Good afternoon, everyone, and welcome to the webcast of ATEC's Third Quarter Financial Results. We would like to remind everyone that participants on the call will make forward-looking statements. These statements are based on current expectations and are subject to uncertainties that could cause actual results to differ materially.

These uncertainties are detailed in documents filed regularly with the SEC. During this call, you may hear the company refer to reported amounts, which are in accordance with U.S. GAAP, as well as non-GAAP or pro forma measures. Reconciliations 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 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 Koning. Now, I will turn the call over to Pat Miles..

Thank you very much, Ella, and welcome to the Q3 2021 conference call -- ATEC conference call. Clearly, we will be sharing some forward-looking statements, so please review at your leisure. And just kind of walk through some slides and really talk about Q3 2021 results.

And the revenue for Q3 2021 was $63 million, which is a 53% year-over-year growth, with the contribution by EOS of $11 million.

And I think as much as anything, it just spells out our a kind of unique positioning for continued industry-leading long-term growth, and a kind of the elements that are the drivers is can't be more excited about what's going on with PTP. I think our ability to expand the lateral market is very clear.

I think we're getting better, and our clinical aptitude is increasing from a U.S. distribution perspective. I just think laying the foundation, and reflecting the value of the EOS information is a tailwind. And I think building confidence such that there is a kind of this halo effect of driving adoption of our entire portfolio is clearly going on.

And then additionally, we really starting to build the foundation for what goes on outside the United States in the international marketplace.

So -- When you start to look at the scorecard, the year-over-year revenue growth in a declining market was 29% in -- we're clearly compelling surgeons because we had a year-over-year growth of 20% in surgeon users.

If you start to look at a few of the clouds out there, the year-over-year growth in average revenue per case, I would say it was muted based upon some of the pandemic flare-ups, and staffing flare-ups going on, and so just the ability to do more complex stuff was somewhat muted.

But the great part is, is the adoption of our new products continues to stay super strong, which [indiscernible] a kind of an attractive continued growth in future. And also the blended average product categories per surgery of 2.0, continues to grow and remain robust. This was a 12th consecutive quarter of double-digit year-over-year revenue growth.

I think -- More importantly, 10 of 11 quarters are greater than 20%, which we're excited about. And ultimately, what that reflects is ATEC has achieved the highest organic U.S.

growth of any public spine company in every quarter since 2018, and I think that our thesis is reflective of that dynamic and, and clearly, there's been a bit of a tough backdrop, but we're doing the things that we are committed to doing, and our commitments are going to remain these for as far as the eye can see.

But we will continue to earn our place in the market by really creating clinical distinction. And that means we will perpetuate our organic product development, and continue to advance our information-based core competency.

When you create clinical distinction, you compel surgeon adoption, and so we see the a kind of the objective reflection of that compelling, and an increase in revenue per product per case through innovation. And then as you create clinical decision, compel surgeon adoption, the likelihood of attracting pros to this thing is very, very high.

And so we will continue to attract clinically adapt salespeople. And so -- When you think about clinical distinction, it's really not as much about individual product development as it is developing products that support the procedures.

And you cannot pursue the perfect procedure if you are unwilling to design the specific requirement of the perfect procedure, and so, we're super excited about the volume of product revenue contributed, the new product revenue contributed at 83%.

But I think more importantly, what we're seeing is an expansion in the products, and a kind of an acceptance of the type of enabling technology that I think is candidly the more challenging things to do and so. When we commit to innovation, we talk about a cadence of 8 to 10 new products per year, and clearly, we continue to fulfill that commitment.

But something to, I think, appreciate is, there's a prioritization that takes place that allows for the most influence. And I think that we've laid a tremendous foundation through the work of our organic innovation machine and -- Imagine our opportunity to translate yields like we have SafeOp.

We haven't talked much about SafeOp as of late, but clearly, a competency in terms of translating information as well as the whole mechanical device design, I would tell you, is a clear competency. And so we like to leave a list here because we don't PR every product that we release.

We like to communicate with them most often in terms of the clinical effect they have on spine procedures.

And so when you start to think about EOS, and you start to think about our mechanical aptitude, in terms of design and development, and we are good at translate the information, imagine an opportunity to demand to match implants based upon bone quality.

And you see OsseoScrew right up here, and just the ability to be able to understand what the requirements of a specific patient is, and then adapt this based upon their bone quality. And so when you start to look at these things, you start to look at InVictus, you start to see such distinction in, in our fixation or our stabilization system.

And so I think so often we talk about spine surgery as decompression, stabilization, and alignment, this is really kind of a core part of our stabilization. And InVictus goes from the occiput to ilium. And then the volume of integrated features is substantial.

Everything from a single step, which is, which is a unique product that will ultimately integrates to our modular screw system, that attaches to our neurophysiology system that delivers retractor blades, I think it really speaks to the level of distinction that this group has in terms of understanding the requirements of spine procedures.

And SafeOp we have recently launched InVictus' OsseoScrew, and then tomorrow, we build upon the identity implant system with an improved ALIF device, that will launch tomorrow. And really, kudos to the internal organization, and the sales force. It's probably our most comprehensive successful alpha release.

And now we're ready to go full commercial, and we have really great expectations of the contribution of, again, more sophisticated anterior column surgery. And so -- Another key organizational focus really has been a kind of the EOS integration.

And when you start to think about what we committed to, we said, gosh, let's first integrate our selling efforts. And I got to tell you, that's gone very well, and I feel great about where that is. We are prioritizing the product portfolio. I think we have a very good internal cadence of how we release products.

We're doing the same with regard to the EOS family, and making sure that they coincide, and then really scaling operations to meet demand. And those have been a kind of, really, the 3 key efforts.

And some of the highlights are Eric Dasso is in a leadership position, at the leadership position in France, and so I think that he's really bringing together the strategic imperatives of ATEC and EOS, and how they fit together. I love the fact that we contributed $11 million in EOS related revenue in the third quarter.

