Alphatec Holdings, Inc.

Good afternoon, everyone, and welcome to the webcast of ATEC's third quarter financial results. We would like to remind everyone that participants on the call will make forward-looking statements. These statements are based on current expectations and are subject to uncertainties that could cause actual results to differ materially. These uncertainties are detailed in documents filed regularly with the SEC. During this call, you may hear the company refer to reported amounts, which are in accordance with 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 provides management's view of why this information is useful to investors. Leading today's calls will be ATEX Chairman and CEO Pat Miles and CFO Todd Koning. Now I will turn the call over to Pat Miles.

Thanks very much, Michelle, and thanks everybody for joining the Q3 2022 financial results call. As you would expect, there will be some forward-looking statements, so if you'd review the small print at your leisure, that would be great. celebrating my fifth year here and recollecting back to the first full year of 2018 we finished with US revenue that approximated 84 million dollars it's nice five years later to be generating 90 million for the quarter and which is a 43% year-over-year growth rate and the the thesis clearly is working so What we're doing is scaling top line growth toward positive adjusted EBITDA in 2023, advancing lateral sophistication with innovation, improving the predictability and reproducibility of core elements of spine surgery, reflecting our information-based competitive advantage, and extending EOS's influence while leveraging new hospital access. So taking a quick look at the Q3 2022 scorecard, I do believe it to be a validation of what we're doing. So 43% year-over-year growth as stated. It's really 53 in terms of surgical revenue growth. And so the growth is very strong. It's our 14th consecutive quarter of greater than 20% U.S. revenue growth, excluding the 11% in the pandemic-ridden Q2 2020. 32% year-over-year growth in procedure volume. 15% year-over-year growth in average revenue per case. $11 million in EOS revenue with a significant opportunity pipeline up 45% year over year. And we'll get into the blended average of product categories per case, but that ended at 2.3 and continues to grow. And so what I want to do is just give a little bit of a strategic view with regard to our commitments and kind of why we're doing what we're doing. These are the things that create value in the company. I want to make sure that we're providing some illumination with regard to these areas. Ultimately, they get categorized into three commitments, and it's creating clinical distinction, which we love to move the field of spine surgery forward, and that compels surgeons. Surgeons want to do better work, and they're compelled by clinical distinction. And then also focusing on elevating the – the sales channel. And so just jumping right into that is a clinical distinction is driven by an investment thesis around asset allocation to create clinical predictability. And as stated, you know, the momentum really has demonstrated buy into that. And our focus, and we've really kind of had the opportunity at numerous meetings this quarter to display this, is really a focus on lateral surgery. And we'll get into a little bit more of that. We're super proud of what's going on on the SAFOP front. We'll get into that. The first really of many expandable implants to come. We're bolstering ACDF with a new cervical plate insignia. And then also expanding the ecosystem of AIX, which is the alpha informatics ecosystem with an app called Zia. And so We'll talk a little bit about that as well. But our intention, to be hugely subtle, is to dominate lateral surgery. And there is great internal competence at ATEC in lateral surgery. The group here really popularized it, and so our know-how on that front is significant. And you may ask, why focus on lateral surgery? And our belief is that it's better, and the literature is profoundly compelling. Less blood loss, shorter hospital stays, shorter return to normal activity. It truly is the most coveted market in spine and the one that continues to grow. So if you're going to dominate lateral surgery, a foundational requirement is neural monitoring. And there's no way around it. And having been at this for north of 20 years, you're not getting around being a player in lateral surgery without neural monitoring. It's really why we focus so much effort. and garnered so much expertise in this area. The group here internally is phenomenal, and our experience with regard to automating EMGs and automating SSEPs really kind of has been foundational. And so, SAFOP is the only neuromonitoring system that provides both location and health information of the neural plexus. And really, the most concerning part of lateral surgery is the risk of femoral nerve injury. And so to be able to locate where it is and to understand what its health is is of significant value. It is actionable information that drives surgeon decision-making. And the history of spine has been wrought with subjective rules. And another one in lateral surgery is one that says, hey, I got to get in and out of the surgery in 20 minutes, meaning the exposure that I make in the psoas has to be no more than 20 minutes. That stuff goes on until someone creates an objective measure. And that's what we did with Safe Op. It's proprietary us, and we can't be more excited about the effect that automated SSEPs is having on lateral surgery. And so remain profoundly bullish on PTP, super excited about what's going on on that front, super excited about the momentum. A big reason why traditional