Alphatec Holdings, Inc.

Good afternoon, everyone, and welcome to the webcast of ASEC's first quarter 2021 financial results. 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 the call, you may hear the company refer to reported amounts, which 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 view of why this information is useful to investors. Leading today's call will be ATEC's Chairman and CEO, Pat Miles, and CFO, Todd Koning. I will turn the call over to Pat Miles.

Thanks very much and welcome to the Q1 2021 ATEC conference call. We will clearly be making some forward-looking statements, so if you review the forward-looking statement at your leisure, Let me start by saying I'm super proud of the ATEC family. And one of the things we talk about around here is we always say that revenue chases value creation. And so over the last eight quarters, we grew at an average of 33%. And so I would say that we're well positioned for continued industry-leading growth. And we'll talk more about these, but really revolutionizing spine surgery through the launch of PTP. A lot of excitement there. Increasing clinical prowess and progressing towards sales exclusivity. We'll talk more about that. Elevating surgeon and sales education through our new state-of-the-art facility. We have a beautiful facility and are hosting a lot of people, and the traction is palpable. And then really how do we improve information from diagnosis through follow-up? with really a set standard, which is what EOS is going to provide. And so, you know, historically we've provided a bit of a scorecard of leading indicators, and we'll continue to do the same, but expect some evolution in how we view the demographics of our business. So for Q1, strong momentum, 50% year-over-year growth, 10th consecutive quarter of double-digit year-over-year growth, 77% new product revenue contribution, which is clearly up over the previous couple of years, 17% year-over-year growth in revenue per surgeon, 13% year-over-year growth in average revenue per case, and we're seeing a tick up in the average products sold per category. And so the one thing that you're going to find is that our commitments will remain unchanged, and we will accelerate growth by prioritizing these key initiatives. And we will continue to create clinical distinction. That's where we build an organic product development machine and advance our information-based core competence. Through clinical distinction, we will compel surgeon adoption, and we measure that objectively through the increased revenue and product sold per surgery. And then also perpetually revitalize the sales force, making sure that we have the congruence between the inside and the outside of the company and that things are going well. So we'll jump into the scorecard really under each of the commitments. And so I would say that the organic innovation machine will continue to create clinical distinction really through a sophisticated understanding of what approach-based technology compels surgeon adoption. And so probably the thing that is most evident is you're really seeing an adoption of the products that really serve a procedure. And so the interesting thing is clearly we've gone from really nothing in the inception of our turnaround to 22 to 56 to 77%. So I think you would affirm the fact that based upon what we're picking and based upon the reflection of the growth and of the adoption of the new products that we're creating clinical distinction. And so that part is clear. I think when you start to look at examples of relevant additions, so we launched what's called Invictus OCT. And OCT stands for occipital cervical thoracic. And historically, companies would design a posterior cervical system completely separate from a thoracolumbar system. And in doing that, they rarely function elegantly in concert. And so in the short time we've been here, we've launched a completely contiguous system from occiput to ilium. When we say organic innovation machine, I would tell you that that's a reflection of that. When you look at Invictus as a system, it is a completely comprehensive system, really from the head to the alien. It has very consistent instrument design, color coding, nomenclature. The function and the confidence is very much the same, and it really kind of speaks to the development speed. In addition to Invictus OCT, we also launch Invictus Medialized Mod. This adds a cortical screw option for circumstances that surgeons require a medialized trajectory. you'll start to see that influence the posterior fixation number. However, we didn't return to revolutionized spine solely based upon individual products. We designed multiple products based upon the specific requirements of a procedure. And so one of the things that is truly making for a difference in why you're seeing such lateral surgery prowess is because we designed a specific procedure based upon the specific requirements associated with that technique. And so when you start to see the adoption of PTP happening very quickly, it really harkens back to work that we've previously done in terms of designing for the specific requirement. A litmus test always is that what you'll find is people will initially adopt something in a very kind of a simple application. And when you see them start to march more toward complex surgery, what you're realizing is that you're getting significant traction. And so we're seeing this thing applied to more complex surgery. I think the other attractive part is we've directly witnessed and interfaced with surgeons who have tried prone lateral. And candidly, they've struggled. And prone lateral is cobbling together instruments that aren't designed for the specific requirements of. And so these guys have tried prone lateral and candidly had not a very good experience, and only to try PTP and have a great experience. And so we feel very bullish in