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.

Thanks much, Todd. I think in conclusion, I think the reality is we still have a lot of work to do, but there are some great tailwinds. PTP is the real deal and excited about the years of continuing to advance that procedure. Clearly, our ability to continue to improve our U.S. distribution, make it exclusive and expanded is standing in front of us. I think reflecting EOS is our next foundation and such an opportunity to make for better surgery and further academic influence. And so I think the halo effect of some of these things will be tailwinds as well as literally just the – we've been a U.S. company only, and now the – opportunity to march in the international space is something that we hold very exciting. So our transformation requires strong execution against our commitments. We remain totally committed to advancing the clinical experience in spine. We feel like when value gets created, then dollars chase it. And so we're just getting started and can't be more excited about the route forward. So with that, we will take questions.

Thank you. As a reminder, to ask a question, you'll need to press star 1 on your telephone. To answer a question, press the pound key. Please stand by while we compile the Q&A roster. We will now open the floor up for questions. Your first question is from Brooks O'Neill from Lake Street Capital. Your line is open.

Thank you. Good afternoon, guys. Congratulations on all you've accomplished. One of the things I'm particularly curious about is I have a sense that with the SafeOps informatics platform now on the cusp of being integrated with EOS, that there's a significant opportunity for pull-through product sales and product utilization in spine surgeries. Can you just talk a little bit about where you're at in terms of integrating and linking those three elements such that you can really begin to drive the product sales going forward over time?

Yeah, Brooks, thanks for the question. And, you know, the I've got to tell you, it's great fun to be able to pull stuff into the operating room that ultimately makes for real effect. And so the ability to drive that information into the operating room and even into the preoperative planning phase, where what we'll do is we will inform the preoperative plan with our products. And you start to think about all of the opportunities to do that, and that will reflect a pull-through that is – that is abundantly clear. And so, you know, there's some very tactical ones that I think are going to happen sooner. And that's going to be in how do we start to place more and more EOS units across the world? And how do we ultimately tie implant utility to the EOS unit? And I think that there's been such a widespread acceptance. I very much like the combination of our currency, which becomes the implants to ultimately serve the interest of better information. And so I think that when you start to think about pull through, I think you initially start to talk about just the effect of a current population of EOS units out there that can be upgraded and upgraded through a currency. And then you start to think about the acquisition of more units through a currency. And all of those have an effect on the volume of implants utilized. And then I think really where we want to go is, candidly, the sophistication of a very small interoperative footprint and being able to deliver information that becomes actionable in the operating room. And that's going to take a little work and a longer period of time, but that's where it's all going. And that will completely affect what type of implants are used. One, based upon bone quality and demand matching the type of fixation elements that stabilize the spine. And then secondarily, making sure that, gosh, things like how do we make sure that the patient is aligned in the way that I prescribed based upon my surgical plan? And so I think those things are the real interest, and they're doable things, and they're things that we've done before. And so I love where we're going on that standpoint, but I think the earlier phase may be a great one with regard to seeing implant sales reflected through the utility or value of EOS.

Yep. Okay, second question I had was I'm excited about international. Obviously, your international agreement with Globus ends this month, end of this month. Can you just talk a little bit about how you foresee expanding and enlarging the ATEC presence and take advantage of international opportunities, let's say, over the next year or so?

yeah you know the the i think i think the i'll speak broadly about about the international opportunity and again it's something that we're very enthusiastic about we're also very uh realistic about how we get contribution out of uh respective areas of the world and so you know i i think that we will be very well served by being very narrow and very narrow and deep As you appreciate, I think the clinical distinction that we're driving requires engagement at a deeper level. And so for us to lay a foundation for depth through a narrow focus is what's in our interest. And I think that anybody who's been around the spine space knows really the great five or six markets that are very apparent. I think that it's going to be a very apparent walk toward markets that have kind of a good-paying environment, have a very kind of clinically sophisticated environment. And we're going to go into these markets with the best of the best, which is such an advantage. A lot of people dump in markets, and that's not our way. Our opportunity is to go in there and really go out of the gate, you know, first-generation products that are the best of the best.

And, Brooks, you know, I think, as Pat said, kind of this narrow and deep allows us to be fully committed to a geography and ultimately drive penetration. And then we believe that that will ultimately throw off returns sooner and give us a better overall margin profile in the long run in our international footprint.