I think it speaks to the enthusiasm around the shared interest of the company. And then -- Just the volume of pipeline leads has also increased significantly. And when I'm in the field, and I get the opportunity to meet with customers, and I hear the level of sincere enthusiasm, as it relates to adding EOS machines.

We have institutions like hospital for special surgery that has 4 EOS units currently there. There's an interest to expand the volume of units, and so when we start to think about opportunities and start to think about, geez, what's the -- what's the opportunity with EOS. It is not 1 per hospital.

The opportunity is, in our mind, very, very substantial, and we'll outline that more as we roll it forward. But I think when you think about the spine industry, and you start to think about the most sophisticated part of the spine industry, a lot of people point to deformity.

And I think that when you look at the Scoliosis Research Society, or SRS, it's often a beacon of a kind of clinical relevance. And when somebody of Lawre Lenke stature says, if you're going to treat deformity, EOS imaging is a requirement.

I would say that's not a passive affirmation, that these are the things that are necessary in terms of value in that space. And so the strategy in the near term is how do we start to place units. And I think that our ability to sell into spine surgery, to really understand the benefits of this technology, is phenomenal.

And then starting to integrate a kind of the information through planning platforms and the like the, becomes very, very valuable.

And then facilitating purchase decision based upon not just selling capital equipment, but also the ability to utilize earned purchase agreement type things, that ultimately facilitate a much more expedient exercise in terms of placing the volume of units. And so a lot of great things going on.

And I think when you start to look at the demographics, there's 100 units in France, and you start to say, gosh, how many units could just the United States utilized effectively.

And just by population, if I took the population of France at 60 million, and there's a 100 units there, that would equate to a 500-unit population of EOS units here, without really doing anything different, and so we can't be more excited about the opportunity. We feel like it really a kind of furthers the multifaceted tailwind that we talk about.

And when you start to talk about multifaceted tailwind, how you don't talk about PTP would truly be a miss, and so 50% of our Q3 revenue growth was driven by lateral. And so when you look to what's going on with regard to PTP, I think that really, there's unmatched sophistication and know-how here at ATEC.

And I think it's being reflected really in the adoption. And when you go back and you understand kind of the origin of lateral surgery, a key element to origin of lateral surgery was, hey, where is the nerve. And when we acquired SafeOp in 2018, we said, hey, what we have in this technology is, we have a unique way to determine nerve health.

We said we would add automated EMG. And now we find ourselves in 2021 completely revolutionizing this technique, and it should be of no surprise to anyone. And so we are clearly penetrating the lateral market, but also expanding the utility.

We talked earlier about lateral -- we talked about surgical goals being decompression, stabilization, and alignment, and just the ability to add the ability to directly decompression a lateral surgery becomes very, very valuable. And when you start to think about why people do PLIF and TLIF, is because they like to decompress the spine.

And so our ability to make sure that we're doing the things that ultimately enable us to find ourselves within market spaces that, candidly, traditional lateral didn't is very, very valuable.

And so what we're seeing is really an increase in the number utilized in complex cases as well as we're seeing an increase in the number of cases done in ASCs, which we love nothing more than a 360-degree fusion done in 60 minutes in an outpatient center. I think it just speaks to predictability, it speaks to sophistication.

And so love what we're doing from a SafeOp perspective. And if you look at the ATEC surgeon visits, I think it's reflective of an increase in demand. And so those of you who are not looking at the slide, it's a bar chart that shows increase up to the right.

And so when you start to think about surgeon adoption, it's really driven by approach-based innovation. And so that's how we compel you say, gosh, how do you compel surgeon adoption? And you do it, through creating clinical distinction, and so -- You can see the third quarter in terms of the year-over-year average revenue per case was slightly muted.

In our mind, it just speaks to a little bit of a black cloud from the staffing, and the coronavirus dynamic. But you can see the enthusiasm is not hampered in any way, as we saw a significant increase in the volume of surgeons desiring to be trained, and we continue that moving forward.

And so when we think about adoption and compelling surgeons, it's often times because we're aligned on how they serve the interest of patients. And that's why we think holistically about designing the fab of spine procedures.

And there remains so many opportunities to continue to move the field forward, as long as you're not hampered by only designing currency items, and that's not being aligned with the customer. And I think our ability to continue to remain in alignment based upon our interest in furthering the field of spine surgery, that's what alignment is all about.

And the great part is we get to see the objective reflection of that when we start to look at convoyed sales. And so when we think about convoyed sales, we oftentimes talk about the blended rate. But the real opportunity is where are we creating distinction, and where have we committed that investment a kind of thesis to reflect and improve surgery.

And so you can see we were nearing 4, which would suggest that acceptance of the thesis, and clearly, that's grown year-over-year in terms of, of our approach. A continued place of improvement also is, really, in our sales force.

And in our minds, who doesn't want to sell clinically distinct procedures that compel surgeon adoption, and say -- so we continue to drive almost all of our sales, from those who are committed to the long haul, and that's the whole 97% driven by a strategic sales channel. And when you commit to each other, and what happens is you grow fast.

And the reason you grow fast is because, in essence, you adopt the share and the interest of the clinical thesis. And so you see the organic revenue growth from strategic distribution at 37%. If you look at those groups who have committed to PTP, and have done very well at PTP, it's even more than that.

And so just the ability to start to make sure that there's true alignment in the selling organization has been a lot of fun.

So although 97% of our sales comes from the strategic distribution, we still have uncovered or poorly covered geographies, and -- And really, another key component of managing growth is -- so we continue to expand the sales footprint.

And now what we do is we say, gosh, how we manage the assets and -- And so in Q3, if my memory serves me, we opened up Memphis. And so there's a few things better than the type of efficiencies that you've gained from the ability to turn assets in a centralized location, where FedEx has a hub.

