Alphatec Holdings, Inc.

Good afternoon everyone and welcome to the webcast of ATEC's second 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 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 table 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 ATEX Chairman and CEO, Pat Miles. and CFO Todd Koning. Now, I will turn it all over to Pat Miles.

Thank you much, Faith, and welcome everybody to the Q2 2021 financial results and update. Clearly, we're going to be making some forward-looking statements. And just to jump right in, I love where we're positioned. I'd say that we are uniquely positioned for continued industry-leading growth. And I think when you start looking at the tailwinds, you have to think from a PTP perspective. I'd say we're penetrating the current market, and we're really expanding the MIS market. And I'll go through further explanation of that later in the presentation. prepared remarks. I would say that our U.S. distribution is also improving and expanding. And so that's another tailwind. Love what's going on with regard to EOS from just our ability to have academic influence and so many of the other benefits of the type of information that comes out of a machine. And I think a lot of that is providing a halo effect with regard to more kind of conventional procedures. And so I think we're earning our way in with some of our unique stuff and then getting rewarded additionally by the halo effect of other procedures. And then, you know, you love the building of a foundation for the international marketplace with EOS. If you look at the scorecard, year-over-year revenue growth of 93%, up 28% sequentially, which is good. 46% two-year CAGR, which I think is good. It's our 11th consecutive quarter of double-digit year-over-year revenue growth. Another, I think, driver is there's real acceptance of our new products, and I think that that's reflected in the 84% new product revenue. 30% year-over-year growth in revenue per surgeon. I would tell you that's a phenomenon due to PTP, clearly, complexity of the type of surgery. So we're earning confidence. And then the halo effect of the type of confidence that we're building in them applying it to other procedures. And then a 15% year-over-year growth in average revenue per case. And I would say that that's a convoyed reflection. So we're seeing more products used per case and then clearly a complexity dynamic. And then now we're up to two products, and that's a blended average of categories per surgery. And so one thing that you may hear from us over the coming years is, you know, not a lot's going to change. We're going to earn our marketplace by creating clinical distinction. and that just means improving products and procedures in spine surgery, that compels surgeon adoption unto itself. And that'll be reflected based upon how surgeons are applying the type of procedures that we're creating. And then what you're seeing, you'll see an expansion and a clinical aptitude increase with regard to the sales force. And so we're really excited about what's going on on that front. And as they move more toward exclusivity and the type of people that we're attracting are clinical apt people, I like where we're going. But starting off with regard to clinical distinctions, or clinical distinction. Again, I think that the reflection of the percentage of revenue driven by new products would suggest that there's been acceptance of the type of things that we've put forth. From 2018 to 2020, we've released around 30 products, and you could expect 8 to 10 a year from now and into the future. I think the relevance, though, really becomes in terms of how do you create and how do you pursue the perfect spine procedure? And I think that that's really the architecture that most fascinates us. And that's why you saw really the reflection of PTP as really one of the first kind of of very uniquely assembled procedures come out of ATEC. One of the things that we highly covet, however, are things like information that really kind of drives predictability. And so what I wanted to do is spend a little bit of time on really the unmet need of creating clinical and economic predictability really through the vision of informatics. And so when we think about information, I think oftentimes we think about how relevant is the information and is it actionable type of information? One, how do you integrate information in the workflow? And then we also think about just the spatial availability in the operating room. that ultimately makes information available. When you think about the three pillars of what we've done to date, first of all, SAFOP. We acquired SAFOP back in 2018. We said, what we're going to be able to do is we're going to be able to identify where nerves are, and then we're going to be able to tell you, gosh, what's the health of the nerve over time? I think that the utility of that technology has been very, very valuable. If you look across the landscape of our industry, We are now the purveyor of neurophysiology, automated neurophysiology in spine. We continue to invest in it. We continue to make improvements in it. Nobody else is doing real monitoring, meaning the whole SSCP element of determining nerve health over the time in a case. And so the value that that creates. But the other beauty of that is it comes in a tablet form. So when you start to think about impediments to adoption and bringing huge pieces of capital equipment into the operating room, we're bringing a tablet. And so you love just the dynamics of being able to make available that information in a very seamless way. When you start to go to navigation, really what you want to make is you want to make sure that the workflow is very, very seamless and predictable. And so part of the challenge that navigation has had over the years is the fact that oftentimes it is a very difficult tool to use from a workflow perspective. You start to think about interoperative CT. That requires a two-minute spin. There's substantial radiation delivered mostly to the patient because the surgeon can step away. But realize a lot goes on during an operation. And when a patient moves in the operation, what you want to do is be able to update the image because now the image is no longer relevant because the patient moved. The beauty of TrackX is the way it acquires an image and provides biplane navigation is by a ubiquitous tool in a fluoroscope or a C-arm. And you see