ALPHATEC HOLDINGS INC (ATEC) Q3 2021 Earnings Call Transcript

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ALPHATEC HOLDINGS INC (ATEC 1.62%)
Q3 2021 Earnings Call
Nov 4, 2021, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

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 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'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 Koning.

Now I will turn the call over to Pat Miles.

Pat Miles -- Chairman & Chief Executive Officer

Thank you very much Ella, and welcome to the Q3 2021 Conference Call. It's a conference call. Clearly, we will be sharing some forward-looking statements, so please review at your leisure. And just going to 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 yields of $11 million and I think as much as anything, it just spelt out our unique positioning for continued industry-leading long-term growth and kind of the elements that are the drivers is can be more excited about what's going on with PTP. I think our ability to extend 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 then reflecting the value of the EOS information is a tailwind. And I think building confidence such that there is kind of this halo effect of driving adoption of our-- of our entire portfolio, it is clearly going on.

And then additionally, 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% and we're clearly compelling surgeons because we had a year-over-year growth of 20% and 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 the adoption of our new products continue to stay super strong which tell us kind of a a attractive continued growth in the future and also the blended average product categories per surgery of 2.0 continues to grow and remain robust.

This is the 12th consecutive quarter of double-digit year-over-year revenue growth and I think more importantly, 10 of 11 quarters are greater than 20%, which, which we're excited about and ultimately what that reflects is, ATEC can 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 clearly there has been a bit of a tough backdrop, but we're doing the things that we committed to doing and our commitments are going to remain --for as far as the eyes 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--the kind of the objective reflection of that compelling in an increase in revenue per products OK, through-- through innovation.

And then as you create clinical distinction compel surgeon adoption, the likelihood of attracting pros to this thing is very, very high. And so we will continue to attract clinically adept 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 procedures and you could not pursue the perfect procedure if you were 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 kind of an acceptance of the type of enabling technology that I think is candidly, the more challenging things to-- to do and so when we--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 is 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 I mentioned our opportunity to translate EOS like we have SafeOp. We haven't talked much about SafeOp the other way but clearly a competency in terms of translating information as well as the whole mechanical device design, I would tell you is a clear, a clear competency. And so, we like to leave a list here, because we don't PR every product that we released.

We would like to communicate that 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 in our ability to translate information imagine an opportunity to demand match implant based upon bone quality and you see Arteaus grew right up here and just the ability to be able to understand what the requirement of a specific patient is and then adaptive based upon their bone quality and so when you start to look at these things, you start to look at the InVictus you start to see such distinction in our fixation or stabilization system. And so, I think so often we talk about spine surgery as decompression stabilization and alignment. This--is it 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 single step which is which is a unique product that don't hold to integrates to our modular screw system that attaches to our neurophysiology system that delivers retractor blade. I think it really speaks to the level of distinction that this group has in terms of understanding the requirements of spine procedures.

And so, we have recently launched InVictus OsseoScrew and then tomorrow we build upon the identity implant system with an improved ALIF device that we'll--that we'll launch tomorrow and really kudos to the internal organization and the sales force who is probably our most comprehensive successful alpha release and now we're ready to go for commercial and we have really great expectations that the contribution of again, more sophisticated-- more sophisticated anterior column surgery and so another key organizational focus really has been kind of the EOS integration and when you start to think about what we committed to, we said, gosh, but 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 are doing the same with regard to the EOS family and making sure that they coincide and then really scaling operations to meet demand. -- have been kind of the three key efforts and some of the highlights of -- Eric Dasso is in a leadership position of the leadership position in France. And so I think that he is 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 volume of the pipeline leads is also increased significantly. And when I'm in the field and I, and I get the opportunity to meet with customers and I hear the level of coherent enthusiasm as it relates to adding EOS machines, we have institutions like Hospital for Special Surgery that has for EOS units currently there, there is 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 EOS, it is not one per hospital, the opportunity is in our mind is very, very substantial and we'll outline that more as we roll 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 big kind of clinical relevance and when somebody of Larry linking stature-- if you're going to treat deformity, EOS Imaging is a requirement. I would say that's not a passive deformation.

