Alphatec Holdings, Inc.

Good afternoon everyone and welcome to the webcast of ATEC's fourth quarter and full year 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. Reconciliation of non-GAAP measures to U.S. GAAP can be found in the supplemental financial tables included in the press release, which identify and quantify all excluded items and provide management's view of why this information is useful to investors. Leading today's call will be ATEX Chairman and CEO Pat Miles and CFO Todd Koenig. Now I will turn the call over to Pat Miles.

Thanks much, Paul, and welcome everybody to ATEX Q4 Full Year 2021 Financial Results. In the call, you will find some forward-looking statements, so if you'd like to review that at your leisure, I would invite you to do so. The 2021 was a good year. I would tell you that during a pandemic year, we grew to 243 million in total revenue, which was a 68% year-over-year growth rate. A bunch of highlights that you'll hear about during the call. We continue to pioneer PTP, which has gone exceedingly well. It is the largest revenue growth contributor in 2021. We launched more than 10 products. We closed the EOS imaging acquisition, which contributed $30 million to full-year revenue. We opened a new headquarters, which is absolutely beautiful, and increased sales and surgeon education capacity, which is key to our effort moving forward. We trained greater than 400 surgeons. We opened up a distribution center in Memphis to further the foundation effort, foundational building effort. and closed a $316 million convertible debt offering to fuel investment in future growth. And so if you look at Q4 2021 and kind of look at the scorecard, we had 42% organic revenue growth. We had 23% growth in insurgent users, 9% growth in average revenue per case, 84% of the products used were new. We had a blended product, average product categories per case of two. And it was our 13th consecutive quarter of double-digit revenue growth. 11 of 13 were greater than 20%. And so the excitement here is really sector-leading growth. And so we have a three-year organic U.S. revenue of 36%. And so we have built one of MedTech's best growth stories. our best is yet to come. There's no question about that. And the reason our best is yet to come is because our focus continues on clinical distinction. And so how we best create clinical distinction, how we compel surgeon adoption, and how do we continue to evolve a sales force that keeps getting better. And so really, we're going to kick off first with the whole clinical distinction scorecard. And I think everybody knows who knows us is we are in pursuit of the perfect spine procedure. Spine still has challenges and hence a ton of opportunity. And so we have released approximately 40 products from 2018 through 2021. I think that's why you see such a significant amount of revenue generated by new products, which as I said earlier is 84%. So when you start thinking about the pursuit of the perfect procedure, you have to think about what's going on in lateral, and I think specifically in PTP. And so I think I stated over 40% of Q4 revenue growth was by our lateral portfolio. It's really PTP that's driving the prowess. The sophistication and know-how at ATEC is unmatched. So it is unrivaled. And I think it's reflective of the type of growth that we're seeing from the procedure. The great part is we're not only taking from lateral surgery, we're also building users that are conversions from PLF and TLIF. And so surgeons who like to operate on patients when they're in the prone position really accommodates the surgeon transferring or coming over from having done PLF or TLIF previously. We're also seeing utilization increase in complex cases. So the the volume of utility in complex deformity continues to grow as well as we're starting to see utility in things like a corpectomy, which is cancer and some trauma utility. And that will continue to expand over time. One of the other things that we're super excited about is for years, minimally invasive surgery was relegated to the hospital. And what we're seeing is we're seeing a 60 minute 360 degree fusion in an outpatient ASC setting. And so now you're seeing reconstructive minimally invasive spine surgery done in the outpatient setting. And what avails that is automated neurophysiology. And more specifically, what's most important, when you do a lateral approach, what's required, and it's not something that a nice to have, it is an absolute requirement, is to understand where the nerves are in the psoas so you can go through the psoas. And so we have the only technology that not only lets you identify where the nerve is in the psoas, but also gives you an idea of the nerve health And so what's important is when you retract the plexus in the psoas is you understand how you're, am I hurting it or not? And so from 2018 when we acquired SafeOpt, the technology that we coveted was automated SSEPs. It's a very hard thing to do. That's why very few people do it or nobody does it other than us. And so we can't be more excited about it. And what you see is you see the reflection in the volume of surgeons who are interested in coming out. If you can see the graph in terms of ATEC surgeon training visits, it is a hockey stick. And I think that that is a great lead indicator of the level of enthusiasm for the things that we're doing. And so another, I think, clinical distinction driver really is what's going on with EOS. And I wanted to give a little bit of progress on our strategic objectives. Clearly, you know, the intention here is, you know, how do we increase the volume of systems placed so that what we could ultimately do is effectuate surgery, both pre, intra, and post, and be able to impact the predictability associated with surgery. The real virtue here becomes in the data collection and what we can do with that over the long term. And so our enthusiasm for EOS has done nothing but groan with regard to it being under the auspices of ATEC, and we can't be more excited about it. Several Q421 highlights is $13 million in EOS-related revenue for the fourth quarter. Establish a cadence of discipline on the product development front. Eric Dassel and the team over in France are doing a great job. It's starting to reflect the same type of rigor that has existed here and has reflected in all of the different product launches over the last three years. We've accelerated deliveries and increased the size of the order book. We've more than 2X the number of capital reps, as well as we've placed a very high-caliber leader in a guy by the name of Joe Walland, who was the USA CEO for Medicrea. So it's a guy who loves the space and I think is a great leader. He reports up through Dave Sponsor, who runs our sales force, but can't be more excited about what's going on from a from a commercial perspective on the EOS front. One of the things we wanted to make sure that everybody appreciated is really kind of the strategic value of this technology. And one of the things you have to look at is what's the kind of the immediate term and then over time how you see this thing kind of unfolding. And so the opportunity immediately is expanding the footprint and expanding utilization. And what