And so we're thrilled to adapt to be in Memphis, and have opened the distribution center, and we expect to get kind of continued efficiencies out of Memphis. And so you start talking about, again, tailwinds.

These are the things that we're willing to do, to commit to the long-term growth, which would include things like EOS, and then commit to the long haul of a kind of our -- the creation of the international effort in building a foundation around that.

So anyway, I just want to provide a little bit of color commentary with regard to the goings on in Q3. We're very excited about the business. And I think with that, I'll turn it over to Todd, let him talk about the financials..

Thanks, Pat, and good afternoon, everybody. Thank you for joining us today. I'll begin with revenue. Third quarter total revenue was $63 million, reflecting 53% growth over the prior year and 1% growth compared to the second quarter.

Our $63 million in revenue is comprised of $52 million in organic revenue, $11 million in the EOS contribution, and $100,000 of revenue related to our international distribution agreement. Organic revenue of $52 million grew 29% compared to the prior year period and was down 7% sequentially.

As we announced in late September, a resurgence of COVID-19, and hospital labor shortages, pressured surgical procedure volumes in spine, and affected hospital operations throughout the months of August and September. We've estimated the negative impact of that to be approximately $4 million of revenue for the third quarter.

Despite the COVID-related headwinds, our third quarter organic revenue growth outpaced the overall market. As Pat mentioned, revenue from lateral procedures contributed 50% to growth in the quarter, on strong expansion of our lateral market share.

Third quarter year-over-year volume growth of 22% was driven by the advancement of our sales footprint, and by the continued expansion of surgeon adoption, with surgeon users up 20% compared to last year.

Average revenue per case grew 6% year-over-year, reflecting disruptive impact of the pandemic on hospitals during the third quarter, which resulted in a shift in case mix towards the outpatient setting in more emergent cases.

Those cases favor less complex procedures, which generally require fewer categories per case, and generate lower per case revenue. Sequentially, organic revenue was down 7%, with volumes down 4% and case ASP down 3%, again, as more complex, higher ASP cases were deferred.

Overall, our procedural volumes dropped in August, began to improve after Labor Day, and continued to improve through the months of September and October. While the disruption created by COVID, and hospital labor shortages, hasn't entirely dissipated.

Average daily sales for the month of October were higher than the average daily sales in the second quarter, which is an encouraging sign of recovery. In the third quarter, we recognized $11 million in EOS-related revenue, which was up $5 million compared to the second quarter.

Now keep in mind that the transaction closed midway through Q2, so we didn't recognize a full quarter of revenue, like we were able to in Q3. Timing of EOS replacements in the third quarter drove a better-than-anticipated revenue result.

Finally, revenue from our international supply agreement, which ended on August 31, totaled approximately $100,000 in the quarter.

So to summarize, the total revenue result of $63 million represents 53% growth and is comprised of organic revenue of $52 million, which grew 29%, EOS-related revenue of $11 million, and a minor contribution from the now-terminated international supply agreement.

Continuing through the remainder of the P&L, non-GAAP gross margin was 72% in the third quarter, down 490 basis points compared to the prior year quarter, and down 120 basis points sequentially. The year-over-year decline in gross margins was primarily due to the consolidation of EOS imaging.

The delta between EOS' gross margin profile in the low 40s on $11 million of EOS revenue, and the 79% gross margin that our base business generates, resulted in an unfavorable 660 basis point impact compared to the prior year period. That was partially offset by a favorable impact of 170 basis points, driven by leverage in the base business.

Operating expenses in the third quarter reflects continued thoughtful investments to fuel long-term industry-leading growth. During Q3, we maintained our planned investment levels to the pandemic-related reduction in volume and revenue, that unfavorably impacted our year-over-year and, in particular, our sequential comparisons.

Non-GAAP R&D was $8 million and approximately 13% of sales in the third quarter compared to $4 million and approximately 11% of sales in the prior year quarter. The increase on an absolute dollar basis was driven by continued investment to support organic portfolio expansion and EOS activity.

Non-GAAP SG&A was $52 million and approximately 83% of sales in the third quarter compared to $31 million and approximately 76% of sales in the prior year period.

The increase was driven by continued expansion and professionalization of the ATEC distribution network, surgeon training, spend behind major events like NASS and our national sales meeting, as well as investments required to support the increasing size, and sophistication of the company.

Total non-GAAP operating expenses amounted to $60 million and approximately 96% of sales in the third quarter compared to $36 million and 87% of sales in the prior year period. Adjusted EBITDA was a loss of $10 million compared to a loss of $2 million last year and to a loss of $7 million last quarter.

The sequential increase in adjusted EBITDA loss was primarily driven by the combination of lower third quarter sales in the sustained pace of investment. We ended the third quarter with $224 million in cash, and I'll walk that from our June 30 balance of $77 million.

On August 5, we closed an upsized convertible debt offering of $316 million, with a 75 basis point coupon and a conversion premium of 32.5%. Net of fees, a capped call feature, a share repurchase, and debt repayment, the offering generated $188 million in cash.

Offsetting that was $37 million in operating cash burn, of which close to $22 million was invested in inventory, and instruments, to support sales growth, and $16 million was attributable to other operating investments and working capital fluctuations.

Debt at carrying value is $327 million, which includes $316 million of convertible debt and EOS-related debt of approximately $20 million, less debt issuing costs of $10 million. I want to address a few more implications of the convertible debt offering.

In addition to supporting a continued investment to scale the business, a portion of the proceeds extinguished $53 million of debt which bore a much higher 9% to 12% coupon, compared to the 75 basis point that we now have.

The new debt structure will save us a little over $2 million in interest expense annually, while significantly increasing our access to capital. We closed the convertible debt at a stock price of $13.84, and have a premium of 32.5%, which implies that at conversion, we will issue approximately 17 million shares in exchange for the debt.

