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spk01: 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.
spk04: 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
spk08: 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.
spk04: Thanks, Todd. Our strategy is about evolving the clinical experience. We believe that good medicine is good business. In that way, we will earn our share. And you don't need to earn your share. The share is not earned before effectuating the clinical experience. That's why we believe in the long-term value creation of ATIC. We are doing things that create momentum. And clearly, you look at PTP. You look at the addition of EOS. You look at the confidence reflected in the halo effect of our entire portfolio based upon what we're doing clinically. our expansion and improvement from a U.S. distribution perspective and the foundation that we're laying from an international standpoint. And so through a commitment to advancing the clinical experience in spine, we have set the stage for sustainable, multifaceted, industry-leading growth. And so literally we have just started this process, and we look forward to the long haul of continuing to evolve the field of spine. So with that, we will take questions.
spk01: We will now open the floor up for questions. The first question comes from the line of Brooks O'Neill from Lake Street Capital.
spk07: Brooks O' Good afternoon, guys. Congratulations on sort of boring through the disruption of COVID. I have one primary question. I had the good fortune to come visit your headquarters and trading facility in San Diego recently. Can you just talk a little bit about how that integrates with the, you know, effort to proceduralize and sell platform opportunities into the spine market going forward?
spk04: Yeah, Brooks. Thanks for the question. To me, this whole opportunity to demonstrate the reality of how to further the field of clinical spine care is one of those where the surgeon puts their hands on all of the products that ultimately reflect in a procedure in a cadaveric setting as close to the OR as possible. And they're doing it with luminaries in the field. And I think that just the opportunity to understand why each of the individual components that reflect in the sophistication of the procedure is very, very valuable. And it's not one of those things where it's like they're coming here and we're pouncing on them to sell. What we're trying to do is compel them based upon the clinical application of a specific procedure. And I think that's why you're seeing such a robust interest in volume of people who are interested in coming to learn PTP. It's not that they're coming here to learn about Invictus, our pedicle screw system, or the lateral inner body device, but what they're trying to understand is how they put it together, what the specific patient that they're going to apply this to, and what the expected experience is going to be. And so we have that laid out, I think, as well as anyone. The other thing is we start to give them an understanding of EOS, especially those guys who haven't been experienced in understanding what EOS is. I think really it provides them such a much deeper view as to why this acquisition was such an important part of our clinical thesis moving forward. Anyway, not the drone, but it's just one of those things where it's like we're getting started with PPP. We show them exactly how we're addressing the clinical utility. And then the beauty is we start to march up the sophistication of how they apply it in the different pathologies. And each time we get another opportunity to influence them. And so I would say that that's the reflection of the new building, and that is why we contemplated kind of the structure of putting it together when we put it together.
spk07: I can just say I was blown away when I saw it. I'm sure everybody else is, too. So that's great. Thanks a lot.
spk04: Thanks.
spk01: Yeah, thanks a lot, Brooks. Next question comes from the line of Matthew Blackman from Stiefel.
spk03: Good afternoon, everybody. Thanks for taking the questions. Just to start, I'm curious on the mixed headwinds from complex procedure deferrals. Is there any way to reflect back over the course of the pandemic I don't know, maybe using 4Q20 and 1Q21 as a proxy, but just give us a sense of how quickly complex procedures come back. Do they typically come back faster than more traditional procedures? Do they typically come back slower? Just any thoughts there, and I just have a couple of follow-ups after that.
spk04: Okay, I'll let Todd quantify things because I'll totally screw that up. But I think what happens is the patients who get operated on is claudication. So if there's something pushing on a nerve and it's more emergent, those people get operated on. And so when you start to talk about long construct stuff, I've got to tell you, sometimes it's, and please take this in the vein it's intended, is it is cosmetic. And it may not be a claudication issue. It may be more of a cosmetic issue, which means the deferral is likely able to go longer. But when someone has a more immediate intervention required, I think those are the cases that are going on. And so I think the Northwest was a kind of a perfect storm where you saw the flare up of the pandemic. And what you would see is you'd still see some stuff come out of there, but not at the volume that we previously expected, as well as not of the complexity. And so our view was, gosh, based upon you know, the goofy staffing dynamics that we're in, the cloud on the pandemic, what we're seeing is some ASC type of stuff, but not longer complex stuff that often would be less about emerging quadrication and more about longer construct.
