Welcome to Alphatec Spine Third Quarter 2015 Earnings Call. At this time, participants are in a listen-only mode until the question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded. If you have any objections, you may disconnect at this time. I would like to introduce to your host, Christine Zedelmayer, Head of Investor Relations at Alphatec Spine.

Good afternoon and welcome to Alphatec Spine's quarterly update conference call to discuss our third quarter 2015 financial and operating results, as well as provide an update on our outlook for the remainder of 2015. This afternoon, our comments will build on the press release we issued earlier today. 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 and operating improvement, 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 could adversely affect our business and financial results, we suggest to 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 prepared 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 Alphatec Management team that are here with me today: Jim Corbett, President and Chief Executive Officer; Mike O'Neill, Chief Financial Officer; and Ebun Garner, General Counsel. I will now turn the call over to Jim. Jim?

Thank you, Christine and good afternoon. Welcome to the Q3 2015 Alphatec conference call. I'm going to begin by an overview of worldwide revenue. Following that I am going to give an operational review within the context of our three pillars of transformation. Now, I am going to reorder the pillars, and I want to make a quick comment to why. The first pillar is around the go to product strategy and our product pipeline. That’s going to stay the same because that's the most fundamental competitive basis that we focus on. The second pillar that's what’s going to be different. We are going to put the second pillar from now on to be manufacturing transformation and physical distribution transformation. Once we’re able to make it, we have to sell it for a profit rather straightforward. Third, we’re going to take on this commercial transformation worldwide, so that will be the order from here on. Let’s stuck to the revenue, worldwide revenue was $43 million for Q3 of 2015, broken-out geographically the U.S. was $27.4 million that is consecutively up, which is a very good news because we’ve had two consecutive down quarters. Underlying that there is a lot of good progress which I will share with you later. Internationally, sales were $15.6 million that’s 13% up in common currency. International continues to be strong, it’s no accent. So I’ll share those details with you a little bit later. Now, let’s get to the three pillars, product development and the go to market pipeline that we are developing at Alphatec. Couple of things, first we are focused on the big market segments that means stabilization, fixation so the third of all the money. Arsenal is on the market, Arsenal Cortical Bone is now launched, clearly differentiating us from a significant…

Thank you, Jim. I’m going to focus the majority of my remarks on the reported operating performance for the third quarter that ended September 30, 2015. We are actively executing against our strategy with operational discipline and are focused on driving overall improvements in our return on invested capital and cash position. We believe that the progress, we have seen in our U.S. commercial execution from Q2 to Q3 give us confidence that our transformation is beginning to take hold. That starts my commentary today will be primarily focused on core operating results for the quarter, including some comments comparing Q3 sequentially to Q2. For more details regarding our Q3 financial results please refer to the press release we issued earlier today. I will then provide an update on our full year 2015 guidance. Our consolidated revenues were $43 million compared to $51 million in Q3 of 2014 and as Jim has previously noted international revenues were up 13.2%, operationally over prior year. In the U.S. we are encouraged by the sequential improvement in revenue from Q3 over Q2 as well as our expansion efforts during the quarter, which we believe will drive new revenue in Q4 and beyond from new surgeons, new distribution and new geographies laying a stronger foundation for future growth for us. Consolidated gross margin was 66.2% in Q3 compared to 71.2% prior year. The decline over prior year is primarily attributable to unfavorable variation in global regional and product mix as well as foreign currency effects and lower milestones and royalties in the prior year. It’s also worth noting that in Q3 our fixed costs, was spread across the lower volume base that impacted our gross margin in the U.S. In the longer-term our manufacturing and distribution outsourcing initiatives should help reduce our overhead and…

Thank you. [Operator Instructions] Our first question comes from Glenn Novarro with RBC Capital Markets. You may begin.

Hi, good afternoon guys.

Hi Glenn.

I’m wondering if you can provide us with a bridge from the 3Q revenue reported a $43 million to the $50 million that you expect in the fourth quarter I know there’s $3 million that you're calling out from these new distributors, but historically if we look back in the past you've only been able to sequentially go up only a few million from 3Q to 4Q. So maybe provide a bridge is to how we get from 3Q to 4Q? Thanks.

Well, of course it’s a precise bridge is rather difficult to do, but what I can share with you is the bridge that you’re seeking I think will be is readily seeable in the international revenue line. So if you look at our four quarters, you'll note that with a third-party distributor model, which is excluding Japan our predominant method of distribution Q3 is always our lowest revenue quarter internationally. So without precisely hitting it, the gap you're looking for, for example in Q2 we were near $19 million internationally. And so the $15.6 million in Q3, seasonally was expected by us and in fact it was 13% over prior year. So I think what you're looking for Glenn is, you need to match the U.S. growth with what seasonally happens internationally as well.

Okay, and then the $3 million that you called out of new revenue. So that's from the U.S. so we got $3 million coming from the U.S., we’ve got another sequential uptick coming from international so between U.S. and the $3 million and the U.S. internationally does that comfortably is going to get you to that $50 million?

Yes, is that what we believe.