our firm based upon our lateral prowess. And I think when you have the type of experience and you have the type of of understanding of the technique. These are the types of things that you do. And so as we've shown, where we've invested, we've prospered. And I would say that we're in the very early stages of enjoying a really kind of a long growth profile. And so the technology we're developing is not only moving the needle clinically, but also financially. And so I think when you start to look at the ROI on these investments, I think you have to look into things like SAFOP, which is really part of what we call alpha informatics, and that's the AIX on the slide, but also lateral and posterior fixation. And so when you think about AIX, that's the conduit that we're going to deliver the EOS information through. And so, again, I think what you're going to see is continued enthusiasm on that front. And then you see a growth of 76%, and this is all back since 2018, in the phase two investments in ALIF, PLIF, and TLIF. And then we're starting a lot of investments across the cervical and biologics portfolio that you'll continue to see a growing contribution over time. And so as we look at how we did in Q1 with regard to compelling adoption, I would say we continue to grow in average products categories per surgery, which is clearly the the reflection. Kind of an interesting statistic you can see by this slide, we're slightly above 1.9 average product categories per surgery. The year-over-year growth in average revenue per case is 13%. The year-over-year growth in revenue per surgeon at 17%. I think what's interesting, though, is rarely do you see companies grow sequentially. And so from Q4 to Q1, we had a little bump in the growth of our top line. I think the interesting part is there is a slight dip in the volume of procedures. And when you start to think of convoy sales and the influence it has on the top line number, then I think that you can appreciate the fact of why that is really important. And so I think now to kind of jump into, you know, the thinking around proceduralization and convoy sales, It's also good to reflect on what drives adoption. What ultimately drives adoption is better surgery and better outcomes. One of the things that is interesting to me is that there's still so much opportunity to make spine surgery better and just generally improve spine care. And I think there's some in the business who conflate spine surgery with pedicle screw placement. And spine surgery is much more than placing pedicle screws or mitigating poor screw placement. It is decompression, stabilization, and alignment. And so I love our investment thesis, and it's focused on the prioritized list of procedural requirements and not solely on the specific requirements. And I think that what you'll see is that will continue to differentiate us as a company. I think, too, when you start to look at what drives adoption and what are the core elements of defining the future, and I think that it's things like economics, that will drive a greater position forward in predictive analytics. And I think that really kind of driving clinical and financial decision-making is much about what we're doing with regard to EOS, but it's also about preparing for the best spine procedure. And when we think about that in the near term, we're thinking about convoy sales. And when you look at the convoy sales, you have to look at – them uh not just blended but individually and one of the things that i think is exciting is when you when you create something like ptp what happens is you get to make the rules and you get to make the rules based upon the required number of products that creates uh predictability and so as you can see a disciplined approach to this effort ultimately outputs a more consistent numeric reflection of convoy sales. And so as we start to think about the future and we start to think about economics and we start to think about predictive analytics and we start to think about how EOS rolls in here, the ability to start to understand what type of procedure goes with what pathology and what the economic profile is, is really kind of a game-changing opportunity. So we're very excited about that. The other commitment that we talk about is really the revitalization of our sales force. And we worked out, I think, most of those who are not going the distance with us and And really kind of the march now is toward exclusivity. We want to dominate the very thinking. And you can see the walk over the years from 72% in terms of contribution of revenue up to 95%. And that group grew at 60%. And so the importance there is that what we do is expand geographically. And so I would still consider us a very pocketed group. And when you start to look at 95%, it would suggest, gosh, these guys must be done. But I would say, as all the 95% reflects, is the current sales force in place. And what we have is still a lot of geographical holes that we still need to plug with the type of prowess that exists in many of our markets. One other comment is I'm exceedingly enthusiastic with regard to the maturity and the prowess of our sales management team. I've got to say, for a company this size, they've got a lot going on and a lot of experience and a lot of prowess. As stated, we still have a lot of geographies that remain under or completely without ATIC representation. Our focus is still recruiting those with clinical acumen and that will go the distance with us. Our interest is still kind of a number around 50-ish of distributors and about a $4 million contribution and And clearly, that's a relatively dynamic number. We're running north of that in some and south of it in others. But that's kind of the update as it relates to what's going on in the business. And it's a real pleasure for me to turn the call now over to Todd Corning, our new EVP and CFO. So over to you, Todd.