the C-arm picture there. And so the beauty of TrackX is your ability to create an updated navigation of exactly where you are based upon acquiring an image out of a CRM. And so we love how that fits into the workflow of how we're executing a procedure, and these things become very, very relevant. And the other thing becomes is I talked about space in the operating room is finite. And so the ability to attach to a current tool that's already accepted and utilized in the operating room is valuable and not have to sell in another huge piece of capital. When you talk about another big piece of capital, EOS is a very big piece of capital, but it's not in the operating room. So the ability to integrate that information into the operating room through the conduit that we've already created in a tablet type of platform becomes very, very attractive. And what you start to integrate in are things like a standardized standing full-body weight-bearing image. And there's just such a wealth of information in these tools. And so If you think about spine surgery as being decompression, stabilization, and alignment, our ability to plan in three dimensions from a standing image is so opportune. And the ability to really drive alignment. Alignment has been discerned as the greatest predictor of a long-term successful outcome. You start talking about spine, you start talking about durability, then what you want is an aligned patient. And so just the ability to align somebody and know before you get them off the table that this patient is aligned is such an opportunity for us to design and develop into. The other thing that hasn't been touched very well is bone quality assessment. And so to utilize some of the EOS elements to make sure your demand matching your stabilization tools in a way that ultimately enables you to fix the spine and stabilize the spine specific to a patient. And that begets the patient-specific type of treatment and the ability to contour your implants to the specific patient and to understand the other unique dynamics really provides an insight into the cost of care, the whole clinical walk and the whole economic walk. And so our view of this acquisition is that it really is a foundation for multi-year opportunity for expansion. And the great part is the academic community has already spoken. If you look across really the world, these things have been placed in a who's who of institutions. The great part about us owning this asset is the fact that we can avail it to virtually everybody through things like a lease agreement or an earned purchase type of an agreement. So the ability to start to translate these assets is really tremendous. And so you say, gosh, what's the crawl, walk, run associated with this effort? And I would tell you the first thing that we've done is really kind of integrated our selling efforts. And that means aligning the sales force. It means taking what used to be six people selling capital to now 306 people, having a field force of in-plant people, and then having a group of capital people really start to focus the opportune efforts, especially in North America. And so the ability to expand the footprint The other thing becomes driving utilization. When you start to think about a salesperson going and trying to change the behavior of a spine surgeon, it's a very challenging walk. And I think the opportunity for a spine salesperson to walk in without the confrontational, hey, will you use my implants in a surgery, but really start to say, hey, will you utilize EOS in a way that ultimately enables you to be more well-informed about the the uh prospective patient i think is a much less confrontational opportunity and i think the ability to walk someone through that experience and and and walk them into uh our our way of thinking and ultimately inform surgery with with our stuff really begets i think a a reasonable walk into a selling environment and also if you look across the the landscape most of the the footprint out there for eos is is 3.5 or their previous generation which was more of a of a pediatric or adolescent type of a of a of a of a tool the eos edge really expands uh the opportunity for us to really kind of utilize this in in all types of uh patients uh with different uh habitus and uh and really provides enough an opportunity to upgrade current users The other thing that is going on in real time is really trying to focus the resources on the highest priority product development initiatives that will have the greatest strategic impact. And what that means is now that EOS is part of a spine company, how do we make sure we maximize the opportunities available to us in the most immediate term? And to that point, one of our executives is going to move over to Paris into the EOS facility And it's a guy, Eric Dassa, who I've worked with for many years, who I have great confidence in the ability to really create a sound cadence of execution between the two groups. And so I'm greatly excited about the reflection of that. And then, you know, also I think that, you know, just investing in the infrastructure, you know, to enable increased product and service requirements. If you think about EOS as a standalone company, It was really a different dynamic. And for us to really expedite the order to installation and have the available resources to put forth a greater expedience, and a greater service level I think is opportune. So, you know, it's amazing we talk all about that and we've yet to touch on PTP. And I would tell you that clearly every other company covets prone lateral or they wouldn't be trying to do it. And I will tell you what we're doing with PTP is outstanding. And having been the guys who created lateral surgery at the other place, just not to be shy, I got to tell you this is better. And it's better because what it provides is really greater optionality for the surgeon. And when you talk about predictability in spine, in terms of the surgical approach itself, one of the things that drives predictability is orthogonality. And so if you look at those surgeries that have gone very well and are very predictable, ACDF is one of them, ALIF is one of them, lateral is one of them, and oftentimes it's because they're orthogonal. But for us to be able to create a very orthogonal type of a surgery and then provide the type of optionality to go from the back of the spine to the front of the spine and back to the back of the spine