spk08: Yeah, I think I'd add to that, Pat. You know, certainly when you looked at the mix of procedures and kind of how they grew year over year, you know, ultimately you definitely saw a stronger growth in cervical relative to the other contributors. And I think, again, that kind of speaks to the place and the ability to do those procedures in maybe a little bit lower risk environments, if you will, or a lower risk procedure rather. And so we saw probably a stronger experience there than we did in some of the more complex areas. You know, Matt, we talked about, I think it's most clearly seen in our sequentials where total revenue is down seven, volume is down four, ASP is down three. And so ASP is, you know, almost half of the contributor in the movement of revenue sequentially. And that really kind of comes down to the fact that many of the more complex procedures and higher revenue, higher case ASP were deferred out of the period.
spk04: One other point, Matt, sorry to pipe in, but when you start to see a 20% increase in the volume of new surgeons but only a 6% ASP, you think, gosh, more revenue of less complexity. And so just trying to create an objective understanding of, gosh, what we believe to be the dynamics that are driving the business.
spk03: Great. I appreciate it. And then maybe just some updates on the channel, new reps, exclusive reps, new distributors. new U.S. geographies, just anything going on on that front end. Just curious, is EOS obviously attracting new surgeons, but is it helping you attract any more higher-performing distributors or sales reps now that there are pull-through opportunities? Just curious about that dynamic. Thanks.
spk04: Yeah. You know, I could answer and just say yes, but I'll give you a little color commentary. You know, we've been weak in many of, I think, the major metropolitan areas, and I think when you start to think about where the academic institutions are, I think that there's a lot of people that have significant experience that may have previously worked with large companies where the companies don't have the passion to continue to evolve the field. And I think that what they see is a significant momentum from, again, I think a small but pivotal player that's very interested in continuing to move the field forward. And I think that... that EOS is a great driver of interest because I think they understand how we will ultimately translate that information to continue to improve surgery. And candidly, it creates a moat around it's unique. We're the only guys that have it. And I think that it's a little bit misunderstood to realize, hey, listen, when you think about lateral surgery, there's two companies that have neurophysiology, ourselves and some guys down the street. And candidly, our neurophysiology is profoundly more sophisticated than theirs. And so our ability to ultimately earn people's confidence in that is very high. And then to look longer term about, hey, we're going to lay the foundation and then translate the information out of EOS, I think are two key factors of really bringing over a sophisticated group. And so we're seeing that real time in the Northwest. We're seeing it real time in the middle part of the country. Chicago's starting to bulk up. And so we're seeing a lot of different areas where there's a level of sophistication that we haven't enjoyed previously.
spk03: Thank you. Appreciate it.
spk01: The next question comes from the line of Jason Witts from Lute Capital.
spk06: Hi, thanks for taking the questions. Just a quick clarification. In terms of your fourth quarter outlook, I assume there is still some COVID impact assumed in there. I think you said volumes aren't quite up to speed. Do you assume, A, I don't know how much quantitation you give on what you think the impact might be, and B, is there an expectation that by year end we can resume kind of normal volume levels?
spk08: Yeah, Jason. I think I guess I'd say a couple things. One, just in terms of context, you know, we know COVID's still out there, you know, still hot pots in Northwest, a little bit in the Southwest, in the middle of the country still. We also know that staffing challenges continue to be a variable that hospitals are working through. You know, I think in terms of, you know, the direction those are going. I think COVID is generally improving. I think the staffing challenges kind of are what they are, and we're going to have to work through those. And, you know, I think the other thing that is manifesting itself is the traditional seasonality of Q4. We're definitely starting to see that demand as well. So we think that's kind of a setup for the quarter. And then, you know, in terms of our sequential performance kind of from August to September, to October, I think improving sequentially has been positive. And, you know, given the fact that our October ADS greater than our Q2 ADS is a good sign there, we can see this in the weekly trends, which also give us, I think, a good amount of confidence about the fourth quarter. And so, you know, I think ultimately our $57 million guide for organic sales It does assume that we see some continued level of improvement in November, December, and that's really kind of as COVID attenuates a bit, and those areas begin to improve their volumes along with the seasonal demand, but recognizing that we're still going to have to work through the staffing issues.
spk06: Okay, that's helpful. I appreciate that. And then if I could just ask about, you know, you've seen, obviously you're seeing tremendous growth with PTP and Lateral. major contributor last quarter, but especially this quarter. In terms of the surgeons that you're kind of getting on board with this, are they primarily lateral surgeons, or are you also seeing traditionally non-lateral people starting to look at PTP as a real viable opportunity for them?