Absolutely. Makes sense. Thanks a lot for taking my question. Thanks, Brooks. Thanks, Brooks.

Your next question is from Kyla Rose from Canaccord. Your line is open.

Great. Thank you for taking the questions. So just really two for me. One, I wonder if you could just talk a little bit more about the case mix you're seeing in the United States. I mean, obviously, you know, with the growth from new products and the, you know, average products per case, I mean, the whole scorecard is moving in the right direction. But maybe you could give us just a little more color. I mean, I think we've talked in the past, PTP has got a pretty high training burden. It seems like training is happening a lot more now than it was previously. So are you seeing more of those PTP cases come in? Or just when you're bringing on the new reps, are they going towards one side of the product portfolio versus another? And then I'll ask my next one in a minute.

I'll start off and then I'm going to turn it over to Todd because he's going to be more precise than me on all things. I think the people that come through here are super excited about PTP. But the beauty is that there's an underlying sophistication to what we've done from a product development perspective. You know, what's funny is people will come here and they'll say, gosh, you know, I want to come learn PTP. And then they'll see things like single step and they'll see things like safe op and they'll see things like, you know identity and the different things that we're doing and they'll say you know what uh this is truly next generational stuff and so the great part is is I think that people are compelled by the PTP thing and and to your point is there's a training requirement to there and and there's going to be a long walk on that and it's going to be a good long walk but I think that what's earning uh utility becomes some of the sophistication associated with the the type of design prowess that we have from an engineering and marketing perspective and just the whole team, honestly.

So anyway. And overall, Kyle, I mean, when we kind of look at our portfolio, you know, our Thorough Columbia portfolio clearly was a strong contributor to our growth, grew very much in line with our overall growth profile. We saw a strong contribution from our alpha informatics line as well as biologics in the quarter, kind of above our corporate growth rates. And then when you kind of look into it, obviously the PTP driving a lot of the procedural volume and then that pull-through, we're seeing strong contributions from both Invictus and Identity, which you would expect and I think is reflective in the fact that 84% of our total revenues are from new products. So, you know, I think when you kind of dig in that layer two deeper, it all really hangs together quite nicely. Thank you.

Great. And then you talked about the strength of the exclusive team. Maybe just any more gaps that you see in the portfolio that you think you really need to address in order to really capture, I guess, the remaining portion that might not be exclusive. And then secondarily, just on EOS, on the exit velocity, I mean, I appreciate the guidance for this year, $25 million. Is that kind of the runway we should think about moving forward when we think about the second half of this year and the mid-teens growth, just trying to understand longer-term modeling implications of EOS as well, just particularly given you're going to take some of the earn-out opportunities as well?

Kyle, that was really three questions. This guy's just too. No, I'm just kidding. Let me answer the one with the holes in the portfolio, and then I'll let Todd answer the one on EOs and exit velocity. If you look across our portfolio, there are still holes in our portfolio. And I think the ones that are most specific, but candidly you're going to see in the short term, are things like corpectomy devices. And so, you know, one of the real great things opportunities with PTP is the different types of surgery. So it's candidly similar to an experience that we're very familiar with that we had previously, which becomes is you teach someone how to ultimately do a procedure, and then they walk up the sophistication curve. And so, you know, you'll see the applications of, say, PTP and things like, you know, a single level 4-5 spondylolisthesis or a 3-4 adjacent level. And then you'll see them start to walk up. And so what we're doing is we're running forward to catch the corpectomy because it's ultimately going to get there. And so I would say when you start to think about holes, currently, you know, an expandable corpectomy device is what I would consider a hole. But again, you know, we're running up the sophistication ladder, and what we want to do is beat them to corpectomy, and I think we will. The other elements becomes as we get more sophisticated about the utility of PTP in longer construct surgery, our ability to start to go to the back first and release the facets to make sure that we completely control the angulation of a specific level and then to be able to do that through an expandable device is super exciting. I get a hard time for not loving expandable devices. What I don't like is introducing um uh more variability into an environment that doesn't require it i would tell you the level of sophistication that we will get to in terms of angulating a segment is very very high we'll take the eos information integrated in and make sure that we were able to ultimately architect a a alignment that is completely what we intended and so things like expandable devices are going to enable us to do that. And things like corpectomy are still what I would consider holes. But again, we're walking up a sophistication ladder that I think is, is, is, uh, it's kind of what we love to do and why we're here. And, and, and, and so, um, I'll let Todd jump on it.

