Alphatec Holdings, Inc.

Good afternoon everyone and welcome to the webcast of ATEC's third quarter 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. Reconsolidations 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 calls will be ASX Chairman and CEO Pat Miles and CFO Todd Koenig. Now, I will turn the call over to Pat Miles.

Thank you very much, Ella, and welcome to the Q3 2021 conference call, APIC conference call. Clearly, we will be sharing some forward-looking statements, so please review at your leisure. And just going to walk through some slides and really talk about Q3 2021 results. And the revenue for Q3 2021 was $63 million, which is a 53% year-over-year growth. with a contribution by EOS of $11 million. And I think as much as anything, it just spells out our kind of unique positioning for continued industry-leading long-term growth. And kind of the elements that are the drivers is can't be more excited about what's going on with PTP. I think our ability to expand the lateral market is very clear. I think we're getting better and our clinical aptitude is increasing from a U.S. distribution perspective. I just think laying the foundation and then reflecting the value of the EOS information is a tailwind. And I think building confidence such that there's kind of this halo effect of driving adoption of our entire portfolio is clearly going on. And then additionally, really starting to build the foundation for what goes on outside the United States in the international marketplace. When you start to look at the scorecard, the year-over-year revenue growth in a declining market was 29%. And we're clearly compelling surgeons because we had a year-over-year growth of 20% in surgeon users. If you start to look at a few of the clouds out there, the year-over-year growth in average revenue per case I would say was muted based upon some of the pandemic flare-ups and staffing flare-ups going on. And so just the ability to do more complex stuff was somewhat muted. But the great part is the adoption of our new products continues to stay super strong, which spells, you know, kind of a, a attractive continued growth in future. And also the blended average product categories per surgery of 2.0 continues to grow and remain robust. This is the 12th consecutive quarter of double-digit year-over-year revenue growth. And I think more importantly, 10 of 11 quarters greater than 20%, which we're excited about. And ultimately what that reflects is ATEC has achieved the highest organic U.S. growth of any public spine company in every quarter since 2018. And I think that Our thesis is reflective of that dynamic, and clearly there's been a bit of a tough backdrop, but we're doing the things that we committed to doing. And our commitments are going to remain these for as far as the eye can see, but we will continue to earn our place in the market by really creating clinical distinction. That means we will perpetuate our organic product development and continue to advance our information-based core competency. When you create clinical distinction, you compel surgeon adoption. And so we see the kind of the objective reflection of that compelling in an increase in revenue per product. her case through innovation. And then as you create clinical distinction, compel surgeon adoption, the likelihood of attracting pros to this thing is very, very high. And so we will continue to attract clinically adept salespeople. When you think about clinical distinction, it's really not as much about individual product development as it is developing products that support procedures. And you cannot pursue the perfect procedure if you are unwilling to design the specific requirements of the perfect procedure. And so we're super excited about the volume of product revenue contributed The new product revenue contributed at 83%. But I think more importantly, what we're seeing is an expansion in the products and kind of an acceptance of the type of enabling technology that I think is, candidly, the more challenging things to do. When we commit to innovation, we talk about a cadence of eight to ten new products per year, and clearly we continue to fulfill that commitment. But something to, I think, appreciate is there's a prioritization that takes place that allows for the most influence. And I think that we've laid a tremendous foundation through the work of our organic innovation machine and innovation Imagine our opportunity to translate EOS like we have SAFOP. We haven't talked much about SAFOP as of late, but clearly a competency in terms of translating information, as well as the whole mechanical device design, I would tell you, is a clear... a clear competency. And so we like to leave a list here because we don't PR every product that we release. We like to communicate that most often in terms of the clinical effect they have on spine procedures. And so when you start to think about EOS and you start to think about our our mechanical aptitude in terms of design and development, and our ability to translate information. Imagine an opportunity to demand to match implants based upon bone quality. And you see Osseoscrew right up here, and just the