spk04: Yeah, you know, Jason, kind of a question that we had, you know, early on, are we just going to get kind of the lateral guys and have them, you know, kind of come over from doing traditional lateral? You know, the challenge has been with laterally positioned surgery is that, you know, we never really got much above 20% of the surgeons, you know, applying the technique. And so, you know, what we're seeing is the very thing that we'd hoped for, which is a lot of the guys didn't – in essence, do lateral surgery because, one, a lot of them typically believe that you want to do a direct decompression. And so the great part about PTP is it provides that optionality. The other one is the whole alignment thing. When you're in the lateral position, to align someone from a lordosis perspective is harder, candidly. And so the ability to have the belly hang from a prone position really speaks to the posterior approach guide. And so our ability to put them in a familiar position and be able to really address lordosis, really address the direct decompressive element, but then also place fixation or stabilization in a very familiar position has really kind of been phenomenal. And so when we look at the demographics of those people who are coming in to be trained, it's not just lateral guys. It's also guys who have been traditionally posterior guys. And so, you know, to us, that begets kind of our interest at above 5.1, our access to the Pliff and Tealiff guide is readily available. And that's what I think Todd's talking about when he starts to quantify the value of the marketplace. It's different than what has been historically pure lateral.
spk06: That's helpful, and it does describe that slide well. Last just quick question on EOS. I assume that the numbers that you see – in terms of revenues are still basically the book of business that you inherited um i guess it's just too kind of is it right to assume it's just too early to see any purchase agreements tied to eos as opposed to outright capital sales which is what they were doing before or are we starting to see that now and in terms of when you think what the timeline is before we can really start to see the EOS ATEC combination really start to take a role in placing these systems? Is that still like a 9- to 12-month process, I guess is what I'm asking?
spk04: Yeah, I'll let Todd, again, quantify it because I'll screw it up. But the whole ability to have influence, I think, was relatively immediate. And that's why we believe the market opportunity is so big is because what happens is we've already had guys who, I would tell you, are kind of A-tech friendly acquire them immediately. uh in individual practices and so the relevance of this technology is such that guys are in essence opening up the checkbook writing a check for a unit and we we've seen that a couple of times through the um through the initial phase of kind of the the integration. But, you know, the best is yet to come. And the real virtue of this thing becomes how do we ultimately lay a foundation such that, again, you look at France and there's 100 of them. Imagine if there's 500 to a few thousand here. Our ability to translate those units in ways to make surgery better is so opportune. And so I would tell you we are such in a very, very, very early phase. Do you want to add?
spk08: I don't have a lot to add to that. Unless there's another question or follow-up to that. I'm good.
spk00: Thank you very much.
spk06: I'll jump back in queue. Thanks, guys.
spk01: Next question comes from the line of David Saxon from Eat Him and Company.
spk02: Hi, this is Joseph. I'm here for David. Thanks for taking our questions. I guess maybe first, coming out of Nat's, I'm sure PPP and EOS generated a lot of interest, but can you maybe share some of your takeaways and talk about what other products were getting attention from docs?
spk04: Yeah. I think that what's interesting is that this was a resurrection in terms of the company. And if you look about several years ago, the type of aptitude that came over here with regard to kind of mechanical skill set from a design and development perspective was over the moon. And so what happens is that I think surgeons come over and they say, gosh, that EOS thing is kind of cool. It's, you know, clearly what the luminaries in spine surgery view as being a valuable tool. Well, and then you come over and you see it doesn't stop there. What happens is you go by and you see a posterior fixation that goes from occiput to ileum. you're not going to see that at 99% of the boost at mass. And so you start to realize, hey, it's not just stopping at EOS or not just stopping at PTP, but really it's the ability to understand that there's a sophistication that gets delivered across the way. And the things that just continue to inspire is you know as i mentioned in the call who has a system in a pedicle screw perspective that that delivers a percutaneous pedicle screw that's k wireless that is a a modular device that's attached to neurophysiology that includes delivery of a blade for telit and i'm going to tell you nobody And so what happens is they come over and they see some of these things and they're like, oh, my gosh, this is the real deal. And so the great part is these opportunities provide us the ability to touch people who we may not be touching because of the maturity of our sales force. And, again, enables us to drive confidence in ways that we wouldn't have otherwise. And so, again, you know, nobody jumps up and down more about PTP and EOS than me. But I got to tell you, the further people get into our portfolio, the more impressed they are.