Common shares outstanding as of September 30, 2021, were $99 million in the fully diluted share count, including employee equity awards and the warrants is 132 million shares. Using the treasury stock method, the fully diluted share count at September 30, 2021, is $121 million.

When the debt converts to equity, approximately 17 million shares will be added to our share count. At that point, $316 million in debt will be excluded from the calculation of our enterprise value as it will have converted into equity. Now turning to our full year 2021 outlook.

We now anticipate full year 2021 total revenue will approximate $235 million, representing growth of 62% compared to 2020. That includes the following.

We expect full year 2021 organic revenue to approximate $208 million, which implies growth of 47% year-over-year, driven by the impact of clinical distinction on surgeon adoption, and the elevation of our strategic sales network. Updated U.S.

organic revenue guidance captures the $4 million of COVID-related impacts that we weathered in the third quarter. Our expectations for the fourth quarter are based on a continuation of the improved trend that we experienced in October.

We now anticipate EOS-related revenue of approximately $26 million for the full year 2021, up $1 million from previous guidance. While we are pleased with EOS' performance, the ongoing integration efforts, and the current strength of the order book in the third quarter, we want to keep expectations realistic.

The timing of new deliveries, and the unit upgrade cycle, which meaningfully affect the revenue we are able to recognize in the period, have natural variability from quarter-to-quarter. We expect it, now-ended the international supply agreement to contribute about $900,000 to the full year revenue.

Now I'd like to spend a moment on a quantified view of the opportunity ahead of us. The current momentum of PTP adoption, and its expanding applicability, validates our belief in PTP's continued ability, to increasingly penetrate the roughly $1 billion lateral market.

The familiarity of the approach, coupled with the predictable reproducible outcomes that PTP begets, can gradually convert PLIF and TLIF surgeons that haven't yet adopted the lateral approach, due to the challenges that the traditional technique presents.

The conversion of PLIF and TLIF surgeries to a lateral approach, will enable us to shift a significant portion of the $2 billion PLIF and TLIF market into the lateral market.

Our ability to demonstrate clinical value in a space that still means predictable outcome improving innovation, is already building surgeon trust, and creating a halo effect, broadening the overall adoption of ATEC's now comprehensive portfolio, to drive significant share taking across the $10 billion U.S. spine market.

Additionally, our recent acquisition of EOS imaging opens the door to an estimated $2 billion market opportunity, assuming roughly 3,000 U.S. hospitals, and ASCs at the average ASP for an EOS system. That doesn't consider the potential to place multiple EOS systems at a single center, a dynamic that is already at play today. So with a $12 billion U.S.

market opportunity in front of us, in our differentiated procedural approach, it is clear why we are so optimistic about the road ahead. Over the past 3 years, we've consistently demonstrated the significant growth, that share taking, through clinical distinction can deliver, and we are just getting started.

We are building a sustainable growth story that, as we execute on our share taking strategy, can span decades. In closing, we continue to do what we said we'd do. In the third quarter, we delivered industry-leading growth, up 53% in total, and 29% organically compared to a U.S. spine market that was down.

We remain relentlessly focused on the long term, and steadfastly committed to revolutionizing the approach to spine surgery. I hope to connect with many of you over the next few months as we have a full calendar of investor outreach activities planned. And with that, I'll turn the call back over to Pat..

Thanks, Todd. Our strategy is about evolving the clinical experience. We believe that, good medicine is good business. In that way, we will earn our share, and you don't need to earn your share. The share is not earned before effectuating the clinical experience. That's why we believe in the long-term value creation of ATEC.

We are doing things that create momentum. And clearly, you look at PTP, you look at the addition of EOS, you look at the confidence reflected in the halo effect of our entire portfolio based upon the -- what we're doing clinically, our expansion and improvement from a U.S.

distribution perspective, and the foundation that we're laying from an international standpoint. And so through a commitment to advancing the clinical experience in spine, we have set the stage for sustainable, multifaceted industry-leading growth.

And so, literally, we have just started this process, and we look forward to the long haul of continuing to evolve the field of spine. So with that, we will take questions..

[Operator Instructions]. The first question comes from the line of Brooks O'Neil from Lake Street Capital..

Congratulations on sort of boring through the disruption of COVID..

Thanks, Brooks..

I have 1 primary question. I had the good fortune to come visit your headquarters, and trading facility in San Diego recently.

Can you just talk a little bit about how that integrates with the effort to proceduralize, and sell platform opportunities into the spine market going forward?.

Yes, Brooks, thanks for the question. To me, like, this whole opportunity to demonstrate the, a kind of the reality of how to further the field of clinical spine care is 1 of those where the surgeon puts their hands on all of the products, that ultimately reflect in a procedure in a cadaveric setting as close to the OR as possible.

And they're doing it with luminaries in the field. And I think that just the opportunity to understand why each of the individual components, that reflect in the sophistication of the procedure is very, very valuable. And it's not 1 of those things where it's like they're coming here and we're pouncing on and then sell.

What we're trying to do is compel them based upon the clinical application of a specific procedure. And I think that's why you're seeing such a robust interest in volume of people who are interested in tending to learn PTP, is it's not that they're coming here to learn about InVictus, our pedicle screw system, or the lateral interbody device.

But what they're trying to understand is how they put it together, what the specific patients that they're going to apply this to, and what the expected experience is going to be. And so we have that laid out, I think, as well as anyone.

The other thing is we start to give them an understanding of EOS, especially those guys who haven't been experienced in understanding what EOS is. I think, really, it provides them such a much deeper view as to why this acquisition was such an important part of our clinical thesis moving forward.

And so anyway, not to drone, but it's just on the things where it's like, we're getting started with PTP. We show them exactly how we're addressing the clinical utility. And then the beauty is we start to march up the sophistication of how they apply it in the different pathologies, and each time we get another opportunity to influence them.