that does is it gives us not only hospital access, but access to surgeons who may have never seen us before. And so if a surgeon is utilizing a tech product and maybe his partner is not, we have immediate access to his partner, which is such a value driver. The type of surgeons who have traditionally coveted EOS have been deformity surgeons. And so our ability to increase sales per surgeon is significant. The other thing it does is enables us to increase sales in general when we do things like user-based rebate type agreements whereby these guys can utilize our implants to help offset or to help acquire an EOS unit. And then the other thing is, how do we continue to drive utilization? And when you start to think about utilization rates, you look at a place like HSS, and we've talked about it before, but they do over 90 scans a day of EOS scans a day. When you start to think about the relevance of that and our opportunity to translate the relevance of the volume of scans a day, it becomes exceedingly attractive. And that's just a single place. And then, you know, you start to think about how do you extend that clinical influence? And I would tell you that when So when companies want to get upstream in a surgeon's practice, what they have to do is insert themselves in the diagnostic phase. And so for us to understand from a pre-op film perspective, and these guys judge themselves by their films, and so to get upstream with regard to the diagnosis, get in the operating room by integrating that information and the surgical plan into the operating room, and then to determine how did I do against my plan is so valuable. And then to better understand the outcomes from a myriad of different ways, we believe to be absolutely reflective of a value-creating experience. And so the long haul of this is the value of the data. And so for us to be the mavens of of clinical data based upon our ability to understand the pre-op, understand the intra-op against a plan, and then understand how close they got to it is extraordinarily valuable. And the type of opportunities to monetize that is virtually endless. And so the other thing that I think a lot of people don't realize is just how inefficient the operational dynamics are in our business and just the opportunity for us to to understand what the requirements of the surgery is well preoperatively. And so our ability to start to custom configure not only implants but instruments has really kind of been the holy grail. And it's being done in some places that utilize EOS for total joint replacement. And so these are very doable experiences. And so also, we always kind of complain a little bit about the currency in our business being only implants. And I think that our opportunity to be creative with regard to the economics in the space is availed by the type of information that EOS is providing. And so, anyway, can't be more excited about that. And when you start to think about clinical distinction, one of the other things that we talk a lot about is just the volume of product launches that we're doing. If you saw 2021, clearly a lot on the informatics front. We're gonna start making a more, a larger contribution from a cervical perspective. PTP is in the first inning of a long game. Clearly, we've done a lot on the invictus front, and you'll start seeing more contribution from biologics from us as we roll forward as well. So can't be more excited about what's going on from an R&D focus area perspective. I won't go through each of these, but, you know, let it be known that there's still so many opportunities to make spine surgery better, and that's what we're committed to and And we have a very sound perspective as to how to get that done. So one of the things that we talk a lot about is really kind of a clinical thesis. Like, what's our clinical thesis? And when you start to take an objective view as to what your clinical thesis is, it's like, are they buying into what we're communicating as the procedural event? And so when we talk about compelling surgeon adoption, we oftentimes look at the average products per case as a driver of of are they accepting the clinical thesis? And so if you look at the full year growth in average revenue per case, it's been, it was 10%, as we talked about before, greater than 400 surgeons trained in 2021. And then the expansion of the user base of 24%. But we always like to point back in terms of why we're different. And I think that If you really try to align yourself with what the requirements of surgery are, it's not just implants. And I think that so often the other people in the industry think that I'll bring the implants in and I'll really help the surgeon. The reality becomes is that to create predictability and reproducibility, oftentimes the surgeon needs more than just the implants. It's things like SafeOp, which is such a game changer, and EOS, which is a game changer. and things like a patient position that ultimately makes for a procedure that ultimately is improved. And that's what we believe to be a real commitment to the field of spine surgery is providing the requirements of the environment. So, again, looking at the adoption and looking at, you know, kind of the whole convoy sales thing, and you look at lateral, and clearly that's the leader, but a blended rate of 2.0, and we feel like we have a long run ahead of us with regard to this very area of opportunity. Probably the place that I'm most enthusiastic today, I guess, to talk about is we just had our national sales meeting and the enthusiasm was palpable. It feels like a total understatement. It's so much fun to see the sales force starting to evolve. I think some of the statistics are awesome. The growth rate clearly in the strategic distribution organically has been phenomenal. The number of sales reps trained has been phenomenal. Here's the statistic that I think is the most important, which is the revenue growth of our top 20 PTP distributors is 77%. And so I think that, you know, if you have any question that the PTP is a confidence creator, I think, uh, you know, that, that should say it all. And so, um, when you start to think of us, you know, we're, we're, we're still, you know, either on or underrepresented in a ton of different geographies. Um, we're at the sales meeting and we were all excited to see the, the distribution force from Kansas, Arkansas, and Oregon, and nobody stood up because nobody's there. And, and, and so it's, It's a situation where we have, I think, some great distributors in focal places around the country, but we still have such an opportunity to grow in that space and do more. I think that based upon the growth rate and based upon the undercurrent of enthusiasm around, they're coming. The other thing I love that we're doing is building a foundation for distribution in Memphis. The vast majority of our cases get supported out of Memphis. It's reflected the very expectation that we had in terms of creating efficiencies, and so we can't be more excited about that. Also, building the foundation for our international opportunities are forthcoming, and then can't be more excited about what's going on with EOS and the footprint. With that, I will turn it over to Todd to review the financials.

