Good afternoon, everyone, and welcome to Alphatec's First Quarter 2019 Conference Call. 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 U.S. GAAP as well as non-GAAP or pro forma measures. Reconciliations of non-GAAP measures to U.S. 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 views of why this information is useful to investors. Joining us on the call today will be ATEC's Chairman and CEO, Pat Miles; and CFO, Jeff Black. Now I will turn the call over to Pat Miles.

Thank you very much. We're going to stick with a presentation format as we did last time. And when we presented last, we talked a lot about a strategic pivot. And so if you look at the slide that's headed strategic – our Strategic Pivot, what we said we needed to build a company in double-digit growth is really an organic innovation machine. And so we felt like that was the right approach, and there's really a historical basis for it. If you look at the graph on the right, and you look at those companies, who have grown in double digits, literally, the thing that they have in common is they're focused on spine. They developed products organically, so in-house, and really, they have focused selling entities. And so those are really the historical basis that reflected double-digit growth, and we got cash – if we're going to pivot the company, there's a – there's really a sound reason to do that. And so if you go to the next slide, really, what we believe to be the key efforts is really to do three things. And it's to create clinical distinction; it's to revitalize the sales channel; and then really compel surgeon adoption. Really, all of these feed one another in terms of creating results. And so I would like to delve in a little bit with regard – on the next slide, of the scorecard of result. And so really, reviewing our progress on the goals regarding creating clinical distinction, we grew – we have 22% of our revenue that's from new products. And so that would reflect progress against our 29 look out – 2019 outlook, with regard to the volume of sales from new products, kind of a vitality index. The other really clear thing…

Thank you, Pat, and good afternoon, everybody. I just want to spend a few minutes on four points. A little bit of a deeper dive commentary into revenue, address gross margin, some P&L operating expense highlights, and then wrap up with commentary on balance sheet. So in terms of revenue, we continue to focus on building our strategic distribution channel as Pat mentioned. We began to see a delivered result from the fourth quarter of last year, and we continued to see that performance in the first quarter. We saw about 40% year-over-year growth from strategic distribution in Q1. And this is happening before we see the full benefits of our new product launches. At the same time, we also saw revenue as expected from legacy distribution continue to wind down as part of our planned transition. This headwind will continue in 2019, as we saw about 16% of our U.S. revenue coming from what we consider more unpredictable or unsustainable sources of revenue. We also saw revenue from international supply agreement decrease over Q1 of last year, which is consistent with what we expected. The bottom line is our Q1 revenue results are in line with expectations. We're especially encouraged by the performance of our strategic distribution channel. But we're cognizant of the unpredictable nature of our legacy channels. Revenue guidance for 2019, remains at $94 million to $98 million in U.S. product revenue for the year until the revenue of $98 million to $103 million. On the gross margin, you see the gross margin year-over-year has decreased by about 550 basis points and just over 71% as compared to last year, but consistent with our fourth quarter gross margin of 72%. As we mentioned in our fourth quarter call, we saw margin pressure from non-cash obsolescence charges. This…

Thank you, Jeff. So as I review Q1 of 2019, it's really consistent with what we described that we would do in terms of really creating stability for this company and creating a growth profile that we're all excited about. And so we're creating clinical distinction and increasing the vitality index of new products sold into – into surgery. We're professionalizing a sales channel that needed to evolve and that's going well in the metrics that we're going to look for in that is really more dollars per distributor, which is what will reflect success. And then, compelling surgeon adoption, and making sure what we're doing is the whole approach technology ATEC, how do we make for more products sold in to each individual surgery. And so if you look at what we're creating and what the strategic pivot is all about. It's really about an organic innovation machine. And really, it's set in motion. And so we're expediently learning. We're accelerating elevation, and really heading toward our initial milestone of creating a couple of hundred million dollar company here in 2022. And so I'd like to close, really, with the last slide, which – we had a great, what we called a product launch meeting this past weekend. And if you looked at the surgeon faculty at this, it would rival any spine meeting out there. And so to be able to have the company together, and it galvanizes to create, really, an organic innovation machine that, ultimately, is going to reflect the building of a growth company. And so excited about the first quarter. I want to be thoughtful about exactly where we are and what we're going to do is keep doing the very things that we say we're doing, and create the confidence of our market pictures. So anyway, with that, that will conclude the presentation. Happy to take any questions.

