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.