ability to be able to understand what the requirements of a specific patient is. um and then adapt this based upon their bone quality and so when you start to look at these things you start to look at invictus you start to see uh such distinction in um in our fixation or our stabilization system and so i think so often we talk about spine surgery as decompression stabilization and alignment This is really a core part of our stabilization. Invictus goes from the occiput to the ileum, and then the volume of integrated features is substantial. Everything from single-step, which is which is a unique product that ultimately integrates to our modular screw system that attaches to our neurophysiology system that delivers retractor blades. I think it really speaks to the level of distinction that this group has in terms of understanding the requirements of spine procedures. We have recently launched Invictus Osseoscrew, and then tomorrow we build upon the identity implant system with an improved ALIF device that will launch tomorrow. And really, kudos to the internal organization and the sales force. It was probably our most comprehensive, successful alpha release, and now we're ready to go full commercial, and we have really great expectations of the contribution of, again, more sophisticated anterior column surgery. And so another key organizational focus really has been kind of the EOS integration. And when you start to think about what we committed to, we said, gosh, let's first integrate our selling efforts. And I've got to tell you, that's gone very well, and I feel great about where that is. We are prioritizing the product portfolio. I think we have a very good internal cadence of how we release products. We're doing the same with regard to the EOS family and making sure that they coincide. And then really scaling operations to meet demand. Those have been kind of really the three key efforts. And some of the highlights are Eric Dasso is in a leadership position or the leadership position in France, and so I think that he's really bringing together the strategic imperatives of ATEC and EOS and how they fit together. I love the fact that we've contributed $11 million in EOS-related revenue in the third quarter. I think it speaks to the enthusiasm around the shared interests of the company. And then just the volume of pipeline leads has also increased significantly. And when I'm in the field and I get the opportunity to meet with customers and I hear the level sincere enthusiasm as it relates to adding EOS machines. We have institutions like Hospital for Special Surgery that has four EOS units currently there. There's an interest to expand the volume of units. And so when we start to think about opportunities and start to think about, geez, what's the opportunity with EOS? It is not one per hospital. You know, the opportunity is in our mind, very, very substantial and we'll outline that more as we roll forward. But I think when you think about the spine industry and you start to think about the most sophisticated part of the spine industry, a lot of people point to deformity. And I think that when you look at the Scoliosis Research Society or SRS, it's often a beacon of kind of clinical relevance. And when somebody of Larry Lanke's stature says, if you're going to treat deformity, EOS imaging is a requirement, I would say that's not a passive affirmation that these are the things that are necessary in terms of of value in that space. And so the strategy in the near term is how do we start to place units? And I think that our ability to sell into spine surgeons who really understand the benefits of this technology is phenomenal. And then starting to integrate kind of the the information through planning platforms and the like becomes very, very valuable. And then facilitating purchase decisions based upon not just selling capital equipment, but also the ability to utilize earned purchase agreement type things that ultimately facilitate a much more expedient exercise in terms of placing the volume of units. And so a lot of great things going on. And I think, you know, when you start to look at the demographics, there's 100 units in France and you start to say, gosh, how many units could just the United States to utilize effectively. And just by population, if I took the population of France at 60 million and there's 100 units there, that would equate to a 500 unit population of EOS units here without really doing anything different. We can't be more excited about the opportunity. We feel like it really kind of furthers the multifaceted tailwind that we talk about. And when you start to talk about multifaceted tailwind, how you don't talk about PTP would truly be a miss. And so 50% of our Q3 revenue growth was driven by lateral. And so when you look to what's going on with regard to PTP, I think that really there's unmatched sophistication and know-how here at ATEC. And I think that it's being reflected really in the adoption. And when you go back and you understand kind of the origin of lateral surgery, a key element to the origin of lateral surgery was, hey, where's the nerve? And when we acquired SafeHop in 2018, we said, hey, what