Well, thanks, Pat. And good afternoon, everybody. Thanks for joining us today. I'll begin with revenue. Fourth quarter total revenue was $74 million, reflecting 68% growth over the prior year and 18% growth compared to the third quarter. Our $74 million in revenue is comprised of $61 million in organic revenue and $13 million of EOS contribution. Fourth quarter organic revenue of $61 million grew 42% compared to the prior year period, and revenue from lateral procedures contributed over 40% to growth in the quarter on the continued expansion of a lateral market share. Strong reception to the recently launched ALIF standalone interbody system was also a notable contributor to growth in the quarter. While the resurgence of COVID-19 and continued hospital labor shortages pressured surgical procedure volumes in spine late last year, The magnitude of impact was lower in the fourth quarter than it was in the third quarter. Our fourth quarter year-over-year volume growth was 30% and driven by the advancement of our sales footprint and the continued expansion of surgeon adoption, with surgeon users up 23% compared to last year. Average revenue per case grew 9% year-over-year as revenue mix continues to shift towards procedures that feature more products per case and procedures with greater complexity. In the fourth quarter, we recognized $13 million in EOS-related revenue, reflecting strong deliveries in the quarter. The $13 million reflects pro forma growth of 42% compared to the revenue EOS recognized on a standalone basis in Q4 of 2020. Now turning to the full year, 2021, total revenue was $243 million, reflecting 68% growth compared to 2020. That is comprised of $212 million in U.S. organic revenue, a $30 million contribution from EOS and a $1 million contribution from the now terminated international supply agreement. Full-year organic revenue growth of $212 million grew 50% compared to the prior year, driven by volume growth of 37% and average revenue per case growth of 10%, with the overall business contributing over 40% of the full-year revenue growth. And we recognized $30 million in EOS-related revenue for the seven-month period since the transaction closed, which represents growth of 42% on a pro forma basis. Now continuing through the remainder of the P&L, fourth quarter non-GAAP gross margin was 70%, down 550 basis points compared to the prior year. The year-over-year decline in gross margin was primarily due to the consolidation of EOS imaging. The approximate 40% delta between EOS's gross margin profile and the gross margin profile of our base business resulted in an unfavorable 680 basis point impact compared to the prior year. That was partially offset by a favorable impact of 130 basis points driven by leverage in the base business. Operating expenses in the fourth quarter reflect continued thoughtful investment to fuel long-term industry-leading growth. And our fourth quarter non-GAAP R&D was $8 million in approximately 10% of sales in the fourth quarter, compared to $5 million in 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. as well as EOS-related activity. Our non-GAAP SG&A was $59 million and approximately 79% of sales in the fourth quarter, compared to $36 million and approximately 81% of sales in the prior year period. The increase on an absolute dollar basis was driven by continued expansion and professionalization of the ATEC distribution network, surge in training, and investments required to support the increasing size and sophistication of the company. Total non-GAAP operating expenses amounted to $66 million in approximately 90% of sales in the fourth quarter compared to $40 million in 92% of sales in the prior year period. An adjusted EBITDA was a loss of $7.5 million compared to a loss of $4 million last year and a sequential improvement from our $10 million loss in the third quarter. Now turning to full year 2021 results, non-GAAP gross margin was 73%, down 390 basis points compared to the prior year, reflecting EOS mix. Non-GAAP R&D for the full year was $28 million and approximately 11% of sales compared to 17 million and approximately 12% of sales in the prior year period. 2021 non-GAAP SG&A was $198 million and approximately 81% of sales compared to $114 million and approximately 79% of sales last year. And total non-GAAP operating expenses for the full year 2021 amounted to $226 million and approximately 93% of sales compared to $131 million and 90% of sales in the prior year. Adjusted EBITDA was a loss of $28 million for the full year compared to a loss of $10 million in 2020. We ended the fourth quarter with $187 million in cash. Operating cash use was $34 million, which, consistent with previous quarters, was predominantly related to investments in inventory and instruments to support sales growth. Now, 2021 overall was a year of significant investment for us, with about $96 million invested in instruments, inventory, and CapEx. That was related to a need to catch up on purchases that were deferred from 2020 due to pandemic-related uncertainty, as well as to purchases made to support 2021 procedural volume growth in what ended up being another year of pandemic-related variability. We expect cash use in 2022 to meaningfully improve with asset leverage and a more favorable full-year adjusted EBITDA, as we begin to drive leverage in the business. Debt at carrying value is $336 million, which includes $316 million of convertible debt. We continue to believe that the convertible debt offering placed last year will support our baseline growth plan for cash flow breakeven at a revenue run rate of approximately $500 to $600 million in revenue. Now turning to our outlook for the full year 2022. In line with our pre-announcement in January, we expect full-year 2022 total revenue will approximate $305 million, representing growth of 25% compared to 2021. That includes the following. We expect full-year 2022 organic revenue to approximate $260 million, which implies growth of 23% compared to 2021, driven by the impact of clinical distinction on surgeon adoption and the elevation of our strategic sales network. We expect EOS-related revenue of approximately $45 million for the full year 2022 and continue to be pleased with the strength of the EOSIS systems placed, the progress being made with the ongoing integration, and the strength of our order book. Now, I'd like to frame ATEC organic growth by sharing some context about its underlying components, namely the growth of procedure volumes and average revenue per surgery. You can see from the chart on the left side of this slide that procedure volumes have increased at a significant pace since the transplant business began back in 2018. The expansion of surgeon adoption has been essential to that growth. Now, over the years, we've leveraged the ATEC organic innovation machine to create clinically distinct portfolio and rapidly trained surgeons to utilize our unique proceduralized technology, both of which are fueling procedure volume growth. The increased penetration and expansion of our geographic footprint in the U.S. is also contributing meaningfully. And the chart on the right of the slide demonstrates growth in average revenue per surgery, which also has increased at a healthy clip over the years. Average revenue per surgery grows as our procedural mix shifts towards procedures like PTP and LTP, which have higher revenue per procedure than our overall average. Additionally, our procedural solutions are being utilized in procedures with greater complexity, like multilevel degenerative and deformity cases. which require more products per surgery and in turn generate higher ASPs. And finally, the level of distinction engineered into ATEC approaches and the cadence of new products launched generally enable us to command a price premium, another continuing driver of growth in average revenue per surgery. And so when we set external revenue expectations, we take a bottoms-up approach, modeling the anticipated growth of the business in a variety of ways. Our expectations for procedural volume growth and the expansion of average revenue per surgery are central to that math. And in 2021, procedure volumes expanded to about 26,000 cases. The factors I just shared give us confidence in our ability to grow that number at a mid-teens percent rate. Average revenue per case in 2021 was approximately $8,200, and our guidance contemplates expanding at a mid-single-digit percent rate in 2022. As many of you know, our guidance philosophy is to be thoughtful and prudent about how we set expectations by putting numbers out there that we believe we can achieve and have a reasonable opportunity to exceed. And we felt sharing this level of detail and context would help connect the multiple drivers fueling our growth to how they impact volume and revenue per case. So in closing, 2021 marks an epic milestone. We achieved the highest revenue ever recorded for ATEC, a company that went public 16 years ago in 2006. We delivered total revenue growth of 68% in 2021, which includes U.S. organic growth of 50%. That isn't just industry-leading growth. It is growth that puts A-Tech in the upper echelon of the med-tech sector. While we are proud of our accomplishments, we are even more motivated by the opportunity to continue delivering sector-leading growth while beginning the walk towards cash flow break-even. Our commitment to revolutionizing the approach to spine surgery has created a durable growth story that will continue to create value in the decade to come. With that, I'll turn the call back over to Pat.