You know, I think when, when you look at our, our guidance, it implies $19 million in the second half and kind of mid teens growth, as I said earlier. And when you, when you look at the revenue, you know, a good chunk of that revenue was maintenance related. recurring revenue, which then we add to that placements and the revenue associated with delivering the actual equipment. And so, you know, certainly we've got a strong order book here. Pat talked about, you know, our focus on reducing the amount of time from order to delivery. And, you know, I don't know how much we talked, but I think there's a tremendous amount of excitement and interest from our existing surgeons. People come in here, they see the EOS machine. And so we've got a lot of interest in the technology. And so, you know, I think that bodes well for our ability to continue to drive growth and placements as we go into 2022. And ultimately, as Pat said, the reflection of the value of EOS won't just be in the EOS revenue line itself. It'll also be in our ability to translate that into implants in the utilization of our products.

Thank you very much.

Your next question is from Josh Jennings from Cullen. Your line is open.

Hi. Good afternoon. Thanks for taking the questions and congratulations on the first half of the year. I wanted to ask about the surge in education visits and just looking at the chart you guys provided in the presentation, looks at least a doubling in Q2 versus even Q4 of 20 in terms of the number of education visits. I wanted to just understand better the conversion rate of new customers, the percentage of if you can break it down, get this granular, the percentage of visits from new customers, surging customers, and is the growth in new surging customer ads kind of correlating with these new growth in the education visits? And then within a new surging customer bucket, are you seeing more veteran MIS surgeons coming to get educated? or are these open surgeons, historically open surgeons that are migrating to MIS? And I just have one follow-up.

Yeah, Josh, you know, I think I'll talk a little bit about our conversion and then pass it over to Pat to kind of dive into maybe the, you know, who's coming through and what kind of folks are participating. But, you know, we pay a lot of attention to conversion. We haven't really been in public about the conversion rate, but I think what I would say is we're very pleased with the level of conversion, and we do pay attention to it. And certainly there's an incredible amount of demand for access to the training, and our sales organization understands that. And it's a commitment on their part. It's a commitment on the surgeon's part. It's a commitment on our part. And I think what's really neat is that when you sit there and oftentimes on a Friday I'll pop in and kind of listen to some of the wrap-up and you get a chance to talk to different people. What's nice to know is everybody understands the level of commitment that it takes from all parties to make that learning experience happen. And so I think that's why we see the strength of adoption post-training that we do. And, Pat, maybe you want to talk about kind of who's coming through

As I listen to Todd and I thought about the history over the last few years, mathematically speaking, they have to be new because there's so many more people coming and they're coming for the reason to learn something new. It's a demographic element that I think that we're most excited about. The fascination for us is, were these lateral guys that are coming to, in essence, refine a new skill set in the same type of an approach from a prone position? Or is it guys who are more conventionally minded who have done more posterior approach? And candidly, it's been both. I would tell you that, you know, probably the familiarity with the person who is laterally trained has been, you know, likely the guys who are most early interested because I think they understand the effect of being able to, you know, address the back of the spine and the front of the spine and back of the back of the spine. it's been fun also to see a lot of conventional guys guys who would do open t lift or open cliff come through here and really be say i've been waiting to do uh lateral surgery until there was a solution that enabled me to decompress directly the the back of the spine and so It's been kind of a fun thing to see. But I would tell you that we're still in such kind of, you know, a bit of the early adopter phase. There's a lot of new surgeons to ATEC, which is, I think, the most – exciting part of it because I think that we blow them away with regard to our new facility. Our facility is state of the art and it was designed specifically for this very utility. And so the opportunity to create confidence in a group of people that ultimately come here to learn something and walk away with a renewed view of our company is just such a great opportunity. And so independent of providing a specific rates of closure with regard to those guys, they walk away with great enthusiasm.

Thanks for that color. And just a question on EOS, and just in short time since you closed the deal, but just any updated thoughts on cross-selling opportunities of A-Tech implants and instruments into the EOS customer base and the other way around, EOS systems into your A-Tech customer base would be helpful just to understand. Thanks for taking the questions.