we have in this technology is we have a unique way to determine nerve health We said we would add automated EMG, and now we find ourselves in 2021 completely revolutionizing this technique, and it should be of no surprise to anyone. And so we are clearly penetrating the lateral market, but also expanding the utility. We talked earlier about surgical goals being expanded. decompression, stabilization, and alignment. And just the ability to add, the ability to directly decompress in a lateral surgery becomes very, very valuable. And when you start to think about why people do cliff and tear, it's because they like to decompress the spine. And so our ability to make sure that we're doing the things that ultimately enable us to find ourselves within market spaces that candidly traditional lateral didn't, is very, very valuable. And so what we're seeing is really an increase in the number utilized in complex cases, as well as we're seeing an increase in the number of cases done in ASCs, which We love nothing more than a 360-degree fusion done in 60 minutes in an outpatient center. I think it just speaks to predictability. It speaks to sophistication. And so love what we're doing from a safe-op perspective. And if you look at the APEX surgeon visits, I think it's reflective of an increase in demand. And so those of you who are not looking at the slides, it's a bar chart that shows increase up to the right. And so when you start to think about surgeon adoption, it's really driven by approach-based innovation. And so that's how we compel. You say, gosh, how do you compel surgeon adoption? And you do it through, you know, through creating clinical distinction. And so you can see the third quarter in terms of the year-over-year average revenue per case was slightly muted. And in our mind, it just speaks to A little bit of a black cloud from the staffing and the coronavirus dynamic. But you can see the enthusiasm is not hampered in any way as we saw a significant increase in the volume of surgeons desiring to be trained. And we continue that moving forward. And so when we think about adoption and compelling surgeons, it's oftentimes because we're aligned on how they serve the interests of patients. And that's why we think holistically about design and development. of spine procedures. And there remain so many opportunities to continue to move the field forward as long as you're not hampered by only designing currency items. And that's not being aligned with the customer. And I think our ability to continue to remain in alignment based upon our interest in furthering the field of spine surgery That's what alignment's all about. And the great part is we get to see the objective reflection of that when we start to look at convoy sales. And so when we think about convoy sales, we oftentimes talk about the blended rate, but the real opportunity is where are we creating distinction and where have we committed an investment kind of thesis to reflect and improve surgery and And so you can see we're nearing four, which would suggest acceptance of the thesis, and clearly that's grown year over year in terms of our approach. A continued place of improvement also is really in our sales force. And in our minds, who doesn't want to sell clinically distinct procedures that compel surgeon adoption? And so we continue to drive almost all of our sales from those who are committed to the long haul, and that's the whole 97 percent driven by a strategic sales channel. And when you commit to each other, and what happens is you grow fast. And the reason you grow fast is because, in essence, you adopt or share in the interest of the clinical thesis. And so you see the organic revenue growth from strategic distribution at 37%. If you look at those groups who have committed to PTP and have done very well at PTP, it's even more than that. And so just the ability to start to make sure that there's true alignment in the selling organization has been a lot of fun. So although 97% of our sales comes from the strategic distribution, we still have uncovered or poorly covered geographies. And really another key component of managing growth is – We continue to expand the sales footprint. And now what we do is we say, gosh, how do we manage the assets? And so in Q3, if my memory serves me, we opened up Memphis. And so there's few things better than the type of efficiencies that you gain from the ability to turn assets in a centralized location where FedEx is a hub. And so we're thrilled to death to be in Memphis and have opened the distribution center. We expect to get kind of continued efficiencies out of Memphis. And so you start talking about, you know, again, tailwind. These are the things that we're willing to do to commit to the long-term growth, which would include things like EOS and then commit to the long haul of kind of our our the creation of the international effort and building a foundation around that so anyway just want to provide a little bit of color commentary with regard to the billings on in q3 um we're very excited about uh about the business and i think with that i'll turn it over to time let me talk about the financials thanks pat and good afternoon everybody uh thank you for joining us today i'll begin with revenue