Thank you, Pat. And good afternoon, everybody. Before I go through the first quarter financial results, I want to express just how delighted I am to be here at ATEC. Having previously worked closely with many on this team, I'm well acquainted with the profound caliber of committed spine expertise that has been assembled here. I've watched from the periphery as ATEC posted quarter after quarter of phenomenal growth. And, in fact, ATEC grew 30% last year, a year in which there was little to no growth from anyone other than ATEC. Needless to say, I wholeheartedly recognize the opportunity for significant value creation that lies ahead, and I'm eager to contribute to that success. As ATEC grows into a much larger spine company, I intend to expand on the strong foundation that has been established to build a world-class finance organization, one capable of scaling the company through rapid domestic growth and eventually expansion outside of the U.S. This inaugural earnings release certainly marks a solid start to an exciting year for ATEC, and I am honored that now, I get to be an instrumental part of it. I'll begin with revenue. We had a great start to the year with the first quarter U.S. revenue of $43.7 million, reflecting growth of 50% compared to the prior year period. Total revenue, which includes the contribution of our international supply agreement, was $44.1 million in the quarter, up 47% compared to the same quarter last year. Increased search and adoption of new products and procedures and the continued revitalization of ATEC's strategic distribution channel offset the pressure we saw on surgical volumes early in the quarter. It is evident that our ability to deliver clinically distinctive procedural solutions is compelling surgeon adoption. Continuing through the remainder of the P&L, non-GAAP U.S. gross margin was 77.9% in the first quarter, roughly in line with the prior year quarter. Excluded from the non-GAAP gross margin number are E&O charges related to legacy products, which were down almost 100 basis points compared to last year as a percent of sales. E&O charges are beginning to normalize and will continue to do so following years of transitioning to new products. Operating expenses continue to reflect consistent, thoughtful investments to support rapid, long-term growth. Non-GAAP R&D was 5.3 million and approximately 12% of sales in the first quarter, compared to 3.8 million and approximately 13% of sales in the prior year quarter. The increase on an absolute dollar basis was driven by continued investment to support organic portfolio expansion. Non-GAAP SG&A was $36.5 million and approximately 83% of sales in the first quarter compared to $24.5 million and approximately 81% of sales in the prior year period. The increase was driven by continued expansion and professionalization of the ATEC distribution network and increased variable selling costs related to strong performance in the quarter. Total non-GAAP operating expense was $42 million and approximately 95% of sales in the first quarter, compared to $28.5 million and 95% of sales in the prior year period. This level of investment in operating expense reflects the priority we have placed on fueling our organic innovation machine and transitioning the sales channel to support our industry-leading sales growth. Turning to the balance sheet, we secured approximately $132 million through the pipe funding that closed in March. As a result, we ended the quarter with just over $190 million in cash, and roughly $100 million of that remains earmarked to fund the EOS transaction. With the remaining balance, plus the $40 million remaining on the squadron credit facility that we have in place, we are well positioned to continue to invest in growth. Cash use of approximately $34 million in the first quarter was driven primarily by CapEx, which continues to account for more than 62% of cash burns. We are investing in the instrument kits and implant inventory to support our strong sales growth through an expanding product portfolio and commercial distribution footprint. The EOS transaction continues to progress as planned. A few weeks ago on March 30th, we secured clearance from the AMF to commence our cash tender offer for EOS's outstanding shares in convertible bonds. On April 1st, the opening of the offer occurred and will close tomorrow, likely to be followed by a second phase of the offer. As a reminder, once we own 90% or more of EOS's share capital and voting rights, it will trigger a squeeze out of any remaining non-tendered EOS shares according to French law and regulation. As of March 31st, we had received tender commitments for 23% of outstanding shares and recently filed with the AMF that we exceeded 25% ownership from our open market purchases. We are pleased with the progress and continue to expect the transaction to close during the current quarter. We will provide updated revenue guidance, including EOS, when we report financial results for the second quarter of 2021. Now turning to our 2021 outlook. As a result of the strength of the first quarter and continued strong momentum, we are increasing full-year 2021 U.S. revenue guidance to approximately $188 million, which implies growth of approximately 33% on a year-over-year basis. Our growth will continue to be driven by the impact of clinical distinction, which is the ultimate catalyst for expanding both surgeon adoption and our strategic sales network. Including the international supply agreement, we now anticipate full year 2021 total revenue to approximate $190 million. This guidance contemplates the termination of our international supply agreement in August of this year. Given the quarter to quarter variability we saw in 2020, I encourage you to assess our revenue results and our full year guidance from a two-year compound annual growth rate basis. And when you do that for our 2021 U.S. revenue guidance, you'll see that we are growing 32% on average over the last two years. We believe this consistent level of growth through the past two years is industry-leading, as you can see in the chart. Now, in summary, I'm a firm believer in the long-term thesis of the company and the mission and vision that Pat has challenged us to achieve. I'm already engaged in ways to meaningfully contribute to ATEC's distinction-fueled evolution into the standard bearer in spines. I'm also eager to establish relationships with the ATEC investor base. So please, feel free to reach out to me directly, either with questions or just to say hello. And with that, I'll turn the call back over to Pat.

