensation, fair value adjustments, litigation-related expenses, restructuring, transaction-related expenses and excess and obsolescence charges in the first quarter 2020 was a loss of $3.1 million, compared to a loss of $2.4 million in the first quarter 2019. 
 
Current and long-term debt at face value at March 31 includes $45 million in term debt with Squadron and $11.9 million outstanding under the company’s revolving credit facility at March 31, with cash and cash equivalents of $27.5 million. To extend its cash runway, the company completed a draw of $20 million under its credit facility with Squadron Capital on April 2. Including this draw, the company’s pro forma term debt with Squadron was $65 million at March 31 with pro forma cash and cash equivalents of $47.5 million.
 
On May 9 ATEC secured a commitment for $35 million in additional secured financing from Squadron. This capital will be made available under the same material terms and conditions as the existing term loan with Squadron, subject to customary closing conditions. Under the terms of the amended facility, the maturity date on the entire term loan will be extended to May 2025. A portion of the proceeds from the expanded facility will be used to retire the company’s outstanding obligation under its working capital revolver with MidCap Funding.
 
In connection with the additional commitment, ATEC will issue warrants to purchase 1.076 million shares of ATEC common stock at an exercise price of $4.88 per share. ATEC expects this transaction to close before the end of May 2020.
 
As a result of hospitals globally postponing elective procedures to preserve capacity for COVID-19 patients, ATEC suspended its previously announced 2020 revenue guidance on April 8. The company cannot yet determine the extent or duration of deferred surgeries, nor the requirements or the timing of the recovery once operating room and other pandemic-related constraints have been lifted.