Yeah, Josh, I appreciate the questions very much. And I can't tell you, we've had several prominent EO surgeons here. And the type of language that they use in terms of the importance of this acquisition can't be understated. And I think that our interest in terms of selling through that is clearly high. But I think what's more important is to further the field from the experience. And that's going to really drive real value. If you start to look at, so you look at, say, a large multispecial orthopedic group and you say, gosh, how is EOS relevant to them? And there's been papers published that talk about an 8% to 10% dislocation rate in total hip surgery when someone fixes a construct to the pelvis in a total hip patient. And there's very clear reasons why that happens, and it's how people retrovert their pelvis when they sit. But the beauty of our mitigating some of that, I think, is one, the proper thing for a company like us to do, but two, there's great financial value in knowing that information and being able to do something about it. As I look at the landscape and I start to think, gosh, what's the reflective? It's not that we're going to sell a few more pedicle screws based upon some alignment thesis, but it's more a matter of understanding the richness of the information coming from that unit and translating into a better care profile.

Great. Thanks again.

Thanks. Your next question is from Matthew O'Brien from Piper Sandler. Your line is open.

Thanks for taking my questions. Pat, can you talk a little bit about the U.S. distribution group that you have, where that needs to go in terms of, you know, getting them more exclusive, the opportunities that are there? And then, you know, you mentioned that third of the group that's still kind of underrepresented at the moment. If I do the math, it seems like The two-thirds that are doing well are, you know, about 5% market share in the U.S. because overall you're about four. So I'm just wondering if you have a couple geographies that are in the upper single digits, you know, and then when can you get the whole group, you know, up to that 5% level and then take it even beyond that? Does it take a couple years to get the whole group to 6% or 7% of the U.S. market, or can you do it, you know, it can take even longer than that?

You know, the beauty of the question is that you know who doesn't do math well, and so you're going to triangulate me into a commitment question. And so let me just speak generally, and Todd will give you the math, the beauty of him here. Just one of the beauties. One of the many. Yeah. I look at the places, like, you know, where we have very effectual salespeople that literally, and I'm still going to surgery, and I was in surgery recently, and I watch these guys make surgery better. And so, you know, I love the company to talk about Replic models and everything else. I hope they further that view because, you know, we're not. And so where we have effectual salespeople, we prosper. And there's multiple marketplaces around the country that we have very effectual guys who are exclusive to us that are doing the very thing that you're describing, which is marching up the market share ladder. And so, and candidly, you know, they are bigger and bigger pockets as we roll forward. They're about two-thirds of our population just because some of the larger cities are places we haven't had much effect. If I look at New York City, Canada, Chicago, and Los Angeles, we're big players, and we're well below the numbers that you're espousing. But, gosh, you look at other geographies, and we're making significant hay. So it's kind of one of those things where it's like we're taking, in some markets, we're taking a C player to a B. In other markets, we have B players, we're moving to A. And so why don't you provide a little... Yeah, you know, we...

We did have the national sales meeting a couple weeks ago, and it was really my first opportunity to meet a lot of the sales force. And then I tell you, the quality of the individuals that show up, and not just to the meeting, but to show up every day to surgery is great and really encouraging to me. And I just want to give a shout-out to the team because I think they're fantastic. And once we do get, I think, full coverage, we've got really sky's the limit based on what I've seen. But to kind of get to your question, you know, I think what we've seen is we've seen in, you know, ultimately our guidance here implies 50% year-over-year growth. And ultimately, I think Pat did a great job of laying out the drivers we have in front of us, PTP penetration, ability to expand that MIS market into TLIF and PLIF, you know, reflecting the power of EOS, the halo effect of all of that. And I think You know, all of that should continue to help us drive, you know, strong growth north of 20% into the next number of years. And so, you know, ultimately how that gets reflected in market share will depend on our performance and our ability to deliver. But I think we've got all of the makings of a strong run here in front of us.

Okay. Thanks for that, Pat and Todd. I really don't want anybody to know what my math grades were in high school and college. So switching over to just a couple things maybe for you, Todd. Did I hear the instrument set deployment number right? Did you say $37 million this year? And then just on top of that, it may be helpful for investors to given where the cash level went from with the EOS acquisition and then some of the one-time transaction costs, just to give us a sense for the cash burn back half of this year and then into 22?

