Alphatec Holdings, Inc.

Good afternoon everyone and welcome to the webcast of ATEC's first quarter of 2022 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 US GAAP as well as non-GAAP or pro forma measures. Reconciliations of non-GAAP measures to US 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 ATEC's Chairman and CEO, Pat Miles, and CFO, Todd Coding. Now I will turn the call over to Pat Miles.

Thanks very much, Casey, and welcome to the Q1 2022 financial results for ATEC. You will hear some forward-looking statements on the call, so please review the reflective slides. forward-looking statements. And so I'll jump right into it. ATIC turned in another strong quarter of growth, ending with $71 million in total revenue, which was 61% year-over-year growth. I think what's most important, though, is really we're laying the foundation for where we're headed. And really, I think you're going to hear a bit of repetition. So PTP had over 100 surgeons trained. But I think what's important is there's a lot of traction, as well as we're starting to set up SafeOp as a confidence builder and conduit to deliver information into surgery. And so what that does is it sets us up for what's next with regard to PTP on the EOS front. We're a long-term foundation building with regard to the clinical, operational, and economic influence of informatics and data, as well as EOS is availing us new hospital access, as well as we're really just starting to lay the foundation for what's going to happen in terms of the integration intraoperatively with regard to EOS. love that we are earning a share of the U.S. market. And so a little scorecard, we grew 39% year-over-year organically from a revenue growth perspective, 18% year-over-year growth in terms of surging users, 11% year-over-year growth in terms of average revenue per case, 87% of our revenue is new products, And 2.1 is the blended average product category sold per case. It is our 12th consecutive quarter of greater than 20% revenue growth, and that just excludes the 11% right in the thick of the pandemic in Q2. And so just as a quick review, we have and will not change our commitments. We are going to stay the course with regard to creating clinical distinction, and we know that that compels surgeon adoption, and that brings about sales professionals that we covet. And so to jump in really in terms of how we're creating clinical distinction, historically spine has been a widget-driven market. We have been exceedingly good with regard to the product development. We've done greater than 40 products since 2018. It represents 87% of our revenue. But I think the magic really is in spine procedures. And our hunt is really in our pursuit of perfect procedures. And so that lends itself really to earning share in really the most coveted market. The market that's growing is the lateral market. Anybody that suggests that this is not the market to covet is kidding themselves because it's the growing market. And we're creating the most distinction within the highest growth market. And so I think that that's why you're seeing such explosive growth. Approximately 40% of our Q1 revenue growth can be attributed to lateral. We're 4,000 cases into PTP, which would suggest that we're not guessing. Adoption reflects unmatched sophistication internally. It's the most versed group in lateral surgery there is, bar none. 16 peer-reviewed publications, so we're just starting that walk. Expanding lateral market conversion in what was historically posterior approach, guys, in PLIS and PLIS surgeons. Increasing utilization in complex cases is always a proxy for acceptance. So that's great news. As well as site of service has more to do with what kind of pathology it is and what kind of intervention it is. And so us applying this in ambulatory surgery centers is increasing. What really avails this is something that's very, very hard, and that's automated neurophysiology. And that's when you have unique features within your automated neurophysiology set, like we do with SafeHop in automated SSEPs, It really creates a sound foundation, and that's being exceedingly well reflected in the number as well as well accepted in the surgeon community. And I think that the continued demand for surgeon training visits is reflective of the amount of enthusiasm that exists with regard to really the PTP. That's why they're coming in. Switching gears to EOS, I think the team is in place and we're executing against the strategic objectives. We're selling systems. Our product development work in terms of integrating the pre-, intra-, and post-operative information is ongoing, and our opportunity to collect and utilize data is really over the moon. And so in Q1, we sold north of $10 million in EOS-related revenue. The cadence of product development is really starting to take place. We're accelerating deliveries and increasing the size of the order book, as you would expect. creating implant sales opportunity in new to ATEC accounts, places that we couldn't get in before. And one of the great parts is not only when we sell a system are we accessing the hospital from an implant perspective, but we're also garnering data access. And the reason the data access is important is that the nemesis of spine surgery for years has been its lack of predictability in the hands of the masses. And so just the opportunity and ability to translate data is profoundly important. And And so our intention is to look at this thing in really three key buckets, and one of them is clinical, the other operational, and the last one economic. And when you start to think about a place that lacks predictability and your intention to mitigate variables, understanding what happens preoperatively, doing a