Okay. And then just maybe talk a little bit about your R&D expenses, because it was only $2 million in 3Q, which was below our expectations. Is that just timing given that you've kind of finish a lot of the R&D projects right now that you called out on the call and it will ramp going forward, maybe talk about the R&D spend and where you are in the timing of some of your projects.

Yes Glenn, it’s Mike. So one of the components that hits through the R&D line is a mark-to-market adjustment for some of our consulting costs and so that was really a credit adjustment based up on the decline in the stock price in Q3. The underlying R&D spend in Q3 is not the similar to what we saw in Q2.

Okay. And then just lastly on the bank debt refinancing. Mike, you talked about having something to announce by the end of the year I'm assuming you will expect the refinance to get announced and that will be in the form of a press release by the end of the year, is that accurate?

That would be correct on an 8-K as well obviously.

Okay, great. Thank you.

Thanks Glenn.

Thanks Glenn.

Thank you. Our next question is from Lin Yu with Cowen and Company. You may begin.

Hey folks, thanks for taking the question. I wonder if you guys can provide first of all an update on the FDA warning letter, any updates on the fund that will be appreciated.

Sure, as you recall one of the – this is Jim. One of the requirements from the FDA was to look backward to validate that the methodology of incorporating purchase technology would not be solely confined to the one issue that arose during the audit and we have completed virtually all that work that they asked us to do and our reply to them is in a very short near-term.

Great and one product I think really interesting is the Biologic and Neocore product, can you talk about the role of progress and any early feedback from physicians and how it's received?

Yes, so we are not out in all form factors, the form factors we were - that we’ve launched are in the [12 CC] strip size, there is a series of different sizes five and 20, strip sizes than of course will be launching Putty and Granules and some other form factors here by Q1 so we are out in a strips now. The response from the customer has been very positive, they find it very easy to work with, we are able to react to what I mentioned earlier is a very dynamic and very elastic price point in terms of how Biologics functions in the marketplace. So far it's going very well, it's early, but we are quite pleased with the customer response so far.

Great. Thanks Jim. And just last one from me, you kind of mentioned a little bit about the lateral and to from many programs very exciting products. Can you just give us a little more details about the timing of launch and what kind of products or what kind of a detail about the programs or products that involved with lateral and deformity? Thanks.

Well, let me take the deformity first, deformity is coming first, we are in complete lock on the whole system to some perspective although you could find a way with our Zodiac system to do close to 50% of the cases that you might come across in a deformity world. It was somewhat of stretch to do that so we really didn’t cover as broad above applications we like with Arsenal we designed it to be over 90% of the deformity cases. So it is a very – and one more will be complex, but also very thorough design system. We expect to launch sometime in January, February timeframe, we are in production preparation and ramp up now, it will require a very technical focused rollout which will incorporate cadaver training and will have a sales team that will be specifically targeted to make those presentations and help early cases. So it's on the forefront and the first one will hit. Lateral it has a slightly less defined timeframe, we currently estimate that around the end of Q1. It will be characterized by two differentiating elements; one is that we will have the titanium-coated PEEK cages as we have designed for Battalion. And secondarily, we have a lateral retractor system, we actually think is best-in-class in a marketplace and the physicians we show it to remark very expressively about how it helps that they believe it will help them treat patients much more efficiently and more safely. So it is just a few months behind deformity, but right behind. The retractor which is the most complex instrument we've ever designed is in virtual lockdown now in terms of design and we are moving to manufacturing.

Great, thank you so much.

You bet.

Thank you. [Operator Instructions] Our next question is from Mark Landy with Northland Capital Markets. You may begin.

Good evening guys, thanks for taking my questions.

Hi, Mark.

So Jim just following on deformity, which part of the markets are you planning on targeting, is it going off to the degenerative portion of deformity to begin with or are you planning on rolling out into those the degenerative part of deformity and scoliosis part?

This system will be applicable to both.

Okay, but in terms of the rollouts are you going to go after the footprint first with your current phase and then entering to the scoliosis portion or you are going to cover it both at the same time because they are different, it is a different call point, correct?

It’s a different call point because the surgeons tend to specialize in one of the other, there is some – they are specialize in both. Our design team was actually made up of both classes if you want to define them that way. And if you look forward to how we are going to roll it out, our system is designed to encompass the full range. So it will be physician by physician how we approach it. We’ll run cadaver labs obviously that won’t overlap as you are describing, but we’ll be checking on the full breadth immediately we’ll be prepared to that.

So I mean do you currently have the footprint in scoliosis does it fair to assume that it will be a step wise approach first in the degenerative and then growth them into scoliosis?

Well, our footprint I would not describe is significant, it’s significant for us, but it’s not significant in terms of the market competitiveness. So I think you're trying to I mean I’m trying to read your question a little bit better. Are you asking if you are going to separately pace degenerative scoliosis?

Say two call points, right.

Yes, that’s right.

And then some respects this maybe even a slightly different selling approach as well. So you have a footprint in the degenerative market. So one would assume that you would tackle where your footprint is, going into the three and four levels and then with time you’ll build out the capability into the more specialized scoliosis part of the market. So I'm just trying to understand how you enter that mark?