Todd, thanks much. As I look at Q1 and the number of catalysts for growth forward, I really can't be more excited. I think we will continue a sustainable approach to long-term growth. execution through the things that we've already committed to which is perpetuating clinical distinction i love where we are from a ptp and a lateral momentum perspective i think bringing the sophistication of the eos transaction on is fantastic we've yet to make our statement in cervical and biologics and we have products in that those areas forthcoming in in large ways and we will continue to be aggressive as we design and develop solutions Our sales force, I think, is being revitalized as we continue to grow. We continue to compel people forward, as well as clearly the surge in adoption is going quite well. And so we've, I think, eradicated many of the headwinds that we had previously faced, and we just – love the business that we're in and we intend to continue to advance spine surgery faster and really make a difference where it counts which is in the operating room which is where our expertise lies so with that we will turn it over and take questions as a reminder to ask a question you will need to press star 1 on your telephone to withdraw your question press the pound key please also be advised to just limit your questions to two at a time thank you

We will now open up the floor for questions. Your first question comes from the line of Brooks O'Neill from Lake Street Capital. Your line is open.

Brooks O' Good afternoon, guys. I'm excited, as you are, for the future of aid tech. And I can see all the progress you've been making over the last couple of years, so congratulations on that. I guess we should open it up by starting to just talk a little bit about what you're seeing in the marketplace now. Pat and Todd in terms of reopening activity. And I'm curious if you think there's any sort of latent backlog of procedures that you have an opportunity to capture over the next few months.

Yeah, Brooks, hey, thanks very much for the comments. And, you know, probably like everybody else has already talked about it, you know, there was softness in January and February, and March was more of a breakout month. And I think everybody's kind of commented on that. And my expectation is that there's likely some backlog, and it's As we've always talked about, it's 500 counties and 3,000 hospitals, so it's always tough to appreciate the demographics. And we're such a small player. It's one of those things where it's tough for us to make big market assessments as it relates to just a reflection of our performance. But it feels a little bit like things are starting to normalize. And I think that that's all that we want is the greater the normalization, the greater the opportunity for us.

Agreed.

Great. And then my second question, you talked about your excitement about PPP. And I recall there was a lot of wonder in my mind about meeting Luis Pimento at the Spying Society meeting last year. Maybe it was the year before. I can't even remember. But is it your assessment that there's anything left in Luis' bag of tricks? Or do you think... forward proceduralization efforts are going to come from other places than Luis.

Yeah. You know, I got to tell you, like, something that makes me very proud is Luis has been a pioneer for years. Luis pioneered the lateral space all the way back in 2003, and we created a monster company through some of his thinking. And so, yeah, When I see him engage in the development of an idea that he's very, very bullish on, candidly, the guy's been right a lot. And I think PTP is just another example of him being right. And so clearly what we do is respond to the requirements associated with each individual technique. I would tell you Louise's forte is lateral surgery. I should take that back. I'd say lateral and anterior column surgery. And so when we look at lateral and ALIP, I think that we have light years of a runway because there's an expertise that exists nowhere else. And so I think he is the driver of that expertise, and I think that the people around him, like Bill Taylor and Vedat Devran and other surgeons, all contribute in their respective ways to the sophistication of that portfolio piece. And so, anyway, I think it's an exciting time, and I think the guy is such a meaningful contributor to who we are as a company. So hopefully that answers your question. I start gushing when I talk about Louisa.

Your next question comes from the line of Joshua Jennings from Cohen. Your line is open. Hi.

Thanks for taking the questions. I wanted to ask on PTP, so this is one of my questions to that topic. Pat, if you could just share, where do you think you are in the launch? We believe it's still early days. Most fine launches are you feel like your team is going to launch a PTP, are you converting mostly minimally invasive surgeons, or are you also converting non-minimally invasive surgeons already? Maybe you can talk about the halo effect from this PTP adoption from your lower surgeon base and also any surgeons that are being attracted to the surgical technique. Thanks for taking the questions, and congrats on a strong start to the year.

Thanks, Josh. And to me, we're in such the early phase. This business runs like in 18-month arrears. We're enjoying the work that we've done 18 months ago today. And then 18 months from now is when you're going to really start to see, you know, kind of the real traction of much of the work that's been launched recently. And so I think it's kind of a fascinating dynamic. So I would tell you that we're in the super early phase of this. The comforting stuff is the very things I try to hit on, which becomes is when someone applies it to a very straightforward type of an indication for surgery, like a grade one spondylolisthesis, and they have success in there, what happens is they go much more complex. And so we're seeing that very thing with the people who are adopting it is they're starting very simple and they're marching toward a more complex utility. And we're seeing the reflection of that in an increase ASP per surgery. And so, first of all, I'd say that we're in the very, very early phases. The interesting part is if I look at the demographics of the surgeons who have come through here, we've had a fair number of guys who have been more kind of traditionally posterior approach guys. More than I would have expected. I would have expected everybody to have lateral experience and then they're going to try this new lateral. And there's a lot of that, but I will tell you there's also a fair number of surgeons who never adopted lateral, who just prefer the position of prone more, and who are interested in adopting this for all the benefits associated with lateral surgery. The one thing that I think is clear is that the lateral guys will likely be a little bit quicker in terms of just they're not learning a heck of a lot new other than this whole position and all of the utility of the specifically designed goods to make it successful. The other guys who have not done lateral are learning a lot more with regard to the retroperitoneal axis and some of the other things. And so we're seeing a little bit of a slower adoption on that front, but we're still as forward as ever.