Third quarter total revenue was $63 million, reflecting 53% growth over the prior year and 1% growth compared to the second quarter. Our $63 million in revenue is comprised of $52 million in organic revenue, $11 million in the EOS contribution, and $100,000 of revenue related to our international distribution agreement. Organic revenue of $52 million grew 29% compared to the prior year period and was down 7% sequentially. As we announced in late September, a resurgence of COVID-19 and hospital labor shortages pressured surgical procedure volumes in spine and affected hospital operations throughout the months of August and September. We've estimated the negative impact of that to be approximately $4 million of revenue for the third quarter. Despite the COVID-related headwinds, our third quarter organic revenue growth outpaced the overall market. As Pat mentioned, revenue from lateral procedures contributed 50% to growth in the quarter on strong expansion of our lateral market share. Third quarter year-over-year volume growth of 22% was driven by the advancement of our sales footprint and by the continued expansion of surgeon adoption, with surgeon users up 20% compared to last year. Average revenue per case grew 6% year-over-year, reflecting disruptive impact of the pandemic on hospitals during the third quarter, which resulted in a shift in case mix toward the outpatient setting and more emergent cases. Those cases favor less complex procedures, which generally require fewer categories per case and generate lower per case revenue. Sequentially, organic revenue was down 7% with volumes down 4% and case ASP down 3%, again, as more complex higher ASP cases were deferred. Overall, our procedural volumes dropped in August, began to improve after Labor Day, and continued to improve through the months of September and October. While the disruption created by COVID and hospital labor shortages hasn't entirely dissipated, average daily sales for the month of October were higher than the average daily sales in the second quarter, which is an encouraging sign of recovery. In the third quarter, we recognized $11 million in EOS-related revenue, which was up $5 million compared to the second quarter. Now keep in mind that the transaction closed midway through Q2, so we didn't recognize a full quarter of revenue like we were able to in Q3. Timing of EOS replacements in the third quarter drove a better than anticipated revenue result. Finally, revenue from our international supply agreement, which ended on August 31st, totaled approximately $100,000 in the quarter. So to summarize, the total revenue result of $63 million represents 53% growth, and it's comprised of organic revenue of $52 million, which grew 29%, EOS-related revenue of $11 million, and a minor contribution from the now-terminated international supply agreement. Continuing through the remainder of the P&L, non-GAAP gross margin was 72% in the third quarter. down 490 basis points compared to the prior year quarter and down 120 basis points sequentially. The year-over-year decline in gross margins was primarily due to the consolidation of EOS imaging. The delta between EOS's gross margin profile in the low 40s on $11 million of EOS revenue and the 79% gross margin that our base business generates resulted in an unfavorable 660 basis point impact compared to the prior year period. That was partially offset by a favorable impact of 170 basis points driven by leverage in the base business. Operating expenses in the third quarter reflect continued thoughtful investments to fuel long-term industry-leading growth. During Q3, we maintained our planned investment levels through the pandemic-related reduction in volume and revenue. That unfavorably impacted our year-over-year and, in particular, our sequential comparisons. Non-GAAP R&D was $8 million and approximately 13% of sales in the third quarter compared to $4 million and approximately 11% 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 $52 million and approximately 83% of sales in the third quarter compared to $31 million and approximately 76% of sales in the prior year period. The increase was driven by continued expansion and professionalization of the ATEC distribution network, surge in training, spend behind major events like NAS and our national sales meeting, as well as investments required to support the increasing size and sophistication of the company. Total non-GAAP operating expenses amounted to $60 million and approximately 96% of sales in the third quarter, compared to $36 million and 87% of sales in the prior year period. Adjusted EBITDA was a loss of $10 million compared to a loss of $2 million last year and to a loss of $7 million last quarter. The sequential increase in adjusted EBITDA loss was primarily driven by the combination of lower third quarter sales and the sustained pace of investment. We ended the third quarter with $224 million in cash, and I'll walk that from our June 30th balance of $77 million. On August 5, we closed an upsized convertible debt offering of $360 million with a 75 basis point coupon and a