And so I would say that that's the reflection of the new building, and that is why we contemplated a kind of the structure of putting it together, when we go together..

I could just say, I was blown away when I saw it. I'm sure everybody else is, too. So that's great..

Next question comes from the line of Mathew Blackman from Stifel..

Just to start, curious on the mix headwinds from complex procedure deferrals.

Any way to reflect back over the course of the pandemic, I don't know, maybe using 4Q '20, and 1Q '21, as a proxy, but just give us a sense of how quickly complex procedures come back? Do they typically come back faster than more traditional procedures? Are they -- do they come back slower? Just any thoughts there.

And I just have a couple of follow-ups after that..

Okay. I'll let Todd quantify things because I'll certainly screw that up. But I think what happens is, the patients that get operated on is claudication. So if there's something pushing on a nerve and it's more emergent, those people get operated on.

And so when you start to talk about long construct stuff, I got to say, sometimes it's -- and please take this in the vein, it's intended is, it's cosmetic. And it may not be a claudication issue, it may be more of a cosmetic issue, which means the deferral is likely able to go longer.

But when someone has a more immediate intervention required, I think those are the cases that are going on.

And so I think the Northwest was a kind of a perfect storm where you saw the flare-up of the pandemic, and what you would see is you'd still see some stuff come out in there, but not at the volume that we previously expected as well as not of the complexity.

And so our view was, gosh, based upon the goofy staffing dynamics that we're in, the cloud on the pandemic, what we're seeing is some ASC type of stuff, but no longer complex stuff that often would be less about emerging claudication and more about longer constructs..

Yes, I think I'd add to that, Pat. Certainly, when you looked at the mix of procedures, and a kind of how they grew year-over-year. Ultimately, you definitely saw a stronger growth in cervical relative to the other contributors.

And I think, again, that a kind of speaks to the place, and the ability to do those procedures, and maybe a little bit lower risk environment, if you will, or a lower risk procedure, rather. And so we saw probably a stronger experience there than we did in some of the more complex areas.

You know, Matt, we talked about -- I think it's most clearly seen in our sequentials, where total revenue is down 7%, volumes down 4%, ASPs down 3%. And so ASP is almost half of the contributor in the movement of revenue sequentially.

And that really a kind of comes down to the fact that, many of the more complex procedures, and then higher revenue, higher case ASP, were deferred on the period..

I think 1 other point, Matt, sorry to pipe in. But you start to see a 20% increase in the volume of new surgeons, but only a 6% ASP, we think, gosh, more revenue of less complexity. And so, like, just trying to create an objective understanding of, gosh, what we believe to be the dynamics that are driving the business..

Great. I appreciate it. And then maybe just some updates on the channel, new reps, exclusive reps, new distributors, new U.S.

geographies, just anything going on, on that front? And just curious, as EOS obviously attracting new surgeons, but is it helping you attract any more higher-performing distributors or sales reps, now that there are pull-through opportunities? Just curious about that dynamic..

Yes. I could answer and just say, yes, but I'll give you a little color commentary. We've been weak in many of, I think, the major metropolitan areas.

And I think when you start to think about where the academic institutions are, I think there's a lot of people that have significant experience, that may have previously worked with large companies, where the companies don't have the passion to continue to evolve the field.

And I think that what they see is a significant momentum from, again, I think a small but pivotal player that's very interested in continuing to move the field forward. And I think that EOS is a great driver of interest because I think they understand how we will ultimately translate that information to continue to improve surgery.

And tenderly, it creates a moat around -- It's unique. We're the only guys that have it. And I think that it's a little bit misunderstood to realize, hey, listen, when you think about lateral surgery, there's 2 companies that have neurophysiology, ourselves, and some guys down the street.

And candidly, our neurophysiology is performing more sophisticated than theirs, and so our ability to ultimately earn people's confidence in that is very high.

And then to look longer term about, hey, we're going to lay the foundation, and then translate the information out of EOS, I think our 2 key factors of really bringing over a sophisticated group. And so we're seeing that real time in the Northwest. We're seeing it real time in the middle part of the country. Chicago is starting to bulk up.

And so we're seeing a lot of different areas where there's a level of sophistication that we haven't enjoyed previously..

The next question comes from the line of Jason Wittes from Loop Capital..

Just a quick clarification. In terms of your fourth quarter outlook, I assume there is still some COVID impact assuming there. I think you've said, volumes aren't quite up to speed. Do you assume -- I don't know how much quantitation you can give on what you think the impact might be and be.

Do you -- is there expectation that by year-end, we can resume a kind of normal volume levels?.

Yes, Jason, I think -- I guess I'd say a couple of things. 1, just in terms of context, we know COVID's still out there, still hot spots in Northwest, a little bit in the Southwest, and the middle of the country still. We also know that staffing challenges continue to be a variable that hospitals are working through.

I think in terms of the direction, those are going, I think COVID is generally improving. I think the staffing challenges a kind of are what they are, and we're going to have to work through those. And I think the other thing that is manifesting itself is the traditional seasonality of Q4, we're definitely starting to see that demand as well.

So we think that's a kind of the set up for the quarter. And then in terms of our sequential performance a kind of from August to September to October, I think improving sequentially has been positive. And given the fact that our October ADS greater than our Q2 ADS is a good sign there.

We can see this in the weekly trends, which also give us, I think, a good amount of confidence about the fourth quarter. And so I think ultimately, a $57 million guide for organic sales, it does assume that we see some continued level of improvement in November, December.

And that's really a kind of as COVID attenuates a bit, and those areas begin to improve their volumes along with the seasonal demand, but recognizing that we're still going to have to work through the staffing issues..

Okay. That's helpful. I appreciate that. And then if I could just ask about -- you've seen, obviously, you're seeing tremendous growth with PTP and lateral, major contributor last quarter and especially this quarter.