lateral did not become ubiquitous was that from a single position, it didn't serve all three goals of spine surgery. And so only in the prone position, so PTP can serve predictably decompression, stabilization, and alignment, which are the goals of spine surgery. So PTP has enabled surgeons to address multiple different types of spine pathologies that explicitly achieves the goals in a single or from a single position. is increasingly utilizing complex surgery and is early in the reflection within the peer-reviewed publications. And so the reason why people are coming to Carlsbad is because of PTP. And there's a boatload of them coming and they continue to come and we've had a big year in terms of surgeons coming to Carlsbad to learn PTP. So one of the ways that we talk about sophistication around here is really, I think, through a quote that in essence says, sophistication is in relation to the number of distinctions one draws to a subject. Our intent is to dominate lateral surgery. In so doing, we have recently begun to release LTP, which is a lateral trans-soas surgery really built from the ground up. It enables surgeons who have traditionally applied lateral surgery in the lateral position and prefer to approach the bottom level, which is L5S1, from an ALIF perspective. I think one of the easiest ways to kind of start to think through PTP and LTP is I would think of it as that which is driven by the pathology. And so the more complex pathology where there requires a direct decompression and stabilization, I would think PTP. more of a degenerative population, which is short segment that may include 5-1 for a surgeon who wants to do it through an ALIF, I would think LTP. But the beauty becomes is back to the sophistication thing. Our ability to provide both platforms that accommodates the surgeon's interest is really what we're after. So we've taken all the learnings from PTP and developed a patient positioner that facilitates lateral surgery and a more midline ALIF access to L5S1. It's amazing that we're in this day and age and people are talking about the commoditization of spine surgery, but we're still taping patients to beds. And so we believe that the addition of the patient positioner, a specifically designed retractor system, the integration of SafeOp, and just an entire procedure built from the ground up is going to be a welcome evolution in the field of lateral trans-psoas surgery. So cannot be more excited about that either. So speaking of applied learnings, we have also launched our first of many expandable inner body devices. This is a posterior approach expandable, first and foremost to assure lordotic correction is accomplished from the back in the prone position. It anchors PTP by providing a medialized posterior approach at L5-S1. In expected ATEC fashion, the medialized posterior procedure includes specific Invictus cortical screw design coupled with an elegant retractor system and expandable interbody device. And so now we have solutions both from an LTP via ALIF and a PTP via the medialized posterior approach for both lateral techniques. Transferring now to really the informatic element and just a little bit about VIA. Our interest is in integrating our multiple informatic elements. We've recently released an app called VIA. What it does is it quantifies the alignment parameters and it will enable broad EOS image access for integration into our interoperative solutions. And so it's another tool whereby we can distribute EOS-related information. More to come, but wanted to provide a little bit of a view in the many ways we will deliver information that will improve decision-making. So I want to talk a little bit about EOS. EOS continues to go quite well. We believe that the value of EOS is unmatched. We believe that a standing weight-bearing biplanar non-magnified image we have the makings of a spine alignment standard. Alignment remains the greatest correlative to a successful, durable, long-term outcome. And it doesn't matter in short-segment or long-segment surgery. It is profoundly valuable in terms of the ability to understand how a spine need be aligned. There's an old quip in spine surgery that 100% of spine surgeons are deformity surgeons. They either create them or they fix them. Many truths are clearly said in jest, but the revision risk for malaligned patients is 10x that of a properly aligned patient. The SRS, who is really the authority when it comes to spinal alignment, are big fans of EOS. During a recent meeting in Sweden, Larry Lanke, previous SRS president and famed deformity surgeon, polled the audience and 70 of the surgeons in the audience at srs owned an eos machine another 30 raise their hands that they had more than one so we see this as as the society um that influences these types of uh of surgeons and and to me as as as the srs goes uh oftentimes the rest of the spine community goes and so The question really becomes is, all right, what do you do from here? And really, you know, our work has really been defined and described and it's ongoing. And what it's about is integrating and designing feature sets that can integrate into ATEC procedures. And so providing automated alignment reports that enable expedient surgical planning, generating data to drive pre-op and interoperable bending, understanding bone density, measure to provide surgeons an understanding of underlying bone quality, Not to mention all the back office work that's going on that's assembling a predictive analytics platform and a platform that ultimately will enable us to gain some operational efficiencies as well. So something else that occurred to us as we were thinking about the quarter, and so often we utilize things like, hey, we're