conversion premium of 32.5%. Net of fees, a capped call feature, a share repurchase, and debt repayment, the offering generated $188 million in cash. Offsetting that was $37 million in operating cash burn, of which close to $22 million was invested in inventory and instruments to support sales growth. and $16 million was attributable to other operating investments and working capital fluctuations. Debt at carrying value is $327 million, which includes $316 million of convertible debt and EOS-related debt of approximately $20 million, less debt issuing costs of $10 million. I want to address a few more implications of the convertible debt offering. In addition to supporting a continued investment to scale the business, a portion of the proceeds extinguished $53 million of debt, which bore a much higher 9% to 12% coupon compared to the 75 basis point debt we now have. The new debt structure will save us a little over $2 million in interest expense annually, while significantly increasing our access to capital. We closed the convertible debt at a stock price of $13.84 and have a premium of 32.5%. which implies that at conversion, we will issue approximately 17 million shares in exchange for the debt. Common shares outstanding as of September 30, 2021 were 99 million, and the fully diluted share count, including employee equity awards and awards, is 132 million shares. Using the Treasury stock method, the fully diluted share count at September 30, 2021 is 121 million. When the debt converts to equity, approximately 17 million shares will be added to our share count. At that point, $316 million in debt will be excluded from the calculation of our enterprise value as it will have converted into equity. Now turning to our full year 2021 outlook. We now anticipate full year 2021 total revenue will approximate $235 million, representing growth of 62% compared to 2020. That includes the following. We expect full year 2021 organic revenue to approximate $208 million, which implies growth of 47% year over year, driven by the impact of clinical distinction on surgeon adoption and the elevation of our strategic sales network. Updated US organic revenue guidance captures the $4 million of COVID-related impacts that we weathered in the third quarter. Our expectations for the fourth quarter are based on a continuation of the improved trend that we experienced in October. We now anticipate EOS-related revenue of approximately $26 million for the full year 2021. up $1 million from previous guidance. While we are pleased with EOS's performance, the ongoing integration efforts and the current strength of the order book in the third quarter, we want to keep expectations realistic. The timing of new deliveries and the unit upgrade cycle, which meaningfully affect the revenue we are able to recognize in the period, have natural variability from quarter to quarter. We expect a now-ended international supply agreement to contribute about $900,000 of the full-year revenue. Now I'd like to spend a moment on a quantified view of the opportunity ahead of us. The current momentum of PTP adoption and its expanding applicability validates our belief in PTP's continued ability to increasingly penetrate the roughly $1 billion lateral market. The familiarity of the approach, coupled with the predictable, reproducible outcomes that PTP begets, can gradually convert CLIF and TLIF surgeons that haven't yet adopted the lateral approach due to the challenges that the traditional technique presents. The conversion of cliff and T-lift surgeries to a lateral approach will enable us to shift the significant portion of the $2 billion cliff and T-lift market into the lateral market. Our ability to demonstrate clinical value in a space that still needs predictable outcome-improving innovation is already building surge in trust and creating a halo effect, broadening the overall adoption of ATEC's now comprehensive portfolio to drive significant share-taking across the $10 billion U.S. spine market. Additionally, our recent acquisition of EOS Imaging opens the door to an estimated $2 billion market opportunity, assuming roughly 3,000 U.S. hospitals and ASCs at the average ASP for an EOS system. That doesn't consider the potential to place multiple EOS systems at a single center, a dynamic that is already at play today. So with a $12 billion U.S. market opportunity in front of us and our differentiated procedural approach, it is clear why we are so optimistic about the road ahead. Over the past three years, we've consistently demonstrated the significant growth that share-taking through clinical distinction can deliver, and we are just getting started. We are building a sustainable growth story that, as we execute on our share-taking strategy, can span decades. In closing, we continue to do what we said we'd do. In the third quarter, we delivered industry-leading growth, up 53% in total and 29% organically, compared to a U.S. spine market that was down. We remain relentlessly focused in the long term and steadfastly committed to revolutionizing the approach to spine 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. And with that, I'll turn the call back over to Pat.