Your next question comes from the line of Matthew O'Brien from Piper Sandler. Your line is open.

Afternoon. Thanks for taking the questions. For starters, Pat, can you talk a little bit more about the distribution channel and, you know, exclusivity and, you know, $4 million per distributor? I mean, that's a boatload, some better, some below that. But where does that trend over time? How many more distributors do you need to cover the U.S.? ? And is there, you know, an opportunity in certain direct markets even in the U.S. to go direct?

Yeah. As you appreciate, Matt, these are the hardest things to do is to make sure that there's just real congruence in terms of kind of the clinical acumen and the and a long-term commitment within the field. So you spend all this money creating solutions, and you've got to make sure that the guys who are carrying the mail are the demographic that are going to make the long run with you. And clearly we've cleared out the vast majority of the historical Alpha Tech spine headwinds. And so the challenge is there's huge markets where we have very, very little. And I won't go individually into the specific markets, but if you name the top metro areas in the country, you'd hit some of them. And the challenge is this. There's zero, like St. Louis, Missouri, we have nobody. There's big swaths of land that we don't have anybody. And so it's found money when we add a distributor. But we're doing our best to really kind of carry the standard of making sure the type of people that come in here are the type of people who want to build a monster. We're going to be in this for a long time, and we are totally committed to you know, really growing a unbelievably strong company. And so we just want to make sure the demographics of the people are reflective of the commitment that we require. And so I know that's a bit vague, but my point is there's a lot of geography that yet need to be covered.

Got it. That's helpful. And as a follow-up, and sorry, I'm going to kind of throw two together here. Can you talk about, and I know you don't own the asset yet, but the EOS funnel and opportunity, there's some noise in the market about like a limited opportunity for EOS in terms of new system placements. And I'd love to just hear a little bit more about that. And then. I think it's kind of important to talk about Invictus OCT. I know it's not the most, maybe the sexiest product in the world, but as I understand it, there's a lot of pull-through sales that you get. And having that one, just generally speaking, on the cervical side of things, so can you just talk about what that can do for you in that part of the business? Thank you.

Yeah, I was going to be facetious and say the reason we acquired EOS is because of the limited opportunity. Yeah, the EOS. I got to tell you, it's what I love about the assembly of a bunch of students of the business of spine. And, you know, the ability to have the standard at the origin of a patient experience to understand from an AP and a standing full body lateral and understand all the compensatory mechanisms. When you start to think about what drives a great spine outcome, it's things like alignment. understanding kind of bone quality, things that a lot of surgeons are guessing at today. For us to create objective measure around those dynamics is such an opportunity. And everybody always talks about predictive analytics and they talk about know machine learning and ai the the reality is how do you do machine learning and ai if you don't have the original standard input and so what we believe the value of of eos is our ability to start to understand the economics and and the clinical elements and combine those of spines such that what we can start to do is is understand what's the likelihood for success within specific pathologic states with regard to specific approaches and what's the financial profile associated with it. And I think when you're committed to those types of things, what happens is you see great value in something like EOS. And when you're into this thing just for the chargeable in the operating room, you're going to miss it. And so the great opportunity is we're committed to this thing for the long haul, and we think there's great value to be created. I got to tell you, I think there's 380 systems already placed. When I look at all the different capital equipment type technology, there's not a lot of people that have 380 systems. For us to make hay with the current systems placed, especially in the United States where it's a who's who of institutions, I like our chances with regard to reflecting value from this asset. And so to me, it's funny when somebody says there's a limited opportunity. I welcome that thinking because over time, what we'll do is just continue to demonstrate the value of the very thinking that has contributed to our acquisition of EOS. And so- The second point I think was a great one, which is the whole OCT thing. So Invictus OCT. We were at a previous place that did a thoracolumbar system and still haven't launched the posterior cervical system. I gotta tell you, in the three years that we've been here, we've gone from head to ilium. And what happens is, If you could say, gosh, does it, you know, what's the meaning of that? The meaning of that is our ability to understand the clinical requirements of an environment and do things expediently and clinically meaningful. And so to go from head to ilium, I think, again, for those of you who are sophisticated students in this industry, there's very few systems that are contiguously built from head to ilium. and, you know, candidly as coveted as the type of sophistication that Invictus brings. So anyway, I think it's a great point, but it's a reflection if you're a student of this game to realize that sophistication.