These are the things that are necessary in terms of--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 you know our ability to sell into spine surgeon to really understand the benefits of this technology is phenomenal. And then starting to integrate kind of the information through planning platforms and the like 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 facilitating 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 a 100 units in France and you start to say, gosh how many units could just the United States utilize 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, EOS units here without really doing anything different. And so we can't be more excited about the opportunity.

We feel like it's really kind of furthers the multifaceted tailwind that we talked 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-- is driven by lateral. And so when you look to what's going on with regard to PT P, I think that really there is unmatched sophistication and know-how here at ATEC and and I think the-- it's being reflected really in the adoption. And when you go back and you understand kind of the origin of lateral surgery, key element to the 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 sur-- we took about surgical goals being decompression stabilization and alignment and just the ability to add given it to directly decompression a lateral surgery becomes very, very valuable. And when you start to think about why people do PLIF and TLIF it's because they like to decompress the spine. And so our ability to make sure that we're doing the things that ultimately enables 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 complexity 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 and speaks to sophistication and so what we're doing from a SafeOp perspective and if you look at the ATEC surgeon business, I think it's reflective of an increase in demand. And so those of you who are not looking at the slides., it's a-- 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-- through creating clinical distinction and so you can see the third quarter in terms of the year-over-year average at revenue per case was slight-- slightly muted and in our minds, it just speaks to a little bit of a black cloud from the staffing in 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 designed to be trained and we continue that moving forward. And so when we, when we think about adoption and compelling surgeon it's oftentimes because we're aligned in how they serve the interest of patients and that's why we think holistically about design and develop 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 as we get to see the objective reflection of that when we start to look at convoy sales. And so when we, we think about convoy sales we often times talk about the blended rate, but the real opportunity is where are we creating distinction and where have we committed that investment going to thesis to-- to reflect and improve surgery and so you can see we were nearing four which would suggest accepting some of the thesis and clearly that's grown year-over-year in terms of our approach.

A continued place of improvement also is really in our sales force and 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 or share a new 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 CTP and have them very well, It''s even more than that. And so, just the ability to start to make sure that there is a true alignment in the-- 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 a quarterly covered geographies and really another key component of managing growth it is so we continue to expand our sales footprint and now what we do with the cash, how we manage the assets and and so in Q3, if my memory serves me, we opened up Memphis and. And so there are few things better than the type of efficiencies that you gain from the ability to turn assets in a centralized location where FedEx is a hub.

And so we're thrilled the debt to be in Memphis and have opened the distribution center. We expect to get kind of continued efficiencies out of Memphis and so you start talking about again, tailwind. 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 kind of accretion of the international effort and 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 Simon and talk about the financials.

Simon Adcock -- Chief Financial Officer

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 was comprised of $52 million inorganic 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 effective hospital operations throughout the months of August and September. We've estimated the negative impact of that the 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 and 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% percent 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 toward the outpatient setting and more emergent cases. Both cases favored 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 troughed in August began to improve after Labor Day and continue to improve through the months of September and October. While the disruptions 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. But 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 felt 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 50% 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 as 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 if you a long-term industry leading growth. During Q3, we maintained our planned investment levels through the pandemic related reduction in value 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 mass and a 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 with a loss of $10 million compared to a loss of $2 million last year into 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. In August 5 we closed an upsized convertible debt offering of $360 million with 75 basis point coupon and a conversion premium of 32.5%. Net of fees a capped call feature a share repurchase and debt repayment reoffering generated 108 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-- value is $327 million, which includes $316 million of convertible debt and EOS related debt of approximately $20 million less the issuance 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 form 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 excess capital.