In terms of the surgeons that you're kind of getting on board with this, are they primarily lateral surgeons, or you've also seen traditionally non-lateral people starting to look at PTP as a real viable opportunity for them?.

Yes. Jason, a kind of the question that we had early on, are we just going to get a kind of the lateral guys, and have them a kind of come over from doing traditional lateral. The challenge is then with lateral positioned surgery is that we never really got much above 20% of the surgeons applying the technique.

And so what we're seeing is the very thing, that we had hoped for, which is a lot of the guys didn't, in essence, do lateral surgery because, 1, they -- a lot of them typically believe that you want to do a direct decompression. And so the great part about PTP is, it provides that optionality. The other 1 is the whole alignment thing.

When you're in the lateral position to align someone from a lordosis perspective is harder, candidly. And so the ability to have a belly hang from a prone position really speaks to the posterior approach guide.

And so our ability to put them in a familiar position and be able to really address, lordosis really -- really address the directly compressive element, but then also place fixing or stabilization in a very familiar position, has really kind of been phenomenal.

And so when we look at the demographics of those people who are coming in to be trained, it's not just lateral guys, it's also guys who have been traditionally posterior guys. And so to us, that begets kind of our interest at above 51%, our access to the [indiscernible] is readily available.

And that's what I think Todd's talked about when he starts to quantify the value of the marketplace. It's different than what has been historically pure lateral..

That's helpful. He does describe that slide well. Last, just a quick question on EOS. I assume that the numbers that you see in terms of revenues are still based on the book of business that you inherited.

I guess it's just to -- is it right to assume it's just too early to see any purchase agreements tied to EOS, as opposed to outright capital sales, which is what they were doing before? Or are we starting to see that now? And in terms of when you think what the time line is before we can really start to see the EOS ATEC combination really starts to take a role in placing these systems.

Is that still like a 9- to 12-month process, I guess, is what I'm asking?.

Yes. I'll let Todd again quantify because I'll screw it up. But the whole ability to have influence, I think, was relatively immediate. And that's why we believe the market opportunity is so big, is because what happens is, is we've already had guys who I would tell you are a kind of ATEC friendly, acquire them in individual practices.

And so the relevance of this technology is such that guys are, in essence, opening up the checkbook, write a check for a unit. And we've seen that a couple of times through the -- through the initial phase of a kind of the integration.

But the best is yet to come, and the real virtue of this thing becomes, how do we ultimately lay a foundation such that, again, if you look at France, and there's 100 of them, imagine that there's 500, a few thousand here. Our ability to translate those units in ways to make surgery better is so opportune.

And so I would tell you, we are such in a very, very, very early phase.

Want to add?.

I don't have a whole lot to add to that unless there's another question or follow-up to that..

Next question comes from the line of David Saxon from Needham and Company..

This is Joseph on for David. I guess maybe first, coming out of NASS, I'm sure PTP and EOS, generated a lot of interest.

But can you maybe share some of your takeaways, and then talk about what other products were getting attention from docs?.

Yes. I think that what's interesting is that this was a resurrection in terms of the company. And if you look about several years ago, the type of aptitude that came over here with regard to a kind of mechanical skill set, from a design and development perspective, was over the moon.

And so what happens is that I think surgeons come over and they say, gosh, that EOS thing is a kind of cool. It's clearly what the luminaries in spines would review as being a valuable tool. Well -- and then you come over and you see, it doesn't stop there. What happens is you go by and you see a -- post your fixation that goes from occiput to ilium.

You're not going to see that at 99% of the boost at NASS. And so you start to realize, hey, it's not just stopping at EOS or not just stopping at PTP. But really, it's the ability to understand that there's a sophistication that gets delivered across the way.

And the things that just continue to inspire is, as I mentioned in the call, who as a system in a pedicle screw perspective, that delivers a percutaneous pedicle screw that's K-wireless, that is a modular device that's attached to neurophysiology that includes delivery of a blade for [indiscernible]. And I'm going to tell you, nobody.

And so what happens is they come over, and they see some of these things and they're like, oh my gosh, this is the real deal.

And so the great part is, these opportunities provide us the ability to touch people, who we may not be touching because of the maturity of our sales force and again, enables us to drive confidence in ways that we wouldn't have otherwise.

And so again, nobody jumps up and down more about PTP and EOS than me, but I got to tell you, the further people get into our portfolio, the more impressed they are..

And that's important, Joseph, because as you look at the utilization of PTP, obviously, lateral approach gives you opportunity to place a spacer. But oftentimes, they do get posterior fixation.

And -- And the fact that we have the best, if not 1 of the best or 1 of the best, if not the best posterior fixation systems out there today as sophisticated as Pat has talked about, while we're launching PTP, and bringing what I think is a solution that physicians are looking for, you a kind of get the credibility of and credit for delivering that solution, the ability to then hang your posterior fixation, and get all of the product per procedure, that procedure requires out of your bag is higher.

And I think that's why it's so, I think, impressive that the company has launched, call it, 40 products in the last number of years, it really sets up nicely for us to continue to get an increase in case ASP, as we continue to penetrate the lateral market..

Okay, okay. Great, that's very helpful. And then maybe 1 more question around the agreement with Globus. Obviously, it ended in the quarter, but maybe, what are your plans for expanding internationally? Our understanding was that this is a 2-year restriction, but that there are some countries that are open to you.

So can you maybe size that opportunity and talk through, how you plan to enter those markets?.

Yes, yes. So first of all, we celebrate the end of the relationship with Globus, regarding international. The other is, I would tell you that what we're going to do is we're going to be very focal, as it relates to kind of our international effort. And I think we've even gone as far as to say, hey, these are the kind of markets of interest.

And so -- not -- I don't think we've communicated the timing associated with our specific interest, but I think that if you look at like New Zealand and Australia, we're starting to lay the foundation there. Companies are about people.