Great stuff, Todd. Thanks so much. And the reality is so much of this becomes about the creation of confidence. And the creation of confidence comes when things go right. In PTP, things are going right. And so what we're doing is we're taking share of a large market, and we're expanding the market by converting over traditional TLIF and PLIF surgeons. We're also increasing the complexity of cases. and also doing outpatient reconstructive spine surgery in 60 minutes period. I think PTP is a MIS category killer. And then when you create confidence, what happens is there's a halo effect on the other portfolio elements that are best in class by the organic innovation machine. You do that well and you attract better and better U.S. distribution and And we have a lot of room to grow within that group and so we can't be more excited about what's going on there. And then you start to think about expanding internationally and you say, gosh, how do we do this in a way that ultimately is focal and deep? And so in the coming years, you're going to see a contribution from our international efforts that will be a valuable contributor to both the top and the bottom. And then lastly, I think don't underestimate the EOS opportunity. Our opportunity to access hospitals and surgeons that we haven't had before, our ability to translate that information, and our ability to evolve the industry based upon the data is out in front of us. And so we believe the decade belongs to APEC. And we love the quote by Bill Gates that says, Most people overestimate what happens in two years and underestimate what happens in 10. We're in this thing for the long haul and in it to win it. So I feel like we're just getting started. And with that, I want to make sure and announce that you are invited to the 2022 ATEC Investor Day in beautiful Carlsbad, California at our headquarters, where you'll see some management presentation, facility tour, Q&A, a surgeon panel, PTP demonstration and an EOS demonstration. We could sign up on our website. So with that, we will close and take questions.