To close, 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 and the fully diluted share count including employee equity awards in the warrants is $132 million shares. Using the treasury stock method the fully diluted share count at September 30, 2021 is $141 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 52% compared to 2020.That includes the following. We expect full-year 2021 organic revenue to approximately $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 EOS organic revenue guidance captures the $4 million of COVID related impacts that we weathered in the third quarter. Our expectations for the 4th 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's performance, the ongoing integration efforts and the current strength of the order book in the third quarter, we want to keep that expectations realistic. The timing of new deliveries in 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 the now ended international supply agreement to contribute about 900,000 in 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 it's expanding applicability validates our belief in PTPs continued ability to increasingly penetrate the roughly $1 billion lateral market. The familiarity of the approach, coupled with the predictable reproducible outcomes that PTP gets 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 ship the 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 needs predictable outcome improving innovation is already building surgeon trust and creating 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 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 and our differentiated procedural approach, it is clear why we are so optimistic about the road ahead. Over the past three 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 do. In the third quarter we delivered industry leading growth up 53% in total and 29% organically compared to 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.

Pat Miles -- Chairman & Chief Executive Officer

Thanks, Todd. Our strategy is about evolving the clinical experience. We believe that good medicine is the business. In that way, we will earn our share and you don't need to earn your share, your 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 and with 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 our 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, 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.

Questions and Answers:

Operator

We will now open the floor up for questions. The first question comes from the line of Brooks O'Neil from Lake Street Capital.

Brooks O'Neil -- Lake Street Capital Markets

Good afternoon, guys congratulations on sort of boring through the--this disruption COVID.

Pat Miles -- Chairman & Chief Executive Officer

Thanks.

Brooks O'Neil -- Lake Street Capital Markets

I have--I have one 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 -- and sell cell platform opportunities despite market going forward.

Pat Miles -- Chairman & Chief Executive Officer

Yeah Brooks. Thanks for the question. To me like this whole opportunity to demonstrate the kind of the reality of how to further the field of clinical spine care is one of those where the surgeon puts their hands-on on all of the products that ultimately reflecting a procedure in a categoric setting as close to the EOR 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 one of the things where it's like they're coming here and we're --not to 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 coming to learn PTP. It's not that they're coming here to learn about InVictus or 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 we 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 yields, especially those guys who haven't been experienced in understanding what EOS is. I think it really -it provides them such a a much deeper view as to why this acquisition is such an important part of our clinical thesis moving forward. So anyway not to drawn but it's just want things worth 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 are acquired in the different pathologies and each time we get another opportunity to influence them. I would say that that's the reflection of the new building and that is why we contemplated kind of the structure of putting it together than [Indecipherable]

Brooks O'Neil -- Lake Street Capital Markets

I think to say I was blown away when I saw it, I'm sure everybody else is too. So that's great, thanks a lot.

Pat Miles -- Chairman & Chief Executive Officer

Thanks. Yeah. Thanks a lot, Brooks.

Operator

Next question comes from the line of Matthew Blackman from Stifel

Mathew Blackman -- Stifel

Good afternoon, everybody. Thanks for taking the questions. It is-- to start, curious on the mix headwinds from complex procedure deferrals. Is there a 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--typically come back faster than more traditional procedures. Did they--did they come back slower. Just any thoughts there. And I just had a couple of follow-ups after that.

Pat Miles -- Chairman & Chief Executive Officer

Okay. I'll let -- quantify things because I'll sort of -- it up, but I think what happens is--is the patient to get operate on is claudication. So if there's something pushing out a nerve, and it's more emergent, those people get operated on. And so when you start to talk about long construct stuff, I would say sometimes it's in, please take us in the venous intended is, is it is cosmetic and they may-- 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--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 there, but not of the volume that we previously expected, as well as not of the complexity. So our view was cash 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 not longer complex stuff that often would be less about emerging claudication and more about longer contract.

Simon Adcock -- Chief Financial Officer

Yeah, I think, I'd add to that, Pat, certainly when you look at the mix of procedures and kind of how they, they grew year-over-year, ultimately you definitely saw a stronger growth in cervical relative to the other contributors. And I think again that kind of speaks to the place and the ability to do those procedures. It 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. That we talked about, I think it's most, most clearly skiing in our sequentials were total revenues 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 kind of comes down to the fact that many of the more complex procedures and higher revenue, higher case ASP were deferred over the period.