Great. Thank you.

Your next question comes from the line of Kyron Rose from Canaccord. Your line is open.

Thank you for taking the questions. Jeff, you know, I just wanted to circle back on PPP and talk a little bit more just about the components of growth. So we think about how much of the growth is coming from the lateral side of the business with PPP. maybe help us understand what that mix looks like with the new products from PTP and Lateral relative to some of the traditional fixation business. And then the real heart of that question is just around now that you've got the opportunity with more reopening and surge in training activities, you've got the educations that are coming on board, I'm really just trying to understand how much have we seen already and how much is really yet to come when we think about going deeper with PTP and Lateral.

Yeah, to me, that's, I think it's, you know, If you're in our boat, meaning so we turn Alpha Tech around, and you better compel someone when you do that. And I think PTP is like the perfect thing to compel people because what it does is enable surgeons to do things with great optionality. And there's so many variables in surgery. Spine surgery is very complex, and so the opportunity to address the volume of variables that you do with PTP is is fantastic. And so, you know, what happens is it gets reflected really, I would say, in the anterior column. The great part is all of these things have been designed to work together. And so when you create a procedure like PTP, to some degree, you've made the rules. And when you make the rules of the procedure, surgeons want to follow those rules because, especially in the early phase, they want this thing to be predictable. And so what happens is the sales get reflected in the the whole neurophysiology front to get reflected in the inner body element, to get reflected in the posterior fixation element. So it gets reflected across the board. And then, you know, in addition to that, when a surgeon, when we steward a surgeon to success in a specific new procedure that ultimately is something that they didn't have before, there's a halo reflection. And so we'll start to see cervical pull through because what's happening is if they trust us with something as you know, uh, uh, intricate as a PTP, they'll surely trust us with an ACDF. And so it just becomes a whole, how do you create confidence through the process? And I think that what we're seeing is, is a reflection across the board in terms of the, the, the sales, but, um, Within the context of PTP, it's just such an early phase, but I think that the surgery is going as we expect it would. You know, clearly it took us a couple years to create this thing, so it's not like we arrived by luck. It's a matter of having gone through the efforts. So hopefully that answers your question.

No, it is helpful. And then just You've spent a lot of time, particularly on this call and on the prior EOS calls, talking about the long-term vision, proceduralizing spine. Obviously, you've got a lot of brain power from an R&D perspective. When do we think we see some of that translate with EOS technology? at the table. Do you need 12 months, 24 months to drive new procedural innovations that maybe fully integrate the opportunity from EOS? And then I'll just ask my last question just up front as well. It's just any other major product gaps you see? There's a lot of focus on cervical discs now. So just any commentary around product gaps moving forward would be helpful as well.

Yeah, you know, kind of the way that I look at EOS is the long-term vision is the whole, you know, machine learning and AI and how do we do predictive analytics, both economically and financially. It's a walk. And so the initial walk is going to make sure that, gosh, are the sales forces going together. You know, we get now 300 people talking about EOS every day. And then we also have the EOS Capital Force going in and talking to the administration. So our ability to expedite kind of the placements of this, and I hate the term ecosystem, but ecosystem out there of EOS units for us to ultimately derive value from. And so, you know, I would say it's going to be in the 12-month timeframe with regard to informing the preoperative planning elements on a tech product. And that will be really kind of the the early phase of our proceduralization. The great part is that will extend into kind of the continuation of everything from building fixation elements that are demand-matched to the type of bone quality, as well as the type of alignment tools that we will be able to ultimately effort. So that will be kind of the second thing that comes out. But that's what you get when you assemble kind of the beauty of a spine company in this, you know, controlling the imaging element is you get to, again, make the rules to these things. And so we'll be sprinting at the different procedures based upon, you know, how people interpret the algorithm for individual pathology out of EOS. But, you know, that will be kind of a little bit of the crawl walk in terms of informing through the preoperative planning elements and then some of the surgical tools. And then the longer term, as I said, will be the AI stuff. From a product gap perspective, I love cervical motion. I think that clearly it's a place where I think it's good surgery. And so I think it's a gap for us. We also have a few other gaps that we're designing and developing through. I would say we've got to hurry up and fulfill the corpectomy requirements. It's a place where we have a lot of interest in terms of PTP applied in corpectomy. You know, I think that those are great opportunities. I would tell you, we have a sound bag, though. And the great part is our sound bag has been created in the last three years by people who know what they're doing. And so there's much to be excited about with regard to ATEC, and I don't feel like the headwind of a cervical disc or the lack of a corpectomy device is our impediment.

Thank you for taking the question.

Thanks.