spk08: And that's important, Joseph, because as you look at the utilization of PTP, obviously the lateral approach gives you opportunity to place a spacer, but oftentimes they do get posterior fixation. And the fact that we have the best, if not one of the best, or one of the best, if not the best, posterior fixation systems out there today, as sophisticated as Pat has talked about, While we're launching PTP and bringing what I think is a solution that physicians are looking for, you kind of get the credibility of and credit for delivering that solution, the ability to then hang your posterior fixation and get all of the products per procedure that that procedure requires out of your bag. is higher. And I think that's why it's so, I think, impressive that the company has launched 40 products over the last number of years. It really sets up nicely for us to continue to get an increase in case ASP as we continue to penetrate the lateral market.
spk02: Okay, okay, great. That's very helpful. And then maybe one question around The agreement with Globus obviously ended in the quarter. But maybe, you know, what are your plans for expanding internationally? Our understanding was that this was a two-year restriction, but that there are some countries that are open to you. So can you maybe size that opportunity and talk through, you know, how you plan to enter those markets? Sure.
spk04: Yeah, yeah. So first of all, we celebrate the end of the relationship with Globus regarding international. The other is I would tell you that what we're going to do is we're going to be very focal as it relates to kind of our international effort. And I think we've even gone as far as to say, hey, these are the kind of markets of interest. And so I don't think we've communicated the timing associated with our specific interest, but I think that if you look at, like, New Zealand and Australia. We're starting to lay the foundation there. Companies are about people. I've got to tell you, we have some great people in terms of New Zealand and Australia teed up to ultimately lead that effort. Then you start to say, gosh, you know, the U.K. is an attractive market from our view as it relates to kind of a combined company. Clearly, this doesn't contemplate all that's going on with EOS already in the international marketplace. Japan is another super attractive country. I think that there's a lot of kind of surgical, you know, views that are shared between the two countries that I think provide opportunity for us to integrate into that market effectively. And then, you know, probably lastly, and, you know, we have Brazilian roots, if you will, and so likely Brazil is a place that we'll spend some time as well. But those are kind of the marketplaces. Timing is about how we lay the foundation and when we feel the need to enter. But I've got to tell you, we're excited about the people we're attracting in those places.
spk02: Sure. Okay. That's super helpful. Thanks for taking our questions. You're welcome.
spk01: Next question comes from Matthew O'Brien from Piper Sandler.
spk09: Afternoon. Thanks for taking that question. Pat, can you talk about this growth in new users? I don't recall the exact numbers over the last couple of quarters, but you know, up 20% is great. How does that dovetail into You know, the growth of the business as we look into 22, it's just difficult because there's, you know, it's a tough COVID comp here to kind of figure out, you know, what you're going to look like next year. So 20% growth in users here this quarter, you know, ASP is helping a little bit. You know, should we think of you guys as, you know, a 25% grower again next year, even though you've got a tougher COVID comp?
spk04: I'll answer the first part, but remember, the quantity guy is tough. I think your point's the right one. It's one of these things where it's like we compel people. Likely, their initial experience with our products is smaller and more focal. As we've always talked about, this is a walk toward confidence creation. And so what we're doing is we're seeing more people be excited about what we're doing. Candidly, the volume of people coming through is very, very high, and there's a great enthusiasm. And when they leave, they usually do stuff. But oftentimes it's not big stuff because what they want to do is they want to get – you know, do I have the rep in place? Do I have the hospital approval? Do I have all of the ability to do what I intend to do? And so oftentimes it's a walk up. And so it's tough for me to specifically quantify. But what it does is it lays the foundation of people familiar with our products who find success in them early. And you see that reflected in really a long-term growth profile.
spk08: Yeah. And, you know, I think the new surge in users, um correlates nicely with the amount of training that we're doing and and i think that's all very much connected obviously also connected to our expansion in in uh in in coverage across the across the country from a distribution standpoint um you know as as it relates to next year we haven't given guidance yet um still in the middle of our planning process so all that's very very live you know i think currently uh consensus is sitting out there like 293 which is 25 so You know, I think you're kind of spot on there. I think we're not offended by where consensus is at.
spk09: Great. Thanks for that. And then I'll stick with the quantitative guy for a second here, Pat. The gross margin that I may have missed it. I'm sorry if I cut you off there, but I may have missed it, but the gross margin was softer. I know EOS is a big component of that in the quarter. How do we think about that metric? And then what does Memphis contribute to the business going forward? And specifically what I'm trying to get to is leverage points in the business going forward? You're making all these investments to grow the top line, which is the right strategic move, but when do we start to see a little bit of that leverage start to squeak out versus some hefty spending numbers on the SG&A side of things here in 2021 and likely in 2022 as well?