Pat Miles -- Chairman & Chief Executive Officer

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

Mathew Blackman -- Stifel

Great. I appreciate it. And then maybe just some updates on the channel, new reps, exclusive reps, your distributors, new U.S. geographies, just anything going on on that front. And just curious as is EOS obviously attracting new surgeons. But is it helping attract anymore higher performing distributors or sales reps. Now that there are pull-through opportunities. Just curious about that dynamic. Thanks.

Pat Miles -- Chairman & Chief Executive Officer

Yeah, I could answer and just say, yes but-- but I'll give you a little color commentary. We spend week in many of I think the major metropolitan areas. And I think when you start to think about where are the academic institutions are, I think there is 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 it's a small but pivotal player that very interesting and continuing to-- to move the field forward and I think EOS is a great driver of interest because I think they understand how we will open and transit that information to continue to improve surgery and -- create a moat around. It's unique. We're the only guys that have it. So I think that it's a little bit misunderstood to realize, hey listen when you think about lateral surgery, there's two companies have neurophysiology. --some guidance down the street. And generally, our neurophysiology is profound and more sophisticated in there and so our ability to opening on people's confidence in that is very high and then to look longer-term about hey, we're going to lay the foundation and translate the information out of EOS. I think our two key factors of really bringing over a sophisticated group and so we're seeing that real-time in the Northwest, we're seeing that real-time in the middle part of the country, Chicago's certain to bulk up and so we're seeing a lot of different areas where there is a level of sophistication if we haven't-- previousl.

Mathew Blackman -- Stifel

Thank you. Appreciate.

Operator

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

Jason Wittes -- Loop Capital

Hi, thanks for taking the question. Just a quick clarification. In terms of your 4th quarter outlook. I assume there is still some COVID impact assumed in there. I think you said volumes aren't quite up to speed, do you assume, A, how much quantitation you give on what you think the impact might be and B, do you-- is there anti--expectation that by year-end, we can resume kind of normal volume levels

Pat Miles -- Chairman & Chief Executive Officer

Yeah Jason, I think I guess a couple of things, one, just in terms of context we know COVID is still out there. Still have parts in Northwest, but a bit in the Southwest, in the middle of the country, still. We also know that staffing challenges continue to be a of variable that hospitals are working through. I think in terms of the direction those are going and I think COVID's generally improving. I think the staffing challenges, 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 kind of a step up for the quarter and then in terms of our sequential performance kind of from August to September to October, I think improving sequentially. It 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, our $57 million guide for organic sales, it does assume that we see some continued level of improvement in November-December. And that's really kind of adds as COVID attenuates a bit and those areas begin to improve their volumes along with the seasonal demand but recognizing that we still gong to have to work through the staffing issues.

Jason Wittes -- Loop Capital

Okay, that's helpful. I appreciate that. And then if I could just ask about, you've seen obviously you're seeing tremendous growth for 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 on a primary lateral surgeons are you also seeing traditionally non-lateral people starting to look at PTP as a real viable opportunity for them.

Pat Miles -- Chairman & Chief Executive Officer

Yeah, Jason, kind of question that we had early on, are we just going to get kind of the lateral, guys and have them, it's going to come over from doing traditional lateral. The challenge is then with laterally position 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'd hoped for, which is a lot of the guys didn't in essence do lateral surgery because one, the-- 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 one is the whole alignment thing. When you're in the lateral position to align someone from a low dose's perspective is harder candidly and so the ability to have the belly hanging 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 low doses really, really address the directly compressive element, but then also -- fixation 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 is not just lateral guys. It's also guys who have been traditionally posterior guys and and so to us that we get kind of our interest at above 5.1. Our access to the PLIF deals guys is readily available and that's what I think Todd has talked about when he starts to quantify the value of the marketplace, it's different than what has been historically per lateral.

Jason Wittes -- Loop Capital

That's helpful and that described that slide well. Last, just 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 too-- is it right to assume it's just too early to see any purchase agreements tied to years as opposed to outright capital sales, which is -- which is what they were doing before or are we starting to see that now. And in terms of when do you think, what the timeline is before we can really start to see the EOS, ATEC combination really start to play--take a role in placing these systems. Is that, is that still like a 9 to 12-month process, I guess is what I'm asking.