We will now open the floor up for questions. In the interest of time, please limit yourself to one question. The first question comes from Brooks O'Neill with Lake Street Capital. Your line is open.

Hey, guys, congratulations on a great year, the progress you're making. I don't understand why you're not going to have this investor day in Minneapolis, Minnesota this year. So let me just ask you, obviously tremendous success with PTP, and it sounds like proceduralization in spine is really working for ATEC. Can we expect any additional new procedures in 2022 or beyond, or do you think you've laid out the areas that are most impactful for you guys? Thanks a lot.

Thanks a lot, Brooks. Spine surgery is still not yet predictable in the hands of the masses, which really avails itself to so many opportunities. we even think there's opportunity. The vast majority of surgery is what would be considered L4 to S1. And there's few things better than ALIF at L5, S1. And so our ability to ultimately effectuate anterior column surgery from L4 to S1 is so apparent to us. And so that'll be really kind of the next significant foray into proceduralization. But also, even things like medialized approaches from the back. And there's a myriad of opportunities. Cervical, there's still opportunity to proceduralize. And so there's a myriad of opportunities. And I think that the challenge has always been that the industry is only invested in implants. And then to suggest that they're aligned with a surgeon, I think, is a misnomer. And so our ability to align with the surgeons based upon assembling the goods necessary... so that what they can do is think, hey, this patient needs this intervention, and here's the procedure I'm intervening with, is a tremendous opportunity. So what you'll see immediately is more anterior column stuff from a thoracolumbar spine perspective, but you're going to see cervical stuff over time. Sorry for the long answer.

Thank you, Pat. No, that's great.

The next question comes from Matthew O'Brien with Piper Sandler. Your line is open.

Afternoon. Thanks for taking my question. Pat, can you talk a little bit more about the PTP growth that you saw in Q4 and what's contemplated for 22? Because what really got my attention, I know there's plenty of share for you still to take, but, you know, doing less invasive surgery and getting into the PLF and TLIF cases seems like a humongous opportunity that's never really materialized. So when you're starting to talk about some of those cases moving over, that really gets my attention because the market opportunity there is still enormous. So talk about, you know, again, the growth that you saw in Q4, what's contemplated in 22, and then, you know, that progression that you're making into PLF and TLIF. Thank you.

Yeah. Thanks, Matt. You know, the, the, the, What we're seeing is when you have 400 surgeons come for training or more than that, come into the new building for training, I think it suggests an enthusiasm for a technique. And so, as you know, this business is a bit of a lag. It's one of those things where it's like the guys in Q1 and Q2 start to ramp up to a heck of a lot more procedures in Q3 and Q4. And so they'll go back, they'll look for the simplest patient they could do to kind of get their arms around the procedure. They'll do a few of those, and then what you'll see is you'll start to see the reflection in Q4 and Q1. And so there's always a lag. And so I would tell you that we're starting to see kind of the guys in Q1 and Q2 start to do procedures. And so if you think we launched this thing Back in late Q4 of 20, the guys in Q1 and Q2 are now on a ramp. The guys in Q3 and Q4 have yet to even started the ramp. You've got to be bullish about the procedure. And so one of the things that, you know, the very team here were the guys who created the marketplace for lateral surgery down the block. And one of the most difficult questions to answer for a surgeon was, hey, if I have to directly decompress this patient, you know, how am I going to do it in the lateral position? And then if I have to place pedicle screws, I don't want to do it in a position with which I'm unfamiliar. And so what happened is, is a lot of the PLIF and TLIF guys kind of steered clear of the technique. And so what we're finding now is, is when guys come into the office, It's not only kind of the lateral types that love all of the benefits of lateral spine surgery, but it's also the guys who were really kind of stuck on the whole, hey, I want to operate on the patient laying on their belly. and I want all of the virtues associated with not only can we indirectly decompress like we did laterally before, but I can directly decompress the patient such that I know when they leave the OR, I have fully decompressed this patient. And so I think that becomes a big part of why a TLIF and a PLIF surgeon have started to come over, and it's been fun to look at the demographics of those guys in training, and you're seeing it, you know, initially mostly lateral guys, and now more and more PLIF and TLIF guys are coming forth.