just getting going. And I think a lot of people utilize that nomenclature to fill space, but to us it's very apparent that as we demonstrate that the foundational elements of our platforms are very relevant well beyond lateral surgery. And so just wanted to provide an example of a field that we're working on. So imagine an idiopathic scoliosis patient with a rotational deformity. That's kind of right in the middle of what companies like us focus on. It would be profoundly advantageous to understand the apex of this deformity via EOS. So you start to think about what the value of our foundational technology is. You think, gosh, EOS will provide great value in that patient type. And then you start to ask yourself, what's the reciprocal alignment? You know, what reciprocal alignment would be gained through direct vertebral rotation via the Invictus DVR system, direct vertebral rotation system? And then you say, gosh, positioning her or the patient in a patient position to assist the surgeon maximizing the correction, that would be quite valuable. and then assuring the neurologic safety of the correction with facilitated MEPs as they're derotating the spine. So I think so often people look at these foundational elements as unique or independent when the reality is the application for these elements will be reflected in future types of applications. So when we say we're just getting started, we genuinely mean it. We're literally just getting started. And so that's just a little bit about the whole clinical distinction. And we would love to give you a couple of objective measures with regard to compelling surgeon adoption. And so we have more surgeon users, 22% growth in surgeon user base year over year. As we talked a little bit, the aggregate products per procedure is growing. It was at 2.3 and 2.3 of 22. And the volume of surgeons coming through our surgeon education group and coming through ATEC has been significant, and that was right around 150. And so not much to add to this slide other than the fact that what we're seeing is just continued growth in our thesis. And we look at this as a proxy for our people buying into the very clinical thesis that we're putting forth. And when they use more of the proposed products, then the likelihood for them buying into this thesis is much better. Love what's going on in the sales channel. Love what's going on Dave Sponsel's lead with regard to the field force and the continued evolution. In those areas that we have established sales agencies, we enjoy a 46% year-over-year revenue growth. And for us, that's a proxy of same-store sales and the stickiness of what's going on. The market share is always a bit of a challenge, but we believe ourselves to be a 3% holder. And I always think that means we have 97% to go and that we're a 5% holder in those markets that we participate in. We still have uncovered geographies. So in the aggregate, probably a 3% in those geographies that we participate in, more like a 5%. And as I think everybody appreciates, the sales force is very much shaping up However, it is the perpetual build and the perpetual place of improvement. And so anyway, just wanted to give you a few kind of background dynamics of what's going on with the company and probably best that I turn it over to Todd at this point.

All right. Well, thanks, Pat. Appreciate it. And good afternoon, everybody. We appreciate you joining us on the call today. So I'll begin with revenue. Third quarter total revenue was $90 million, reflecting 43% growth. over the prior year and a 7% increase compared to the second quarter. The $90 million in revenue is comprised of $79 million in surgical revenue and $11 million of EOS revenue. Now that we've fully anniversaried the close of the EOS transaction, what we used to refer to as organic revenue will now be referred to as surgical revenue. The third quarter surgical revenue of $79 million increased 53% compared to the prior year period. Procedural volume grew 32% year over year as surgeon adoption continued to expand. The number of surgeon users increased 22% compared to last year, reflecting the strong level of training activity we've consistently seen over the last year. Additionally, much of our growth is coming from established sales agencies with at least one year of tenure. And that cohort achieved 46% growth in the quarter, demonstrating durable sales growth from our most tenured agents. Average revenue per case expanded 15% year over year as revenue mix continues to shift toward procedures with more products per case and procedures with greater complexity. As a reminder, the average revenue per lateral procedure is about two times our overall average, and lateral-related revenue continues to grow meaningfully faster than surgical revenue overall. While lateral-related revenue, again, contributed the most to our growth, revenue related to biologics, CLIF, and ALIF also grew significantly in the quarter. EOS revenue in the third quarter was $11 million, flat compared to Q3 of 2021 on a reported basis, and up 7% in constant currency. Results reflect the timing of capital deliveries and installations in the period. Experience is increasingly helping us to better manage the complexity of deliveries and installations and also continue to make nice progress with the integration. We have achieved 45% growth in the opportunity pipeline year over year and are on track with platform innovation initiatives. Continuing through the remainder of the P&L, third quarter non-GAAP gross margin was 71%, down 130 basis points compared to the prior year. Increased EOS service costs as we addressed the backlog of service calls created during the COVID-19 pandemic contributed 90 basis points of pressure year over year. Another 60 basis points of gross margin pressure was related to an increase in our biologics attach rate. which comes at a meaningfully lower gross margin profile than overall business. Our expectation is that the margin headwinds outlined above will persist throughout the year. Operating expense in the third quarter demonstrated leverage while thoughtful investments in the long-term sector leading growth continued. With third quarter non-GAAP R&D was $10 million and approximately 12% of sales, 100 basis points lower than the prior year. 