Pat Miles -- Chairman & Chief Executive Officer

Yeah, it's. I'll let Simon, yeah, again, quantify because I'll -- 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, we've already had guys who I would tell you are kind of ATEC friendly acquired them in individual practices and so the relevance of this technology is such good guys are in essence opening up the checkbook,write the check for a unit and we, we've seen that a couple of times through the, through the initial phase of 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 as again when you look at France and there's a 100 of them. Imagine if there's 500 a few thousand here. Our ability to translate those units in ways to make surgery better. It's so-- and so I would tell you we are such in a very, very, very early phase.

Simon Adcock -- Chief Financial Officer

I don't have all lot to add to that. I mean unless there is another question or follow-up to that. [indecipherable]

Jason Wittes -- Loop Capital

I'll jump back in queue. Thanks guys.

Operator

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

Analyst

Hi, this is Joseph on for David. Thanks for taking our questions. I guess maybe first coming out of-- I'm sure PTP in EOS generated a lot of interest but can you maybe share some of your takeaways and talk about what other products we're getting attention from docs.

Pat Miles -- Chairman & Chief Executive Officer

Yes, I think that what's interesting is that no, this was a resurrection in terms of the company and if you look about several years ago, the type of aptitude that over here with regard to kind of mechanical skill set from a design and development perspective was over the moon and so what happens is, is that I think surgeons tomorrow, say, gosh, that EOS thing is kind of cool. If you know clearly what the luminaries in spine's review has been a valuable tool. Well, and then you come oer and you see it doesn't stop there. What happens is you go by and you see a posterior fixation that goes from occiput to ilium. You're not going to see that at 99% of the boost --.

And so you start to, you start to realize, hey, it's not just stopping at yields, so not just stopping at PTP, but really it's the ability to understand that there is a sophistication that gets delivered across the way and the things that just continue to inspire is, as I mentioned in the call, who have a system in a pedicle screw perspective that delivers a percutaneous pedicle screw that K wireless that is a modular device that's attached to neurophysiology includes delivery of a blade for TLIF and I'm going to tell you nobody. And so what happens of 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 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 the need, but I got to tell you the further people get into our portfolio, the more impressed there

Simon Adcock -- Chief Financial Officer

And that's important Joseph because as you, 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 the fact that we have the best if not one of the best or one of the best if not the best posterior fixation systems out there today and 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 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 products per procedure that that procedure requires out of your bag is higher. And I think that's why it's so I think impressive. The company has launched, call it 40 products over 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

Analyst

Okay. Okay, great, that's very helpful. And then maybe one question around the agreement with Globus obviously ended in the quarter. But maybe what are your plans for expanding internationally. Yeah, our understanding was that this is the 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.

Pat Miles -- Chairman & Chief Executive Officer

Yeah. Yeah, 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 kinds of markets of interest and so not, not, I don't think we communicated the timing associated with our specific interest, but I think if you look at it 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 teed up to ultimately lead that effort.

Then you start to say, gosh, you know, the UK is an attractive market from our view as it relates to kind of the combined company. Clearly, this doesn't contemplate all that's going on with EOS we saw already in the international marketplace. Japan is another super attractive country. I think if there is a lot of kind of surgical views that are shared between the two countries that I think provide opportunity for us to integrate-- enter that market effectively. And then probably lastly and we have a Brazilian routes, if you will. And so, likely Brazil the place that we'll spend some time as well. But those are the 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.

Analyst

Sure. Okay, that's super helpful. Thanks for taking my question.

Operator

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

Matthew O'Brien -- Piper Sandler

Afternoon. Thanks for taking the questions. 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%. Great. How does that dovetail into the growth of the business as we look into '22. Is it difficult because there is, you know that the tough COVID comp here. I want to kind of figure out what you're going to look like next year. So 20% growth in users here this quarter our AST is up a little bit, should we think of you guys as 25% grower again next year. Even though you've got a tougher. So would top

Pat Miles -- Chairman & Chief Executive Officer

So, I'll answer the first part but remember that quality guys--. I think your point is the right one. Right. It's one of the things where it's like we compel people likely their initial experience with our products is smaller and more focal. And as we really talk about this. This is a walk toward confidence 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 is 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 rapid 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 that it lays the foundation. People familiar with our products can find success in them early and you see that reflected in really long-term growth profile.