[Operator Instructions] Our first question comes from the line of Brooks O'Neil from Lake Street Capital Markets. Brooks O’Neil: So I have a couple of questions. I was hoping, perhaps, we can get any kind of a feel for the magnitude of the impact of the distributor changes? Or the impact of product obsolescence charges on the gross margin? Just so we can – I mean, I don't necessarily want to add those back or anything. I just want to have a sense for how big an impact those had in the quarter, because I though the quarter numbers were darn good.

Yes. Thank you, Brooks. I think that your question on gross margin, I mean when you take a look at year-over-year comparison, it's around 380 basis points, in terms of impact of obsolescence year-over-year on margin. We'll continue to see pressure. I mean I think you can expect to continue to see us taking obsolescence charges and right around kind of that same level, as we start to sunset products and replace legacy products with new products. Brooks O’Neil: Yes. And thinking about the organic innovation machine, I really like that personally. But obviously R&D expense is up. Can you give us any sense for this increased investment? Do you think that's going to yield additional new products beyond the 12 this year? Or is that setting us up for another cadence similar magnitude in 2020?

Yes. Brooks, this is Pat. I think that, literally, we're building a foundation. And I would hope that people are appreciative of the type of investment that we're making in product development because this is going to create a cadence of eight to 10 a year into the long future. And so you can't do something once and not continue to obsolete yourself. There's a lot of people out in the marketplace that would love to obsolete you. And part of this – part of the value of creating this machine is for us to continue to apply our learnings. And continue to distinguish ourselves clinically in the marketplace. So that will be what causes or creates the run. Brooks O’Neil: Cool. And then, I'm was just curious, Jeff, you obviously gave us a quick rundown on the balance sheet and cash position. I know there are a lot of investors who think you don't have the money to kind of get this down the road of good measure. So that it's obvious to investors what's happening. But do you think the cash burn this quarter was consistent with your expectations? And where do you think, based on where you're at today and what you're seeing out over the next few quarters, you think you can get with the cash availability you have now?

Yes. Brooks, I think with one exception, absolutely consistent with what we expected. I think the one-time payment of $3.2 million for the SafeOp purchase price, paying down the convertible notes from a year-ago. There was some speculation that we may be able to convert those into equity, based upon the terms, but the share price was not cooperative. So we did have to settle those in cash. But I think on a normalized basis, I think absolutely consistent with our expectation. I think you need to think about this 2019 year as a continued investment year. We see the Squadron facility and that available cash as a runway to continue to fund the initiatives we need to fund for the next several quarters, and really position us at a point where we can be very – more opportunistic and strategic about longer-term financing. Brooks O’Neil: Yes. That's good. And then, just lastly, I guess $2.7 million of litigation expense, a big jump year-over-year. Just give us a quick highlight for where you're at with that? And whether you think it's going to continue at that level? Accelerate, whatever and sort of what the outlook is for the litigation right now?

Yes, Brooks. I would jump on that. I would tell you that nobody loves litigation expense. But I would tell you that this is a very aggressive environment. And the expense is going toward defending ourselves. And so my expectation is that we're creating ripples and that's why people love to sue us. And so I expect these to go down and we've had a stay and so expectations are that they'll go down in the next quarter. But I don't think you ever made great progress and become a disruptive company without a little bit of fighting going on. And so believe me, the last thing we'll do during the day is deal with litigation. We do it after five because our business is spine surgery. And what we want to do is win in the marketplace. So – but we'll continue to go down, and we have no interest in perpetuating fights. Brooks O’Neil: Cool. Thanks and again congratulations on the great progress.

Our next question comes from the line of Scott Gambill from Gardner Financial.

Hi, Pat. Hi, Jeff. Nice quarter.