I got to tell you, we have some great people in terms of New Zealand and Australia, teamed up to ultimately lead that effort. Then you start to say, gosh, the U.K. is an attractive market from our view as it relates to a kind of a combined company. Clearly, this doesn't contemplate all that's going on with EOS already in the international marketplace.

Japan is another super attractive country. I think that there's a lot of a kind of surgical views that are shared between the 2 countries that I think provide opportunity for us to integrate into that market effectively.

And then probably lastly, and we have Brazilian roots, if you will, and so likely Brazil is a place that we'll spend some time as well. But those are a kind of the marketplaces. Timing is about how we lay the foundation, and when we feel the need to enter, and -- but I got to tell you, we're excited about the people we're attracting in those places..

Next question comes from the line of Matthew O'Brien from Piper Sandler..

Pat, can you talk about this growth in new users? I don't recall the exact numbers over the last couple of quarters, but up 20% is great. How does that dovetail into the growth of the business as we look into '22? It's just difficult because it's a tough COVID comp here to really kind of figure out what you're going to look like next year.

So 20% growth in new users here this quarter, ASP is up in a little bit.

Should we think of you guys as a 25% grower again next year, even though you've got a tougher COVID comp?.

So I'll answer the first part. But remember, the quantity guy is Todd. The -- I think your point is the right 1, right? It's 1 of these things where it's like we compel people, likely their initial experience with our products is smaller and more focal. And as we've always talked about, this is a walk towards confidence and creation.

And so what we're doing is we're seeing more people be excited about what we're doing. Candidly, the volume of people coming through is very, very high, and there's a great enthusiasm. And when they leave, they usually -- they do stuff.

And so -- but oftentimes, it's not big stuff because what they want to do is they want to get -- Do I have the rep in place? Do I have the hospital approval? Do I have all of the ability to do what I intend to do? And so oftentimes, it's a walk up.

And so it's tough for me to specifically quantify, but what it does is, it lays the foundation of people familiar with our products, who find success in them early, and you see that reflected in, really, in a long-term growth profile..

Yes. And I think the new surgeon users correlates nicely with the amount of training that we're doing, and I think that's all very much connected, obviously, also connected to our expansion in coverage across the country from a distribution standpoint.

As it relates to next year, we haven't given guidance yet, still in the middle of our planning process. So all that's very, very live. I think currently, consensus is sitting out there like 293, which is 25%. So I think you're a kind of spot on there. I think we're not offended by what consensus is that..

Great. And then I'll stick with the quantitative guy for a second here, Pat. The gross margin that I may have missed it. I'm sorry if I cut you off there, but I may have missed it, but the gross margin was softer. I know EOS is a big component of that in the quarter.

How do we think about that metric? And then what does Memphis contribute to the business going forward? And specifically, what I'm trying to get to is leverage points in the business going forward, you're making all these investments to grow the top line, which is the right strategic move.

But when do we start to see a little bit of that leverage start to squeak out versus some hefty spending numbers on the SG&A side of things here in '22 -- sorry, '21, and likely '22 as well?.

Yes. So on the margin side, ultimately, we saw what was about 490 basis points, unfavorable year-over-year. That's about 660 basis point impact from EOS. So that difference between their 40% margin in our high 70s on $11 million of EOS revenue.

That's partly offset by 170 basis points of manufacturing, and overall efficiency, so I think that hopefully speaks to some of that efficiency side on our operations front.

I think, Matt, in longer term, as we grow the business, I think we get some tailwinds on gross margins just as our implant business grows, probably grows a bit faster than the overall capital business in the long run.

Obviously, as you're looking at any given period, you have to be a little bit cognizant of the mix between capital sales, and placements, and how the expense of the equipment, is reflected now in the timing of all that, so I think more to come on that when we talk about full year guidance in the coming quarter.

But overall, on leverage, I certainly think over the last 2 years, I think if you looked at Q3 operating expense as a percentage of revenue here in the quarter, we're at -- we're at 93%. If you look at that number that had we done $4 million more that we lost at COVID, it'd be about 90%.

And 2 years ago in 2019, Q3 OpEx is -- non-GAAP OpEx as a percentage of sales is 93%. And so I think you certainly would have seen a bit of leverage here in the period, had we hit our revenue number and earlier commentary relative to COVID kind of mixes up this stuff a little bit.

But we've definitely had a kind of 2 meaningful years of investment, and as we get to continue to grow, I do believe that you'll begin to see some leverage here, especially as we get closer to a kind of that $500 million, $600 million run rate. I think the closer that we get to that, I think the improvement will accelerate..

The next question comes from the line of Josh Jennings from Cowen..

This is Eric on for Josh. As you've mentioned earlier, the organic growth trajectory that you've been on since 2018. You've been able to grow well into the double digits exceeding the market and your competitors, and this has really been apparent during the recent COVID-impacted quarters.

Can you help us understand what ATEC is doing that others in the market seems to be missing? And perhaps more importantly, what sort of competitive response you're seeing now that I'm sure other spine players are taking those of your performance?.

Yes. To me, I think that we did our best to lay it out in terms of -- All the guys who created lateral, I think, are best in form to improve lateral. And so I would tell you that, that's such a key part of what we're doing uniquely.

The other thing is -- it's interesting, if you look over the kind of the history, in spine surgery, there hasn't been companies that designed and developed for the specific utility of. And what happens is people are like, gosh, that spine surgery is not very sophisticated.

Well, it's not going to be sophisticated unless you design all of the elements to satisfy a specific requirement. And so our ability to do those things and having done those things ultimately reflects in a product that gets widely accepted very, very early. And so -- That's been our experience in our -- previously.