The next question comes from Joshua Jennings with Cowan. Your line is open.

Hi, good afternoon, and thanks for taking the questions. Great. End of the year. Would love to see, just to hear more, Pat, about your vision of migration of spine surgeries into ASCs. And clearly, ATEC is well positioned, as you've described. I wonder if you could share a percentage of of revenues for ATEC in ASCs today. We're assuming it's still very, very early innings. And then just how you see just the industry evolving and this migration occurring. I think there's some naysayers in industry that don't see the ASCs as a big opportunity in spine. But maybe the pandemic with this move towards same-day discharges or overnight stays is going to catalyze faster migration. A couple questions there. I apologize about one topic. So thanks again.

No, Josh, you know, I've been at this since 1995. And I remember years ago when I was at sophomore Danik, we released a minimally invasive discectomy device. And we thought that that would overtake outpatient spine surgery. And so I think the frustration with the topic is as much as, There's not been a solution that is so meaningful from a clinical perspective. And that's why I think that the whole reconstructive element of thoracolumbar surgery is ultimately what's going to demonstrate the most benefit. Like a little decompression in an outpatient surgery doesn't make for much of a difference. When you start reconstructing people and doing it predictably over and over and over and over, I think it makes a huge deal. And I think your point with regard to the pandemic driving that dynamic is I think it is exactly the case. So often I think that we in industry get consumed with packaging or with, you know, sterile packed goods are going to be what ultimately drives less invasive, or not less invasive, but ASC or outpatient surgery. When the reality is it's, can I do something that's very meaningful from a clinical perspective for a patient? And that's where I feel like the whole PTP thing has really been attractive. And so when you look at a, a single-level spondylolisthesis, the number one reason why someone gets operated on in spine surgery, now can be done in an outpatient setting, I think you're starting to think that, gosh, the relevance associated with the intervention begets an opportunity to do it in another site of service. And that other site of service clearly is the ASC. I got to tell you, I believe at some point, Adjacent level surgery, spondylolisthesis of grade one and grade two will be done in an ASC. And I think the economics support that. I think that the clinical element, which is going to be most important, clinical always first, the economics chase it, will be how things go. So anyway, sorry to be long-winded, but I think that your point is everybody's waiting on a surgery or on a predictable experience to ultimately have that start to show. And I think the pandemic's been a driver of that.

The next question comes from Matthew Blackman with Stifel. Your line is open.

Good afternoon, Pat and Todd. Thanks for taking my question. I'll just go with the boilerplate question about 1Q. I assume January was challenging. Just curious what you're seeing in the first quarter and maybe the best way to frame it is are you guys comfortable with where consensus is in the first quarter, something like $66 or $67 million? Thanks. Thanks.

Yeah, thanks, Matt. You know, I think as probably most people who've reported now have kind of talked about how Omicron showed up kind of mid-December. Second half of December began getting tough, and January was certainly more difficult than December. But, you know, as we kind of looked at and as we've been looking at kind of average daily sales kind of week by week, you know, it it got better it's been getting better through january and and through february um and uh and so ultimately you know i think january is better than february and and and we're feeling like the second half of february was was better than the first half and so you know i think it's trending in the right direction which is good um you know first call i think to your point 65 66 and and we're feeling uh feeling uh feeling comfortable with that um in terms of where that's at and so You know, I think at the end of the day, you know, we're going to work through the pandemic. I mean, we had, you know, we've talked about this on the full year. We had the pandemic in 2021. We're going to have some pandemic in 2022. Our kind of fundamental assumption on the full year guide is ultimately that you got to deal with it. When it shows up, I don't know, but our assumption is going to kind of be a net neutral, and so growth rates overall in the full year should look real in a sense.

All right. Appreciate it, Todd. Thank you. You're welcome.

The next question comes from Kyle Rose with Canaccord. Your line is open.

Great. Good afternoon, everyone. I wonder if we could talk a little bit more just about EOS. Maybe what you're seeing as far as the commercial model evolve when we think about guidance this year, how much of that is capital versus maybe more recurring or service-based revenue to just kind of help us understand what the puts and takes of that business should look like in 2022. Thank you.