I follow your question. So yes we have a footprint in degenerative, we also have a small one in scoliosis. Our design team is made up of physicians from both backgrounds, so for us we’re preparing that as we approach the market, we will target some physicians of course based on what they do and of course train the cadaver training on the degenerative scoliosis as you describe. But our footprint is of such magnitude that I can define depending on our current conversion of our base has being that relevant, it's going to be fundamentally new business for us. And so we’ll be taking a two-step approach, but simultaneously not, they are different and so we’ll approach them differently, but we’ll have the product line to do both classes of patients.

Okay, just moving on to your opening comments and the changing of the pillars. There was a lot in that, is it possible to perhaps give us the three – rank the top three that we should focus on our call after three kind of top bullet points that you would like us to walk away from this call kind of getting our arms around?

Absolutely. The reforming of the pillars is really to help see the sequence in which we have approached them. So the first is being competitive, we have to have a product pipeline, customers will find relevant. So our progress there has been incredibly significant, year-over-year our product go to product strategy and our product pipeline are both rich and the fact that we’re already here is one of the takeaways, that’s the first point. The second, as we described how we are going to transform the fundamental use of capital and cost structure of the company. And that was going to be a manufacturing reduction of instrument cost by 50%, outsourcing manufacturing all of it, of implants and outsourcing physical distribution. All of that is out over the tipping point. The instrument manufacturing cost, we’ve already proven and have demonstrated, we can continue it into the next generation instrumentation. The implant manufacturing outsourcing will be completed in January and the physical distribution has been reduced from the very complex elements of planning it to our first regional rollout and we will be moving to the next one shortly. So the idea of we have a rich product pipeline that we can now make more profitable and use less total cash in managing the manufacturing of it and the reduction in cost and a more effective physical distribution. Those are all foundational to be competitive in this market and those are all very close to completion, so that's the second point. So the first two pillars are really way underway, the third takeaway is our commercial transformation has turned the corner. When we look out at 2016 and we look at the progress we made in gaining new distribution in the United States, establishing new customers and new geographies rolling out our new products. We really feel terrifically positive about how our commercial expansions going to go. We have 90% of the market took us a while to develop the 10% part of the coverage in the U.S., going after that 90% is on one hand a lot of opportunity and we are getting traction in it, internationally the same is true. So I think the takeaway here is around the three pillars of transformation as we’ve moved to the third where now that traction we expect to show in Q4.

Okay, fair enough. So I guess just to maybe go back to the second quarter is it fair to assume that from the distribution point of view that you’ve now basically nailed everything down that the strategy that you wanted in place, the people that wanted in place. Obviously, some of those people have been following there, some of the distributors have been following there, but that's now all in place that you can stop thinking more broadly in terms of how do we make that distribution more efficient rather than how do we just get to where we need to be from our existing footprint?

I’d like to say that's true, but I didn’t Mark. It is a place where we are focusing on the effectiveness, but we didn't actually close the gap on that 10% to 90% gap of coverage. I think we are going to be in the expansion mode simultaneous with the effectiveness mode for some time to come probably years in reality because you could only take on so much expansion at a time and what we want to focus on is making sure that we grow our net surgeons every quarter in new geographies having them use these newly designed and exciting products that we’ve developed. So that’s how we are thinking about it and that's true globally, it’s not just I mean the U.S. issue, it’s also international. So there will be – we still got a lot of opportunity to grow and I think we’ll be constantly expanding and refining how we do it.

Okay, just my last one on that in terms of focus, so I guess part of the point I’m trying to make is that there was a lot thing done in the second quarter there I think to quote, but I could have got it wrong is that you kind of bit off a lot, it was a lot to chew. I just kind of want to get my arms around moving forward that what was focused on in the second quarter I mean in the third quarter as in the original pillar that you spoke with distribution has been. It’s pretty much done, it’s now turning the page and basically expanding that so they aren’t going to be any more miss steps relative to the amount that has to chewed, right. It’s now incremental from quarter-to-quarter where as in the second quarter you basically had to get everything done at once?

Yes, I think if I lived in a world where no missed steps even happen, absolutely awesome, but I will say this in Q2 we are really focused on the what we call the I mean I referred to in a call the planting of the corn, those that type of expansion what we’ve changed in Q3 as we recognize that in some of those markets we will be better suited to find an experience to find distributor partner. And what changed for us as we remain committed to our base, we remain committed in the right markets having a direct sales rep and we also remain committed as part of our expansion portfolio to choose an experienced fine distributor. So it's a broader perspective that I think we had in Q1 and Q2 and it’s proving out that it’s going to be a supplement to how we go forward where we always look at a market and think about what's best in terms of how we approach it and draw from those choices and do what we think will be most effective long-term.

Okay thanks very much for answering my question.

I pleasure.

Thanks Mark. End of Q&A

Thank you. [Operator Instructions] And I am showing no further questions at this time. I will turn the call back over to Jim Corbett for closing remarks.

Thank you very much and thank you for joining us today. I think that concludes the questions. Thank you all for joining. Good evening.