And I think that if you start to say, gosh, why are we -- what are we doing differently than other people are, it's designing and developing for the specific utility of them. And there is great know-how at the place. We're including technologies like automated neurophysiology both from an EMG and an SSEP perspective. These things are very, very hard.

And so when you start to say, gosh, what are we doing that other people aren't doing is what we're doing is we're innovating, based upon the requirement of creating a predictable experience. And so that is clearly the case, and that's being most early reflected in the lateral experience, but it won't stop there.

And I think that we have plans across with multiple different procedures to do the same. And so what you're seeing is a market reflection of what I will call, a procedural sophistication..

That's great. And then on staffing shortages, -- It seems like you're managing well so far based on your 3Q results, and updated guidance for the year.

I'm just wondering if this is an issue you're factoring into your internal expectations as it possibly could be a headwind into 2022?.

Yes. As we look at our Q4, I think as I've shared earlier, we considered a number of things in the context of the quarter. Clearly, hospital staffing is something that we saw. We believe the hospital staffing is going to be real, and continue into the fourth quarter.

We think COVID is attenuating a bit and should -- as that begins to go away, we'll see more resumption of business where we didn't see it in Q3, so that will be a tailwind a bit. And as we believe that the normal seasonality of Q4 also a kind of lift the volumes. So ultimately, we saw October ADS to be in excess of the Q2 ADS.

We saw continued improvements from August to September and September to October, and we're expecting a moderate improvement from October, November, and in December.

And so I think we're well placed to put guidance from our philosophical approach of thoughtful, fully considered and put a number out there that we believe we can achieve and have reasonable opportunity to exceed..

Next question comes from the line of Kyle Rose from Canaccord..

Great. So a lot has been asked, but 1 of the things that stood out on the call was not just the growth, but specifically the growth that's coming from lateral. I mean, you talked about 50% of the organic revenue growth came specifically from lateral. I mean that's somewhere between $5 million and $6 million, when we look at the Q3.

So I'm just trying to understand kind of that dynamic of the strength in lateral, but then also the commentary around, hey, we're seeing a lot of cases move to the ASC. We're seeing a lot of cases, more or less complex. So just maybe kind of frame the opportunity if COVID hadn't been here.

If you didn't have that $4 million headwind, would that $5 million, $6 million of lateral growth turned into $10 million? I'm just really trying to understand a kind of how much of this is really being driven by lateral alone?.

Yes. I will not answer the specific numeric reflection. So I think what you're seeing is you're seeing really a kind of a very positive early adoption of a technique that is going to be profoundly relevant. And if you look at everybody else in terms of what they're doing, everybody is out there talking about the prone lateral.

And we've already been through prone lateral. All of our learnings in terms of failures ultimately reflected in what is now PTP. And so the great part is what we're seeing is a kind of the early adoption.

And I think any time someone adopts something early, what they're going to do is they're going to do something that is [indiscernible] where will they find success. And I think about things like grade 1 spondylolisthesis, whereby the likelihood for achievable high success rate is very good.

And so what you're seeing is you're seeing a kind of the early adoption. The great part is, is those people who have been around this for a period of time, what we're seeing them do is more complex things with the technique. And so the great part is adult deformity is a very challenging a kind of a pathologic profile to treat.

And so when you start to think about the ability to start to move the anterior column around, that's going to reflect in a more sophisticated intervention associated with PTP, and we're starting to see those things transpire now.

The great part is also, if you look at tumor, and trauma, and some of the other kind of tools like from a corpectomy perspective, all of that stuff from a pure PTP perspective is being developed now. And so what you'll see is just a continued walk up the sophistication ladder, which will also be reflected financially.

And so I would tell you that, we see a tremendous opportunity in lateral surgery with regard to PTP. Doesn't mean that LTP is going away in terms of lateral transposed -- laterally positioned transposed surgery going away.

But again, I think that what you're seeing is the type of utility that we would expect out of early users, and then the type of kind of pushing the envelope with people who have been around it a little bit longer. And so I know all that, a kind of qualitative that....

Kyle, it's hard for me to sit here and pretend I know exactly how that $4 million would have manifest itself. But certainly, volumes would have been higher.

And as I a kind of look at the demographics of our growth, where it was, the strength of the growth in the different procedures, I certainly would have expected some of that $4 million to be reflected in our lateral business. And so my belief is, yes, a portion of that would have been lateral.

And your comment about cases getting -- being less complex, and moving to the ASC, we really think that is -- the less complexity is as much about the COVID impact, and the deferrals, and how that plays out in the health care setting as well as you're adding new surgeons to pass point, we're starting out with probably simpler pathology.

So all that to say, had we seen $4 million, certainly would have been more volume. And I do think the ASP contribution would have been higher than 6%..

Okay. And then just overall, I mean, I think the Q4 annualizes the actual -- the broad commercial launch of PTP? I know you had some alpha cases going on before that. When we think about all of the surgeon education, and things that you've done, your surgeons are up 20% here in this year.

How much of your user base is using PTP now?.

Well, it's a great question. I would say a fair amount, and sorry to not quantify it. It's 1 of those things where it's like, I think what compels people to come over here are things like PTP. And so what happened in a kind of the normal a kind of run of things is they come here. They see the building.

They see that we're serious about a long-term value creation in a market space that we're -- we have a long history of serving. And then they become enamored with PTP because that's what brought it here. They have a great experience, they gain confidence, they leave here, and they do work with us based upon the confidence created by their visit.

And so I would tell you that a large amount of people why they come, is because of the clinical distinction and being compelled by it. And we feel like, gosh, that's the right approach in terms of building the foundation of a long-term successful company. Nobody is going to come here to look at our cervical plate.

As great as our cervical plate is, they ain't coming to look at it. They're coming to walk away with a skill set that they didn't have before they came. And so the great part is, is we're giving it to them. And that speaks to again, long-term success..

We have no further questions at this time. This does conclude today's call. You may now disconnect..