Yeah. I guess, you know, what it looks like is that we have an absolute mirror of the implant sales management and the EO sales management. And I think one of the things that was just exciting, Kyle, is just you know, watching the teams come together at our sales meeting and looking at a very integrated approach to both organizations. And so, you know, to me, you know, when you start to look at an integration and you see these groups, you know, getting together and then you look at things like a user-based rebate type of agreement to ultimately drive placements and then And then utilization getting driven by the implant force because now they have access to people who they haven't had access to before. And then you get access to hospitals. There's an example of there's a Bon Secours, I think it's like a 15 or more hospital, 20 hospital group that we didn't have any access to. We sold them in EOS and now we have full access to all 24 hospitals. And so it's things like that that give us great enthusiasm with regard to the integration of the two groups. And so not only the placements, which we're bullish on and the funnel looks great, but also in the relevance of once they get placed, our access from an implant perspective, which is a part of what we negotiate with every placement that we make. We also negotiate access to data. you know, what we're doing is putting a lot of effort into a high trust environment from an IT perspective such that what we could do is start to really be data mavens with regard to all the imaging that comes out of EOS. And so the opportunities are almost endless, but probably evaded your question. I'll let Todd jump in on the number of placements and how we ultimately look at the demographics of the sales. But I guess I just wanted to make sure that it's so important that people understand the value that a EOS provides. And I think that oftentimes it's like, what are you guys doing in the imaging business? And I got to tell you, I am thrilled to death we are.

And Kyle, you know, when I think your question was, you know, what percentage of the 45 million is recurring? And about a third of it is on the full year basis. And so You can kind of think about one-third of that being recurring and two-thirds of that being related to placements. And just in terms of how you should think about that kind of over the course of the year, when you look at the historical EOS experience in terms of revenue recognition when those placements happened, about 36% of revenue has historically been placed in the first half of the year and 64% has been placed in the second half of the year. you know, we don't have any reason to think that this year would be any different. So that's kind of how we're thinking about the timing and the demographic of that.

The next question comes from David Saxon with Needham. Your line is open.

Yeah. Hi. Good afternoon, and thanks for taking the question. Just wanted to follow up on EOS. You mentioned, you know, kind of volume-based agreements for the EOS placements. And obviously, we've seen that with other companies. But for ATEC, is this predominantly a U.S. arrangement, just given the Globus International restriction? Are you seeing that internationally? And then any metrics or color you can share about how we should think about the magnitude of that benefit from those volume-based agreements? Thanks for taking the question.

Yeah, thanks so much. You know, when you look at the demographics of our sales of the, you know, we had, I think, was it a million dollars last year of international sales? We have, you know, we have no footprint implant-wise internationally. And so, you know, the reality is this is a domestic program by default. And so we feel like there's a ton of opportunity to do these types of things. The great thing is, and Todd's mentioned this in years past, at the previous place, we designed and developed an anterior program and not a posterior program. And much of the interest in terms of the kind of the original EOS group is in posterior fixation. When you have a type of system like an Invictus, the ability to attract people to utilize our posterior fixation system as a offset to the expense on an EOS system is super valuable. And so that's kind of been the focus of concentration is, again, creating confidence with a system that has done exceedingly well. And so you have a sophisticated bunch of surgeons utilizing this system. And what it's done is create the level of confidence for us to expand and and really create the halo.

Yeah, David, and I think in terms of how we think about the pull-through, I think the most meaningful impact of EOS this year is really going to be, as Pat kind of talked about, gaining access to facilities that they wouldn't have had access to before. Ultimately, that's kind of contemplated within our guidance. And then as we work with each individual customer on figuring out how do they want to purchase and ultimately finance the placement of their EOs. Some of those will do capital sales, some of them will lease them, and some of them will avail themselves of the use-based rebate. So I think it's going to be a mixture. And ultimately, the net upside is contemplated in our guidance.

Great, thank you.

The next question is from the line of Phil Coover with Goldman Sachs. Your line is open.

Thanks so much for taking the question. We've seen a myriad of different guidance philosophies from different med tech companies this year. I think it's pretty clear, especially from that, that bottoms up analysis that Todd gave that the, you know, you guys have a ton of confidence in the micro and what's within your control. already touched on COVID expectations for the year a bit, but I was hoping you could touch on a few others, the staffing situation and the impact that's contemplated both in 1Q and for the year, as well as any impacts from supply chain, you know, componentry, other parts that could inhibit your growth profile. So thanks so much for taking the question.