in the same sitting becomes very, very valuable. And you start to think, what's the value of that? And you start to think what a T-lift does and a plift does. And you start to say above, at 4'5 and above, really, this really avails a – access from a surgical perspective to really almost any surgery above four or five that requires interbody fusion. And so we're super excited about the opportunity there and clearly as is the number of people who are coming in for educational visits. And if you look at the graph, there is a tremendous demand on the educational group at ATEC, and they are working very, very hard to serve the volume of interest in coming to San Diego and learning from the masters like Luis Pimenta and Bill Taylor and guys who were part of the the core crew that created the procedure in the first place. So we're seeing the utilization really both in complex settings as well as, you know, it's fun to see, you know, for years there's been such great promise of, gosh, what's going on in the ASC setting, but there's also several guys who are doing this in the ASC setting that is fun to see. So reconstructive surgery in an outpatient environment I think is exciting. If you start to look at kind of the ROI, clearly where we've invested, we've prospered. And so you look at clearly in the informatics and lateral and posterior, there's been great momentum in those spaces. And you'll see the others follow suit as we continue to reflect the investment of the other areas. The next key priority is about compelling surgeon adoption. And we look at that as a convoy sales dynamic. And I previously said that we're seeing a blended average of two products per surgery. And the way that we think about this is, are people accepting the entire thesis of how we think about a spine procedure? And when they use all of the products and the likelihood of their accepting that thesis is higher. And so The great part is we're seeing an ever-increasing number of products per procedure, and we're also seeing a year-over-year in the average revenue per case at 15%, average revenue per surgeon at 30%, and then the demand on the surgeons trained is significant, would be an understatement. And so we love that. But what it follows is it follows the thesis that we're willing to invest in the things that others aren't. And those things that ultimately are the requirements of predictability. And I think that why you're seeing surgeons adopt things like PTP is because there is one, a unique know-how. And that unique know-how drives the design and development of different elements that ultimately drive a predictable experience. And so I will tell you, to this day, there's still a lot of the competitive groups out there that are not designing for the specific requirements of. And I will tell you, if you want predictability in an experience, you'll design for that experience. And so I will... I will leave it there. Clearly, when you look more closely at the non-blended, where you're seeing the significant kind of buy-in for the way that we would propose to do a surgery is in the lateral space. And so When you start to choreograph these elements to all work together, there begets an enthusiasm of utilizing multiple products per procedure. And so the great story here is there's still so much opportunity ahead of us in terms of things to ultimately design, develop, create, and further the level of predictability. So excited about that. I'll tell you lastly, just coming off a national sales meeting, the enthusiasm was palpable. And we are loving where we are. I got to tell you, we got to continue to evolve. And so we need to continue to elevate our sales force. We got to create exclusivity. I love that 97% of our sales are driven by our strategic channel. The organic revenue growth within that channel is at 106%. And I think a lot of the right things are going on with regard to the walk toward exclusivity and the clinical aptitude. The crazy part, though, is if you look, You know, you look at a third of the U.S. jackpots are under or completely unrepresented. So where we have the right people in place, as you would expect, we're making for effect. And I think that, you know, that's the exciting part. And that's where you're seeing 97% of the revenue contribution are these people. The great part is the tailwind remains in that third of the geography that we can continue to elevate and create sophistication and really start to build relevance in those marketplaces. Another thing that's going to augment distribution is we recently opened up a distribution facility in Memphis. And when you start to think about know-how and you start to think about distribution, then you better think about Memphis. And there's a keen know-how in Memphis by which distribution becomes really part of a great competency. As we continue to spend significant amounts of money on capital, the one thing we want to do is make sure that we can utilize it efficiently. If you're going to utilize it efficiently, then Memphis is like a great place to be. And so we see that as, again, a foundation builder for a great long run in front of us. And then when you start to see, gosh, well, you know, this is a foundation for a great long run in front of us, how do you also not think about the foundation for what we're doing in the international space with regard to EOS? And realizing that, again, there's been great acceptance. I think an interesting dynamic is that if you've been around spine a long time, you really appreciate the influence the French has had on especially deformity surgery. And when you think about what's going on with EOS and you think about what the reach is globally, not that we want to run to the French market as an implant market, but you just think about the amount of influence that the French has had on spine surgery. And I think that oftentimes a lead indicator becomes what's going on there. And in Q3, we'll see the 100th EOS unit placed in France. And, again, I think it speaks to what's forthcoming with regard to much of the rest of the world is the acceptance of this technology in an arena that is steeped in experience and profoundly sophisticated in the realm of spine surgery. And so those things give us great enthusiasm as tailwinds to our business. And I think just kind of a great second quarter and a great start to the year, but I should likely turn it over to Todd and have him walk through the financials.