plan against the preoperative imaging, intraoperatively integrating that plan so you understand what the objectives are, and then postoperatively assessing that plan. And getting that every time really begets the opportunity to mitigate some of the variables that undermine the predictability of spine surgery. And so really, you know, when you think about that and you think about all of the images being the same and you think about capturing all of that data, really you're setting yourself up for spine's first real predictive analytics. It's been talked about for years but not done. And so there's so much opportunity to integrate these elements into the operating room and make for change that We are running at that as best we can. Operationally, Spine has really spent a ton of money on implants and instruments, sending general configurations into surgery all the time. And the opportunity to understand what's required operationally also provides a great opportunity for us to effectuate freight, labor, time, trade processing, and really configuration and start to modify the configuration to the reflective requirements. that we know based upon the surgical plan. And then economically, really understand how much cost we have into a specific procedure such that we can effectively compete a procedurally price, as well as we could start to to work with the hospitals and share some of the risk as has been talked about for years in this business. And so we really have a lot of momentum with regard to creating clinical distinction. And I think it's being reflected in terms of the surgeon adoption. And so to look at the scorecard for Q1, the growth in the average revenue per case was 11%. I said over 100 surgeons trained. And the growth in surging user base year over year was 18%. And so clearly people are being compelled because they're heading our way, which we love. And the reason they're heading our way is because we think in terms of interventions for specific pathology by procedure, And that's why, really, we have, I think, a unique commitment, an unparalleled commitment to adjunctive technology. And we're going to continue to innovate and align with the surgeons with regard to what's important. And I think when you start to look at the adoption or the buy-in to our procedural clinical thesis, I think that that's reflected in the number of products per surgery. And you see that continue to grow. So I would tell you that our clinical thesis is clearly being accepted. I think the proceduralization is the most and best way to protect our unique technology and really set the rules that other people need to catch up to us with. So our ability to go ahead and design and develop these procedures and then have people, in essence, try to replicate what we're doing is a very tough task, seeing as what we'll do is continue to apply our learnings. And so, you know, we're creating clinical distinction, compelling adoption, which ultimately brings people to us. And I think that if you look across our landscape, or at least the United States landscape, the geographies, I'd say they're still underrepresented. But where we are represented, we're growing in a big way. And so those people who are committed to us are growing faster than what we're growing now. organically, so 43%. But I think the litmus test is if you look over last year and you ask yourself, gosh, is PTP a flash in the pan or is it real? And you see that the distributors, the top 20 distributors that are selling PTP are growing at a 77% rate. I would tell you it's for real and the momentum is is really kind of stoked within our lateral business. So anyway, with that, I will turn it over to Pat.

Thanks, Pat. And good afternoon, everybody. Thank you for joining us today on our call. I'll begin with revenue. First quarter revenue was $71 million, reflecting 61% growth over the prior year and a 4% decline compared to seasonally strong fourth quarter. The $71 million in revenue is comprised of $61 million in organic revenue and $10 million of EOS contribution. Our first quarter organic revenue grew 39% compared to the prior year period and was sequentially flat compared to the fourth quarter. Year-over-year volume growth of 25% was driven by the advancement of our sales footprint and the continued expansion of surgeon adoption, with surgeon users up 18% compared to last year, reflecting increased surgeon utilization. Average revenue per case expanded 11% year over year as revenue mix continues to shift towards procedures that feature more products per case and procedures with greater complexity. And consistent with our increasing average revenue per case, revenue for lateral procedures contributed close to 40% of our dollar growth in the quarter on the strength of PPP, which continues to expand our lateral market share. The ALIS standalone interbody system, which launched late last year, was also a notable contributor to growth. While the resurgence of COVID-19 and associated hospital labor shortages pressured surgical procedure volumes in spine at the first part of the quarter, volumes gradually improved, returning to normal by the end of the quarter. We exited first quarter with exceptional momentum. In the first quarter, we recognized $10 million in EOS-related revenue, reflecting strong deliveries in the quarter and a lower degree of seasonality than anticipated. The progress we've made on our integration objectives is reducing the time required to install new orders. The $10 million reflects pro forma growth of 50% compared to the revenue EOS recognized on a standalone basis in Q1 2021. Now continuing through the remainder of the P&L, first quarter non-GAAP gross margin was 72%, down 560 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 