Your next question comes from the line of Matthew Blackman from Stifel. Your line is open.

Good afternoon, everybody. Thanks for taking my questions. Maybe to start for Todd, welcome aboard. I'm just curious, you know, what are your marching orders? And maybe, you know, give us a flavor of, you know, your skill set and experience that you can bring to bear. I think particularly as we look ahead to some of the longer-term growth factors like international expansion, et cetera, that would be helpful. And then I've got a couple of follow-ups.

Yeah, Matt, thank you. Thank you very much. You know, I think when I look at the growth vectors here and the opportunity for us to create value at ATEC, and as Pat said, there's a long runway, and I'm all in to build this monster in the long run. So just to get that out there. But, you know, the opportunity to see revenue grow in our existing customers, you know, Pat's talked about it, when they trust us with something that is is difficult and complex and we've proven our worth in providing the solution that helps them to provide a better surgical outcome, then it's a lot easier to kind of walk up to the more simpler procedures and cases. And so I think there's a tremendous opportunity for us to grow with our existing customer base. Pat talked about our ability to and need to expand coverage throughout the US. And as we think about partnering with from truly partnering with distribution channels and people, really, organizations. That's an opportunity that I also think I can add value in in terms of how we partner, how we structure that partnership over the long run. And as we think about the international expansion and the opportunity we have to commercialize outside the U.S., as you know, I think I've spent about eight years in roles outside the U.S., And so I'm pretty familiar with that environment and believe that I can add some value there and have spent a number of years of my career growing companies kind of in the sweet spot. So, you know, I think Pat and Jeff and the team have done a great job of getting us to this spot, capitalizing the business. The organic innovation machine is just turning on. And so as you think about what to take to scale a business, it takes a disciplined approach. It takes the prioritization of capital, whether that be our cash or whether that be our intellectual capital and where we spend our time day to day. And I think that can help add value to that and really the prioritization of that so it matches really the opportunity to increase shareholder value in the long run.

If I could, yeah. I was just going to say, Matt, if you don't mind, the only thing I've got to add to that is I think Todd's coming in at the perfect time in terms of also kind of an understanding of capital and how to ultimately sprinkle the entire civilized world with units and making sure that what we're doing is doing it – in a thoughtful way and an expedient way, as we look at kind of the creation of an ecosystem out there of placed units and our opportunity to derive revenue from those placed units, I think that there's going to be a significant role that Todd's going to play in terms of creating an expedience and a confidence to that effort.

I appreciate it, guys. Really, really helpful. Just a couple of follow-ups. You were mentioning sort of the same surge in sales growth. I think you grew that 17% this quarter, but you grew the U.S. business 50% by zero. So I assume that implies you're also opening a bunch of new accounts. Am I thinking about that correctly, that math? Is there any way to sort of quantify or – or give some context to sort of the new account onboarding that you've had, certainly in this quarter, but over recent quarters. And then I'll throw the other one out there just to get out of the way on gross margin. Obviously, excess and obsolete headwinds are fading, as you said, in 2021. Should we expect in 2022 those charges are de minimis and sort of re-approach that 77, high 70s, whatever you want to call it, gross margin? Or is it going to be more measured than that? Thanks.

So I guess what I'd say on the growth, Matt, you know, you look at that 50% growth and just over two-thirds of that was really kind of driven by volume, and then you can kind of see case ASP and kind of the mix towards higher ASP procedures kind of playing into that. You know, I don't know that we've been terribly public about our quantifying our expansion into new customer base. So I don't think we're planning on being public about that at the moment. But what I can tell you is that we have got a ton of both surgeons and the best spine sales force out there coming through our facility using our state-of-the-art training facility. We've got eight suites where we train our surgeons and our sales organization, and that thing's chock full of people. And so, you know, I think that's a great indicator of our ability to expand into other and new accounts on that front. So I guess as it relates to gross margin, you know, we've said that I think we've quantified the E&O impact at maybe 400 to 500 basis points over the last number of quarters. And I think the company's been public with saying that's probably in the 300 basis point on a run rate basis that kind of gets us into an overall U.S. business of mid-70s gross margin. I tell you, Matt, I haven't learned anything in the last three weeks that would tell me to come off that number. So I'm going to elect to hold on that commentary. So hope that helps.

Yes, appreciate it. Thanks.

Once again, to ask a question, that will be star 1 on your telephone keypad. Again, the star 1 on your telephone keypad. Your next question comes from the line of Jason Wittes from Northland. Your line is open.

Hi. Thanks for taking the question. You know, first on EOS, I understand that the potential is pretty significant, especially as you kind of work in some of the data analytics available to surgeons. But there is a value for preparation. proposition now for surgeons? I mean, how do you see the current value proposition for one of your surgeons? And I mean, can you sell it on its current indications or more selling on the promise of what's to come in the future?