spk08: Thanks. On the margin side, ultimately we saw what was about 490 basis point unfavorable year over year. That's about 660 basis point impact from EOS. So that's the difference between their 40% margin and our high 70s on $11 million of EOS revenue. That's partly offset by 170 basis points of manufacturing and overall efficiency. So I think that hopefully speaks to some of that efficiency side on on our operations front. You know, I think, Matt, longer term, you know, as we grow the business, I think we get some tailwinds on gross margins just as our implant business grows, probably grows a bit faster than the overall capital business in the long run. Obviously, as you're looking at any given period, you have to be a little bit cognizant of the mix between capital sales and placements and how the expense of the equipment is reflected in the P&L and the timing of all that. So, you know, I think more to come on that when we talk about four-year guidance in the coming quarter. But, you know, overall on leverage, you know, I certainly think over the last two years, I think if you looked at Q3 operating expense as a percentage of revenue here in the quarter, we're at 93%. If you look at that number, had we done $4 million more that we lost to COVID, it'd be about 90%. And two years ago in 2019, Q3, non-GAAP OPEX is a percentage of sales of 93%. And so, you know, I think you certainly would have seen a bit of leverage here in the period had we hit our revenue number. And so your earlier commentary relative to COVID kind of mixes up this stuff a little bit. But we've definitely had kind of two meaningful years of investment. And as we get to continue to grow, I do believe that you'll begin to see some leverage here, especially as we get closer to kind of that $500 million to $600 million run rate. I think the closer that we get to that, I think the improvement will accelerate.
spk05: yeah very helpful thank you yep thanks so much the next question comes from the line of josh jennings from cohen hi this is eric on for josh thanks for taking the question as you mentioned earlier the organic growth trajectory that you've been on since 2018 you've been able to grow well into the double digits exceeding the market and your competitors and this has really been apparent during the recent covid impacted quarters Can you help us understand what ATEC is doing that others in the market seem to be missing? And perhaps more importantly, what sort of competitive response are you seeing now that I'm sure other spine players are taking notice of your performance?
spk04: Yeah, to me, I think that we did our best to lay it out in terms of all the guys who created Lateral, I think, are best informed to improve Lateral. And so, you know, I would tell you that that's such a key part of what we're doing uniquely. You know, the other thing is it's interesting if you look over kind of the history. In spine surgery, there hasn't been companies that designed and developed for the specific utility of. And what happens is people are like, gosh, that spine surgery is not very sophisticated. Well, it's not going to be sophisticated unless you design all of the elements to satisfy a specific requirement. And so our ability to do those things and having done those things ultimately reflects in a – a product that gets widely accepted very, very early. And so that's been our experience previously. And I think that if you start to say, gosh, what are we doing differently than other people are, it's designing and developing for the specific utility of. And there's great know-how at the place. We're including technologies like automated neurophysiology, both from a EMG and an SSCP perspective, these things are very, very hard. And so when you start to say, gosh, what are we doing that other people aren't doing, is what we're doing is we're innovating based upon the requirement of creating a predictable experience. And so that is clearly the case, and that's being most early reflected in the lateral experience, but it won't stop there. And I think that we have plans across multiple different procedures to do the same. And so What you're seeing is a market reflection of what I would call procedural sophistication.
spk05: That's great. Thank you. And then on staffing shortages, it seems like you're managing well so far based on your three key results and updated guidance for the year. I'm just wondering if this is an issue that you're factoring into your internal expectations as it possibly could be ahead of 2022. Thanks for the question.
spk08: Yeah, you know, as we looked at our Q4, I think as I shared earlier, you know, we considered a number of things in the context of the quarter. You know, clearly hospital staffing is something that we saw. We believe that hospital staffing is going to be real and continue into the fourth quarter. You know, we think COVID is attenuating a bit and should be. as that begins to go away, we'll see more resumption of business where we didn't see it in Q3, so that'll be a tailwind a bit. And as we believe that the normal seasonality of Q4 also kind of lifts the volumes. So, you know, ultimately we saw October ADS to be in excess of the Q2 ADS. We saw continued improvements from August to September and September to October. And we're expecting a moderate improvement from October, November to December. And so, you know, I think we're well-placed to put guidance from our philosophical approach of, you know, thoughtful, fully considered, and put a number out there that we believe we can achieve and have reasonable opportunity to exceed.
spk05: Understood. Thanks again.
spk01: Next question comes from the line of Kyle Rose from Tenacorp.