Hi, Scott.

That see everything looks pretty good. I just had a couple of questions. The first was that, over the last couple of years, you've kind of identified the dedicated distributors as a percentage of your whole distributor network. I didn't see that in the earnings release. So is there something changed there, you're just not going to break that out anymore? Or is that going to be replaced by the strategic distribution network? What was going on there?

Yes. Part of the challenge with all of this becomes the definition of what a dedicated person is and what a strategic person is. And we thought it was more accurate to take a look at those people with whom we want to walk forward with. And so it may not be that they are contracted today as someone who is completely committed to us. It's somebody that we believe that ultimately can be earned into exclusivity. And so I think, kind of the last kind of standard that we've set was dedicated, and I think it's a weak standard. I think our interest is to earn people into exclusivity. And so what we see strategic as is the walk toward exclusivity. I can give you a dissertation, which will bore you to death with regard to what the big companies have done well and what the small companies have not done well. And the small companies have not earned their way to exclusivity.

Okay. So in the future, you think the strategic distributor network is going to be the primary metric you'll present? And then somewhere behind that will be ones that are moving towards dedicated, they'll earn their way? Is that – I understand that correctly?

Yes.

And then we will not be describing them, instead of created in the future? Or...

Yes. So think of it like this. If somebody is strategic, we believe that we're walking to get her toward exclusivity. And exclusivity is related to – is a product portfolio large and broad enough to ultimately earn our way to being their only line every day. And so this is a walk that's going to take a couple of years. And so what we want to do is say gosh, are the people, who are what we call "strategic" are they walking with us until we believe we could get them too exclusive. And so that's the nomenclature. We're going to rid ourselves of dedicated, just because I think it creates fogginess in terms of how we're walking there.

Okay. The other question I have regards SafeOp. I believe if I remember correctly, it was in the fourth quarter, the plan was to receive the FDA approval, do a three-month soft launch, and then go at the market. Since the approval didn't happen until late February, is it still kind of the plan to run three months of soft launch? Or is there – have you been able to get some of that soft launch, even before approval? I'm just all confused about that.

Yes. It's the right question because it's one of the great distinguishers in our portfolio of goods. And so it is exactly as you say. We're going to be highly diligent with regard to making sure that it's behaving in the very way we expect. And so that soft launch is going on now. And it's going very, very well. And so what we, in essence are guiding toward is, it will launch in Q3 of this year, and we're doing all the proper work to make sure that it is – walks out.

Okay. I guess the only other thought on the SafeOp, and I think it's just way to soon, but I'd like to understand the long-range applications for that tool. So you guys are going to focus on spine in the near-term, but is it right to think about this as something that can be used with other surgeries in the future that are non-spine? Where there's a risk of nerve compression or is...?

So we have such a runway in spine. There is so much opportunity that is just staring us in the face. I'm going to drive the focus of our Company to spine only. If there presents an opportunity to do something else, but outside of spine with some partner at some point in the future, we would evaluate that, but for the next foreseeable future, we will concentrate on the behemoth, which is spine because there is just so much opportunity up and down in the cervical spine, in the thoracic spine, and in the lumber spine with regard to this technology. And so we will keep focused on that.

On your website, since you're launching so many new products, I've had a little bit of trouble with the – being able to see them. Are you guys going to have a little bit more information on some of these products as we go forward? Or does it actually work against you to be too revealing about their – what their features are?

No. We will absolutely have more information on the products as we continue to go forward. And it's – there's a lot to do in this company in terms of evolving it into the machine that we want. And some of the flashes is slower than the substance of the work. So we will actually have updates and more product reflection on the website.

Okay. Thank you very much.

Thank you.

Thank you, Scott.

[Operator Instructions] You have no further questions at this time. I will turn the call back to Pat Miles for his closing comments.

Just a stay the course and a quick note of thanks to those of you who are on the line, and appreciate the continued support, we have a great run in front of us and excited about the new ATEC. Thanks much.

Ladies and gentlemen, thank you for joining us. This concludes today's conference call. You may now disconnect.