Jason, it's the right way to be thinking about the EOS. Like I have to say, there's an immediate, there's a medium and a long-term value opportunity. And If you look across the type of institutions that have already acquired an EOS, they're significant, and they're creme de la creme institutions. Much of the utility of EOS in the early phase was based upon an earlier product called EOS 3.5. And it mostly did adolescents. And so there was such great value in terms of the type of imaging that it provided in adolescents. They tried it in adults. The image quality of the 3.5 was not as good in the adults. Our opportunity with the new EOS Edge that has unbelievable image quality and does both pediatrics all the way through adults is phenomenal. And so to your point in terms of the immediate opportunity is significant. I would tell you there's probably kind of a historical bias that you should think about this thing purely in kind of a pediatric adolescent utility based upon kind of the low radiation and everything else. The image quality is so good with the new one and the type of information that you can garner from it. I believe that there's unbelievable value immediately with regard to the type of imaging one gets from the EOS Edge. And so I think that as we start to put the companies together, the ability to start to monetize these things in a much more expedient way than just selling capital, which was the situation that EOS was forced in previously, but utilize our implant as a currency tool like everybody else is doing, you know, within the capital business is just an opportunity to get EOS Edge out there in a way that provides the type of information where there's better decisions made for surgery. And so I would tell you that your point is exactly the right one, which is, The EOS Edge is a tool that ultimately will expand the application and utility, and I think that our ability to utilize our currency to get it out there is just an opportunity for us to start, again, the ecosystem. I'll think of a better term next time, just to start those systems placed. Anyway, I appreciate the question. I think it's the right one.

Well, I appreciate the color on that. You know, secondly, just sort of a clarification. I'm looking at your slide when you talk about expanding exclusivity, and it looks as if you're kind of around 75 distributors, but it sounds like you want to get down to 50. I assume that means there's some more horse training to be done, but also obviously I do 50 times four. I only get 200 million. I assume there's multiple salespeople under those distributors as well. So just maybe a clarification and kind of what the game plan might be in terms of, I guess, further horse trading or consolidation.

I have committed to Tom that he could do all the math ones, but since you did the whole 50 times 4, I can keep up with that. Okay. That's about my level, so thank you. Again, I think these are such fluid dynamics. I think that they're targets, honestly. What we want to do is we want to create sales organizations that have the type of heft that they have. They have reasonably big businesses. And so, you know, the intention was as we walked, you know, I don't recall if you remember, back I think in 18 we said, gosh, in 2022 we'll be a $200 million company. That was kind of the, you know, the 50 guys at $4 million apiece. And so the intention of that slide is really to say, gosh, how do we make for more significant but fewer kind of sales leaders but more feet on the street that ultimately are filling in? And so we have guys that are well above the $4 million mark. And then guys that are well below the $4 million mark, just based upon kind of where they are, when they started, and what the run looks like. And so I would tell you that's somewhat fluid, but I would love to stay between 50 and 75, a manageable number. But, again, I want to make these guys have significant business so they make big livings, and just the ability to create stability is the intention.

Okay, and just one maybe quick follow-up, another math question. I apologize. In terms of EBITDA and cash burn, how should we be thinking about this year? I mean, you've got quite a bit going on, pedal to metal in a lot of respects. So in terms of the outlook for that piece, especially with all the CapEx, which I assume is coming, how should we be thinking about those parameters?

Yeah, Jason, you know, we used about $34 million worth of cash here in the quarter. I think if you looked at our last four quarters, I think we averaged somewhere around 17. So if you assume that the next three quarters would be like that average, you'd probably get to an $85 million number on the full year. And then you kind of ask me, well, why is Q1 so different, so heavy relative to the rest of the year? And I think I'd tell you two things. One, we've definitely invested in the sets and the inventory to support the kind of growth that you're seeing here in the first quarter and that our guidance implies. So I think that's a forward-looking investment. Obviously, we'll continue to invest, but I wouldn't expect it to be at the same rate. that you saw here in the first quarter for the balance of the year. And then the second point is, you know, we do have some one-time compensation-related items that do hit the first quarter that don't hit other quarters. So that also kind of hits on the cash flow timing. So, you know, I think looking at it from that perspective, I think we're going to get pretty comfortable. You know, we ended at $190 million cash. About $100 million of that is earmarked for EOS, more or less, plus another $40 million on Squadron. That gives us roughly $130 million of cash in dry powder. So I think we've got plenty of runway.

Great. Thanks for the kind info.

This concludes our Q&A session. I will turn the call over back to our presenters for the closing remarks.

Just thanks very much for your interest in ATEC. We are in the very early phase of building what we intend to be one of the great companies. Thanks very much.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.