You're welcome. So thanks for the question. And I think what, I guess what I'd say just in terms of my commentary earlier on COVID really was both kind of the viral impact as well as the hospital staffing impact combined. And so, you know, our expectation is that we had COVID in 2021 and the same order of magnitude will hit us here in 2022. Now, whether that takes the form of more staffing shortage feeling or kind of the virus impact on patient flows, I don't know that I can comment on how that split is going to shake out, but In aggregate, we see those things working in tandem and order magnitude being the same this year as it was last year. And so, you know, I think that's kind of the COVID commentary. In terms of, you know, how we think about the one queue, I think I shared earlier how the sales have kind of progressed throughout the quarter. And we shared earlier that we're feeling like the first call is a reasonable place to be, feeling confident with that. And so I think you can draw your conclusions there. And then I think finally on the supply chain side, while we'll certainly have some challenges there, they haven't really been of the order of magnitude gotten in the way of us getting anything done to the extent that we know we need to. And so a good job of mitigating and managing and working through those.

Okay, fair enough. Thanks for all the color talk. You're welcome.

The next question comes from Jason Witts with Loop Capital. Your line is open.

Hi, thanks for taking the questions. There's two related to EOS. One, how should we think about the gross margin for that business? And two, Pat, you had mentioned there's a lot of data sharing going on. Where are we now in terms of what data is being shared and sort of what's the medium and longer term vision in terms of what kind of data that'll grow into?

I'll let Todd jump on the gross margin, but I'll go ahead and start with the second one first. You know, I would say the data sharing is in its infancy, but the opportunity is massive, and I think that's why we're committing so much effort to kind of the high trust IT environment. And so, you know, when you start to think about the opportunities to share imaging data and you match that with data patient-reported outcomes measures, and then you start to group like patients. Everybody talks about the opportunity to provide analytics of sorts, and this foundationally does. And so we think of it as a clinical, a operational, and a economic opportunity. And so to be able to have a data-rich environment that ultimately aggregates this data And then to be able to, again, near neighbor them, meaning what are the like types of pathologies, what are the like types of patients, and start to understand complications, profiles, and the like, and start to understand how someone should be realigned and what their bone quality is, is such a profound opportunity from a data collection perspective. And then to understand what the requirements of surgery are based upon having kind of the preoperative plan generated here. and to understand what needs to go. Can we start to take dollars out of the shipment based upon an understanding of exactly what's required? We have a high expectation that you can, and Kenley, we know you can. And so just our ability to start to customize the configuration that serves the interest of a respective procedure to start to understand what specifically that patient needs and what the expectations are associated with them brings you to an economic opportunity that we think is exciting. We're in the super early stages of this, but as we said, it's kind of the virtue of being interested in the long haul and loving the environment that you're serving. And so we love spine. We're in it for the long haul, and we'll be the guys that ultimately output this information.

And Jason, as it relates to gross margin, the EOS gross margins in kind of the mid to high 30s kind of bounces around a little bit. And there's a couple factors there. One factor is the mix of OUS revenues. The OUS revenues, many of those are distribution agreements, and so ultimately they're bearing a lower gross margin for us. So I think historically that's been a reasonable percentage of total revenue. We've placed our our incremental resource, our investments here in the U.S. where we have a higher ASP and ultimately a higher gross margin. So I think ultimately we'll see some tailwind with that, and I think that'll be a driver of gross margin tailwind in the EO space.

Thanks.

Your last question comes from Sean Lee with HC Wainwright. Your line is open.

Good afternoon, Pat and Todd, and thank you for taking my question. In the prepared remarks, you guys mentioned plans to expand internationally. So could you provide a little color on your thoughts on maybe what products and which geographies you would likely target first? And also, how does EOS plan into that?

Yeah, it's something that we're super excited about and so excited because Ultimately, we're going to be very focal. Literally, the countries of significant interest out of the gates are New Zealand, Australia, Japan, the UK, and then maybe at some point South America. Our interest is really to jump into countries whereby we could have the effect of the same kind of shared EOS implant strategy as we have in North America. There's so many kind of like-minded approach to surgery in the countries that I named. We feel like the opportunity to enter those marketplaces very aggressively such that we get the same type of a uptake is kind of the best place to utilize our time and resources. And so that's the thinking.

Yeah, totally. And I think, Sean, for me, the differentiation here is we're fully committed to these limited international markets, and we're going to bring our best to those markets. And I think oftentimes there's a stratification of what products and lifecycle you bring to different markets. We want everybody to have the best offering that we have to offer. And so we believe, one, that's the right thing to do for patients and clinicians. Two, we also believe that's ultimately how you're going to build a sustainable business because we're going to go in these markets direct. And so, ultimately, you get a commitment to, you know, the clinical requirements of the procedure through neurophys in particular. And so, ultimately, we think that's the best way to build a large, scalable business as fast as possible.

Thanks. That was helpful.

And that concludes the question and answer session. I will now turn the call back to Pat Miles for closing remarks.

Yeah, just wanted to say that we can't be more excited about what's going on and in it for the long haul. And we really appreciate everybody's interest in ATEC. So thanks so much.

This concludes today's webcast. Thank you for participating, Human Ed.