Yeah, so our total operating cash was 37, Matt. Of that 37, 24 was deployed in instruments and inventory. And so... I think that's ultimately there to drive the level of growth and to support the growth that we foresee in the future. Again, if you kind of walk back our cash position, we landed at $77 million. We were at $191 million. Going from $191 to $77, $73 million of that was used on the EOS transaction. That's about $90 million of cash out in both transactions. Shares purchased on EOS as well as Oceans acquired. And then we netted about $17 million of cash in the transaction. And so that's how you get 73 in terms of a net use of cash associated with EOS in the quarter. Then you take the 37 million. And of that 37, 24 is for instruments and inventory, as I said, supporting our sales growth. And then the balance of the operating cash is at about 13 from there. We had about $5 million of contribution from EOS, of which a good chunk of that was some transaction expenses, and we had some transaction expenses in our operating as well. And so, you know, as you kind of think about the cash use in the second half, we've certainly made additional investments in instruments and inventory, and we're going to continue to do that to drive the support or drive the growth and to support the growth that you're seeing and we continue to expect. So, you know, our estimate is, you know, somewhere in the $45 to $50 million of cash use in the second half of the year is our expectation.

Got it. Thank you.

And then just to, I guess, make the point, you know, with $77 million on hand, we've got access to another $40 million with Squadron. And so, you know, that would give us about $117 million of cash, which I think is plenty of runway into the future.

Understood. Thank you again.

Thanks. Your next question is from Jason Witts from Northland. Your line is open.

Hi. Thanks for taking the question. Just a couple of follow-ups. First off, you mentioned international expansion. Do we see any of that this year or is that something more for next year in terms of when we can see that starting to contributing to the top line?

Yeah, that's a good question. I would tell you that we're in the foundation-laying phase and not ready to give specific timing with regard to our participation in the space.

Okay. That's fair. And then, you know, related to EOS, it looks like this year you're kind of tracking for the second half. I think you mentioned mid-teens growth year over year. Yeah. does that include any kind of assumptions on pull-through or synergies, or how should we think about that number? And also going forward, and maybe this is asked, is that the right kind of growth rate to expect for EOS? I want to know how we should be thinking about this part of the business.

Yeah, Jason. So in the second half, our EOS guidance is implied at $19 million, which is mid-teens growth. And that reflects really kind of core EOS revenue. So kind of think about the maintenance revenue as well as the revenue that we gain when we sell a unit and deliver it and transfer the title. And so, you know, that is really very EOS specific. As I mentioned earlier, the ultimate economic reflection of the EOS transaction is going to come both in the form of EOS-related revenue as well as the pull through of our products and services kind of on the core ATEC side of the business. And so, you know, ultimately that'll be the reflection of the value of the transaction. And it'll come both in our hardware products and services as well as EOS placements. In terms of how to think about the EOS revenue in 2022 and beyond, you know, the second half really reflects the order book that we've seen. And so ultimately, You know, that order book is there. We're working to do those placements and deliver on our commitments. And our ability to drive growth there is, of course, dependent on our ability to drive interest in EOS. And I'll tell you, I like our chances there. I think we've got great interest from the ATEC friends and family. And I'm quite excited about what the future holds as it relates to the EOS business, both kind of core EOS revenue as well as the broader reflection of the transaction as it relates to implants.

Okay, that's helpful. Let me push it a little bit harder, though. In terms of how you're selling EOS right now, is it still going to be traditional capital equipment sale with service, or are you starting to bundle in with or offer some kind of bundling or, you know, something that takes advantage of the Alphatech platform?

Jason, let me jump in. So, okay, really there's three ways we're going to sell the unit. We're going to sell outright capital, we're going to lease it, and there's going to be an earned purchase type of an agreement. And so, you know, the things that I think created a headwind for EOS without ATEC is the inability to have a currency by which people can appreciate all the value of that technology, you know, without multiple ways to ultimately offset the cost financial requirement. And so I think what we're seeing is a lot of enthusiasm to say, hey, listen, how do I partner with you guys? There's already an interest based upon kind of, you know, all that they're learning about ATEC. And then it's like, gosh, how do we elevate that with regard to EOS? And so I think our building infrastructure to support that demand is of high interest to us.

Okay. And then just the last question on Alpha Informatics. You know, now that you've added EOS, it's a pretty impressive offering. How do you think about this developing? I mean, obviously there's more to go on EOS. Are there other pieces that you think you need to add to the platform to make it even more compelling?