was the primary driver of the year-over-year decline. Operating expenses in the first quarter reflect continued thoughtful investments to fuel long-term industry-leading growth. First quarter non-GAAP R&D was $9 million in approximately 12% of sales, compared to $5 million in approximately 12% 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 the advancement of the EOS platform. Non-GAAP SG&A was $61 million and approximately 85% of sales in the first quarter, compared to $37 million and approximately 83% of sales in the prior year period. The year-over-year increase on an absolute dollar basis was driven by the inclusion of EOS and the continued expansion and training of the ATEC sales network, which this quarter included our annual global sales meetings. The depreciation of instrument sets to support new product launches and our growing distribution channel and surge in education and investments required to support the increasing size and sophistication of the company also contributed to the increase. Notably, general and administrative expenses have remained relatively flat on an absolute dollar basis over the past three quarters. Total non-GAAP operating expenses amounted to $69 million and approximately 98% of sales in the first quarter compared to $42 million and 95% of sales in the prior year period. Adjusted EBITDA was a loss of $11 million compared to a loss of $4 million last year. While Q1 was a significant investment quarter, we continue to expect adjusted EBITDA for the full year 2022 to improve relative to the full year 2021 as sales growth will drive leverage of our sales channel investments and across the business overall. We ended the first quarter with $152 million in cash. Operating cash use was $38 million, which, consistent with previous quarters, was predominantly related to investments in inventory and instruments to support our expanding distribution footprint and new product launches. Included in Q1 operating cash was approximately $10 million in annual compensation-related payments, which, if excluded, would bring Q1 cash use to approximately $28 million. We expect cash used this year to meaningfully improve relative to last year, with asset leverage and a more favorable full-year adjusted EBITDA. Debt at carrying value was $337 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 toward cash flow breakeven at a revenue run rate of approximately $5 to $600 million, growing at a rate of 20% per year. Now turning to our outlook for full year 2022, we now expect full year 2022 total revenue will approximate $316 million, representing growth of 30% compared to 2021. That includes the following. We now expect full year 2022 organic revenue to approximate $269 million compared to $260 million previously. Updated expectations for growth of 27% compared to 2021 contemplate the strength of Q1 performance and the momentum with which we exited the quarter. We now expect EOS-related revenue of approximately $47 million for the full year 2022 compared to $45 million previously. Updated guidance for EOS reflects the strong execution-driven Q1 result. I shared this slide last quarter to help frame ATEC organic growth with some context about its underlying components, namely the growth of procedure volumes and average revenue per surgery. The left side of the slide depicts procedure volumes, which have increased at a significant pace since the transformation of the business began back in 2018, and the expansion of surgeon adoption and increasing geographic penetration have been essential to that growth. The right of the slide demonstrates growth in average revenue per surgery, which also has increased at a healthy clip. Average revenue per surgery grows as our procedural mix shifts towards procedures like TTP and LTP, which have higher revenue per procedure than our overall average. Our procedural solutions are being utilized in surgeries with greater complexity, which require more products per surgery and, in turn, generate higher ASPs. Finally, the level of distinction engineered into ATEC approaches and the cadence of new product launches generally enable us to command a price premium, another continuing driver of growth in average revenue per surgery. We hope this context will help connect the multiple drivers fueling the growth of volume and average revenue per case. And when we set external revenue expectations, our expectations for procedure volume growth and the expansion of average revenue per surgery are central to that math. The factors that I just shared give us continued confidence in our ability to grow procedure volume this year at a mid-teens percent rate. We are raising full-year organic guidance due to increased expectations for average revenue per case. With the 11% growth of average revenue per case achieved in Q1, we now anticipate a high single-digit percent rate of expansion for the full year, which compares to the mid-single-digit rate expected previously. Our guidance philosophy is to be thoughtful and prudent about how we set expectations by putting out numbers that we believe we can achieve and have a reasonable opportunity to exceed. So in closing, we continue to methodically execute the plan. We build a business capable of delivering sector-leading growth, and we most certainly aren't done. Our relentless focus on revolutionizing spine surgery by delivering predictability and reproducibility, meeting unmet needs in a massive market is a mission that, when executed well, can earn market share and create value throughout the decade to come. I hope to see you at the ATEC Investor Day, where we intend to continue to create confidence in our ability to do just that. And with that, I'll turn the call back over to Pat.