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 $67 million and approximately 75% of sales in the third quarter, compared to $52 million and approximately 84% of sales in the prior year period. We delivered 860 basis points of improvement while continuing to invest in the expansion and training of the ATEC sales network, surge in education, and support for the increasing size and sophistication of the company. Total non-GAAP operating expenses amounted to $78 million and approximately 87% of sales in the third quarter compared to $60 million and 96% of sales in the prior year period, delivering a total of 960 basis points of operating leverage year over year. I'd also like to highlight that we achieved 200 basis points of operating leverage sequentially. That is an early testament to the leverage we are expecting to deliver as our business scales. Adjusted EBITDA was a loss of $6 million and approximately 7% of sales in the third quarter compared to a $10 million loss and 16% of sales in the prior year. The improvement of 870 basis points as a percent of sales was driven by 960 basis points of operating expense leverage, which was partially offset by gross margin. Sequentially, adjusted EBITDA improved $2 million on a revenue step up of $6 million, and resulting in 290 basis points of improvement. As sales growth leveraged across our business, We expect an adjusted EBITDA loss for the full year 2022 of approximately $28 million, or about 8% of sales relative to approximately 12% of sales in 2021. And this will position us well to deliver the breakeven adjusted EBITDA that we are committed to for the full year 2023. Turning to the balance sheet, we ended the third quarter with $106 million in cash. Operating cash use improved relative to last quarter and totaled $24 million. Roughly half of that sequential improvement was driven by lower instruments, inventory, and PP&E spend. Approximately $2 million improvement was related to reduced litigation spend and the balance by improved EBITDA and working capital. We continue to expect full-year 2022 cash use to meaningfully improve relative to last year, consistent with our long-term plan. Debt at carrying value is $370 million, which includes $360 million of a convertible debt and a drawdown of $35 million from the $50 million dollar revolving credit facility that we closed in the third quarter. Now turning to our outlook for the full year 2022, in line with 40% full year growth rate that we previewed in conjunction with the pre-release of the third quarter financial results, we now expect full year 2022 total revenue to approximate $340 million, which as a reminder, compares to guidance of $325 million previously. Updated guidance includes the following. We now expect full year 2022 surgical revenue to approximate $294 million compared to $277 million previously. Updated expectations reflect growth of 39% compared to 2021, which contemplates strong performance in the third quarter and continued momentum into the fourth quarter. We now expect EOS revenue of approximately $46 million for the full year 2022 compared to $48 million previously. Updated guidance for EOS reflects the timing and complexity of installations and deliveries from our order book as the EOS business becomes more U.S. market concentrated. Let me share how our expectations for procedure volume growth and the expansion of average revenue for surgery support updated ATAC surgical revenue guidance. With surgeon adoption expanding and surgeon utilization increasing, we have achieved strong procedure volume growth throughout the year, including 32% in the third quarter. As a result, we now expect procedure volumes to grow at low 20s rate for the full year, compared to the high teens percent rate we anticipated previously. Average revenue per surgery grows as our procedural mix shifts towards procedures that require more products per surgery, like PTP and LTP, and towards surgeries with greater complexity, all of which feature higher revenue per procedure than our overall average. The strength of the growth in revenue per surgery year to date, including a 15% growth rate in the third quarter, drive our new expectation for a low double-digit rate of expansion for the full year. compared to the high single digit percent rate that we expected previously. As most 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. In closing, the third quarter marked the introduction of significant innovation. We showcased LTP at NASS, launched our first expandable interbody cage, and introduced our medialized posterior approach. Our sector leading growth continues to validate our procedural thesis and reinforces that clinical distinction what ultimately compels search and adoption we also demonstrated how revenue growth will enable us to scale the business and begin to deliver operating leverage in short third quarter performance with another step toward the achievement of our long-term objectives as you may expect we have another active ir calendar over the next few months and i hope to connect with many of you in person with that i'll turn it over to pat thanks so much todd um i think that uh we uh