Yeah, you know, I think it's a great question. You know, one of the great things that I think that this company does is we apply our learnings. And you couldn't have convinced me that I would be in the patient positioning business years ago. And so I think whatever the requirement is to further the improvement in surgery is the business that we will be in. And so it's a tough one because... The one probably I'm super excited about is, so there's great internal competence in terms of creating, you know, realigning the spine and doing patient-specific stuff. I think another great outlier becomes the whole bone quality dynamics and just the opportunity to elevate the sophistication and demand to match an implant based upon the specific requirement of a patient's bone. I think we have a great runway in terms of deciphering all of those things. And so in the near, you know, I guess in the near view, those are the things that I think that are super opportune. Like imagine going into the operating room and having an objective measure associated with how you're trying to realign a patient versus someone just, you know, guessing maybe too strong, but, you know, relying upon gestalt. And I'd much rather an objective measure. And that's where we're heading, and I think it's a great opportunity in the most immediate terms.

Well, great, guys. I'll jump back in queue. Thank you very much.

Thanks, Mike. Thanks, Justin. Your last question is from Sean Lee of HC Wainwright. Your line is open.

Good afternoon, guys, and thanks for taking my questions. So I just have a couple of higher-level questions for you. So in terms of EOS, because we know that it has a different sales cycle and even a more separate customer base than your traditional offering, so I was wondering whether you keep the sales teams separate but operating under one big umbrella, or would you try to integrate everyone and then have all the reps cross-selling products on both sides?

Yeah, I think it's a good question, and I think that in years past, I think that EOS was an imaging company, and you sell imaging to a radiologist. But what you need is you need someone who's going to utilize the type of image, and that's going to be most often a spine surgeon or an orthopedic surgeon. And so I think what's important is that what we do is we overlap the selling forces. And if the main driver is going to be the spine surgeon that's going to drive the demand for the imaging, I think that it's important that that's the person that ultimately drives the acquisition of the capital. And so we've already reconfigured our forces to overlie them. They all report up through a single channel. And we believe that EOS is an informatic company. And so our ability to knock down the barriers associated with the financial headwinds to acquire a unit is what we believe to be most important. But I think that your comment is a sound one in that there's going to be some interaction with radiology, but it's something that the capital force is well used to doing and very versed in terms of those kind of selling cycles and selling dynamics.

And, Sean, I think when you look at the two sales, it's really one sales force, but we've added some resources specific to the capital sales process. And so, ultimately, we're making sure that they're very much aligned with the objectives of our spine. Shared company. Yeah, the shared company of our spine team. But the reality is it takes a very specific kind of know-how and understanding in specific institutions on how to move a piece of capital equipment through the process and to get the deal done. And that's really what this team's all about because they have that expertise. They know how to do it. They're going to work very closely with the implant team as we look at leads and understanding who we're going to target and how we're going to go forward here. But there's definitely a different skill set, and we want our implant team focused on implants.

I see. Thanks for the additional clarity. My second question is on how you will develop EOS going forward. So looking back at the success of SafeBob, a lot of the success comes from how SafeBob is driving the pull-through sales of your other products. So I was wondering whether you try to replicate that with EOS and whether in the future you develop a spine implant product that works specifically with EOS.

Yeah, you know, I think you're right on it with regard to the intention. And so there's, you know, we try to not be coy and say A-Tech informed by EOS, and really the informed by means what are things that we can do to improve spine care through the understanding and our learnings of EOS. And I think in the near term what you're going to see is you're going to see a surgical planning platform that ultimately is informed with A-Tech product. And then what you're going to see is you're going to see the evolution of ATEC product being evolved based upon the findings of the types of information that EOS provides. And that's where, like, it's like, you know, for instance, if you think of Osseoscrew, we have a screw that expands. And you start to think about, hey, someone may not have great bone quality at a specific level. Our ability to take an Osseoscrew and apply it to that level based upon a surgical plan is is very apparent. And so that would be kind of the least sophisticated thing that one could expect from the type of information through EOS. And so the excitement that we have in terms of really tailoring people's surgery, and people always talk about, oh, you know, patient-specific stuff. I got to tell you, there's a real walk toward a much more patient specificity associated with the findings through this tool.

I see. That's all I have. Thanks for taking my questions.

Thanks, Sean. Thanks much. Thank you. I will turn the call over to our APEX chairman and CEO, Pat Miles.

Thanks very much. And just want to thank everybody for their interest in APEX. We have a heck of a long run in front of us and super excited about moving the field of spine surgery forward and just appreciate everybody's interest in what we're doing. Thanks very much. This concludes today's conference call. Thank you for participating.

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