Well, thank you, Pat, and good afternoon, everyone. It's a pleasure to share the results of another strong quarter with you. I'll begin with revenue. Second quarter consolidated revenue was $62.2 million, reflecting 110% growth over the prior year. This includes organic revenue of $56 million, reflecting 93% growth compared to the prior year period, and growth of 28% compared to the prior sequential quarter. Impressively, the organic growth demonstrated in Q2 was not simply attributable to an easy pandemic-driven comparison, as our two-year CAGR accelerated to 46%. Both the strong two-year CAGR and sequential improvements speak volumes about the powerful momentum our business is driving. The strength of our organic sales results in the second quarter of this year are driven by a significant increase in procedural volume and continued growth in case ASPs. With the close of the EOS Imaging transaction, we recognized $6.1 million in EOS-related revenue in the second quarter, reflecting sales from the date of the transaction close on May 13th through June 30th. Finally, revenue from our international supply agreement totaled approximately $400,000 in the quarter. So to summarize, the total revenue result of $62 million represents growth of 110% and is comprised of organic revenue of $56 million, acquisition, which contributed $6.1 million in revenue, and $400,000 in revenue from the international supply agreement. Continuing through the remainder of the P&L, the non-GAAP gross margin was 73% in the second quarter, down 430 basis points compared to the prior year. Pressure on gross margins was due primarily to the consolidation of EOS imaging, which had an unfavorable 390 basis point impact in the period. Historically, ELIS's business generates gross margins in the mid to high 30s range after you adjust for GAAP to IFRS differences in internal accounting policy alignment. That is compared to ATEC gross margins in the mid to high 70s range. So we do anticipate a lower consolidated gross margin profile as a result of the combination. Operating expenses continue to reflect consistent, thoughtful investments to support rapid long-term growth. Non-GAAP R&D was $7 million. and approximately 12% of sales in the second quarter, compared to $4 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 and EOS activity. Non-GAAP SG&A was $50 million and approximately 80% of sales in the second quarter, compared to $23 million and approximately 76% of sales in the prior year period. The increase was driven by continued expansion and advancement of the ATEC distribution network increased variable selling costs related to strong performance in the quarter, and investments required to support the increasing size and sophistication of the company. Total non-GAAP operating expense amounted to $57 million and approximately 92% of sales in the second quarter, compared to $26 million and 89% of sales in the prior year period. This level of investment in operating expense reflects the emphasis we have placed on fueling our organic innovation machine and transitioning the sales channel to support continued industry-leading sales growth. Turning to the balance sheet, we ended the second quarter with $77 million in cash, blocking that from our March 31st balance of $191 million. We had a net $74 million outflow associated with the EOS transaction, $37 million in operating cash burn, of which $24 million was for inventory and instruments to support the sales growth, and a further $3 million in other investing and financing effects. Our debt at face value is now $79 million with the addition of EOS-related debt of $15 million in Oceans, outstanding at 6% rate, and another $6 million in existing EOS debt. With the $77 million of cash we ended with and access to another $40 million that remains on our Squadra facility, we are well-positioned to continue to invest in the growth of the company. Turning to our 2021 outlook, we now anticipate full year 2021 total revenue will approximate $238 million, representing growth of 64% compared to the full year 2020. As a result of the strength of the second quarter and continued strong momentum, we are increasing full year 2021 organic revenue guidance to approximately $212 million, which implies growth of 50% year over year and is a $24 million raise over our previous full year guidance. Growth will continue to be driven by the impact of clinical distinction, which is expanding surgeon adoption and elevating our strategic sales network. We anticipate EOS-related revenue of approximately $25 million for the full year 2021, which includes the $6 million recognized in Q2. That implies $19 million of EOS revenue in the second half of 2021 and reflects mid-teens growth compared to the second half of 2020, as we take ownership of EOS's order book and thoughtfully integrate teams and technology. We also expect the international supply agreement to contribute about $1 million in full-year revenue before it terminates on August 31st. Execution against the commitments we outlined back in 2018 has clearly delivered significant growth over the past few years. And as I mentioned, our organic revenue two-year figure in the quarter accelerated to 46%. We've updated full-year revenue guidance today to $238 million. That implies that strong organic momentum coupled with the inclusion of EOS will propel growth of about 55% year-over-year in the second half. That is certainly industry-leading growth. In closing, after having a quarter under my belt, I'm incredibly excited to play a meaningful role in what will be an exceptionally long growth story. ATEC's accomplishments to date are significant. But we have multiple growth drivers in front of us and have only begun to earn the market share that decades of experience has proven is achievable through an unwavering commitment to better surgery. I hope to connect with many of you over the next few months as we have a full calendar of investor outreach activities planned. With that, I'll turn the call back over to Pat.