spk10: Great. Thank you for squeezing me in. So a lot's been asked, but one of the things that stood out on the call was not just the growth, but specifically the growth that's coming from lateral. And you talked about 50% of the organic revenue growth came specifically from lateral. I mean, that's somewhere between $5 and $6 million when we look at the Q3. So I'm just trying to understand kind of that dynamic of the strength of lateral, but then also the commentary around, hey, we're seeing a lot of cases move to the ASC. We're seeing a lot of cases move less complex. So just maybe kind of frame the opportunity if COVID hadn't been here. If you didn't have that $4 million headwind, would that $5, $6 million of lateral growth turn into $10 million? I'm just really trying to understand kind of how much of this is really being driven by lateral alone.
spk04: Yeah, I will not answer the specific numeric reflection, but, you know, so I think what you're seeing is you're seeing really kind of a very positive early adoption of a technique that is going to be profoundly relevant. And if you look at everybody else in terms of what they're doing, everybody's out there talking about prone lateral. And we've already been through prone lateral. All of our learnings in terms of failure is ultimately reflected in what is now PTP. and so the great part is is what we're seeing is kind of the early adoption and i think anytime someone adopts something early what they're going to do is they're going to do something that is a gimme where will they find success and i think about things like you know grade one spondylolisthesis whereby the likelihood for achievable high success rate is is is very good and and so What you're seeing is you're seeing kind of the early adoption. The great part is those people who have been around this for a period of time, what we're seeing them do is more complex things with the technique. And so the great part is adult deformity is a very challenging kind of a pathologic profile to treat. And so when you start to think about the ability to start to move the anterior column around, that's going to reflect in a more sophisticated way. intervention associated with PTP, and we're starting to see those things transpire now. The great part is also if you look at tumor and trauma and some of the other kind of tools, like from a corpectomy perspective, all of that stuff from a pure PTP perspective is being developed now. And so what you'll see is just a continued walk up the sophistication ladder, which will also be reflected financially. And so I would tell you that, you know, We see a tremendous opportunity in lateral surgery with regard to PTP. It doesn't mean that LTP is going away in terms of lateral transoce, laterally positioned transoce surgery is going away. But, again, I think that what you're seeing is the type of utility that we would expect out of early users and then the type of kind of pushing the envelope with people who have been around it a little bit longer. And so I know all the kind of qualitative that Dr.
spk08: You know, Kyle, it's hard for me to sit here and pretend I know exactly how that $4 million would have manifest itself, but certainly volumes would have been higher, and as I kind of look at the demographics of our growth, where it was, the strength of the growth and the different procedures, I certainly would have expected some of that $4 million to be reflected in in our lateral business and so you know my belief is yeah a portion of that would have been lateral um and you know your your comment about you know cases getting being less complex and moving to the ac we really think that is you know the less complexity is is as much uh about the covet impact and and the deferrals and how that plays out in the in the healthcare setting uh as well as as you're as you're adding new surgeons To Pat's point, we're starting out with probably simpler pathologies. So, you know, all that to say, you know, had we seen $4 million, certainly would have been more volume, and I do think the ASP contribution would have been higher than 6%.
spk10: Okay. Thank you. And then just overall, I mean, I think the Q4 annualizes the actual, you know, the broad commercial launch of PTP. I know you had some alpha cases going on, you know, before that. When we think about, you know, all of the, you know, surgeon education and things that you've done, your surgeons are up 20% here in the core this year. How much of your user base is using PTP now?
spk04: Well, it's a great question. I would say a fair amount. And sorry to not quantify it. It's one of those things where it's like, I think what compels people to come over here are things like PPP. And so what happens in kind of the normal kind of run of things is is they come here, they see the building, they see that we're serious about a long-term value creation in a market space that we have a long history of serving, and then they become enamored with PTP because that's what brought them here. They have a great experience. They gain confidence, they leave here, and they do work with us based upon the confidence created by their visit. And so I would tell you that a large amount of people, why they come is because of the clinical distinction and being compelled by it. And we feel like, gosh, that's the right approach in terms of building the foundation of a long-term successful company. Nobody's going to come here to look at our cervical plate. As great as our cervical plate is, they ain't coming to look at it. They're coming to walk away with a skill set that they didn't have before they came. And so the great part is we're giving it to them. And that speaks to, again, long-term success.
spk10: Great. Thank you.
spk04: Appreciate it, Cal.
spk01: We have no further questions at this time. This concludes today's call. You may now disconnect.
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