Simon Adcock -- Chief Financial Officer

Yeah. 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 you know, I think you're kind of spot on there, I think we're not offended by where consensus is at.

Matthew O'Brien -- Piper Sandler

Great, thanks for that and then I'll stick with the quantitative guy for a second here, Pat. -- a gross margin that I may understood, sorry if I --out 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 contributes to the business going forward, and specifically what I'm trying to get to is, is leverage point in the business going forward. We'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. Thanks

Pat Miles -- Chairman & Chief Executive Officer

Yeah, so on the margin side, ultimately we saw what was about 490 basis point unfavorable year-over-year, that's about 660 basis point impact from EOS. So that's the difference between their 40% margin in our high '70s on $11 million of the 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 and I think, Matt, 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 a little bit cognizant of the mix between capital sales in placements and how the spend some of the equipment is reflected in the P&L 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 as had we done $4 million more, that we lost to COVID, it would be about 90% and few years ago in 2019 Q3, opex is at 90 above as a percent of sales of 93%. And so I think, you certainly would have seen a bit of leverage here in the period, have we hit our revenue number. And to your earlier commentary relative to COVID kind mix is up this stuff, a little bit, but we've definitely had two meaningful years of investment and as we get to continue to grow and I do believe that you'll begin to see some leverage here, especially as we get closer to kind of that $5oo million to $600 million run rate. I think the closer that we get to that, I think the improvement will accelerate.

Matthew O'Brien -- Piper Sandler

Yeah. Helpful. Thank you.

Unidentified Speaker

Yeah. Thanks so much.

Operator

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

Analyst

Hi, this is Eric on for Josh. Thanks for taking the question. As you mentioned earlier the organic growth trajectory that you've been on since 2018 you've been able to grow well into the double digits exceeds the market in your competitors. And this is really been apparent during the recent COVID impacted quarters. Can you help us understand what ATEC is doing that others in the market seem to be missing and perhaps more importantly, what sort of competitive response are you seeing now that I'm sure other spine players are taking those of your performance.

Pat Miles -- Chairman & Chief Executive Officer

Yeah to me, I think we did our best to lay it out in terms of all the guys who created lateral, I think are best informed to improve lateral. And so I would say the debt such as, 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 up and what happens is, it is people are like cash that's that very sophisticated. what's not going to be sophisticated you is what you design all of the elements to satisfy specific requirement. And so our ability to do those things and having done those things ultimately reflects in a 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, developing for the specific utility out and there is great know-how at the place where including technologies like automated neurophysiology both from a EMG and an-- 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 accreting the 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 we have plans across multiple different procedures to be the same but what you're seeing is a market reflection of what I would call procedural sophistication.

Analyst

That's great. Thank you. 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 that you're factoring into your internal expectations as it possibly could be a headwind in the 2022. Thanks for the question.

Simon Adcock -- Chief Financial Officer

Yeah. As we look at our Q4. I think as I 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 be real and continue into the 4th quarter. We think COVID is attenuating a bit and and should as that begins to go away, will we'll will 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 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 December. And so I think we're well placed to put guidance from our philosophical approach of thoughtfully considered and put a number out there that we believe we can achieve and have reasonable opportunity to exceed.

Analyst

Understood, thanks again.

Operator

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

Kyle Rose -- Canaccord

Great, thank you for squeezing me in. So a lot's been asked but one of the things that stood out in the call, there is not just the growth but specifically the growth that's coming from lateral and you talked about 50% of the organic revenue growth came specifically from lateral. I mean that's somewhere between $500 and $6 million when we look at Q3. I'm just trying to understand kind of that dynamic of the strength in lateral, but then also the commentary around, hey, we've seen a lot of cases, it will be the ASC, we're seeing a lot of cases move less complex. So just if you kind of frame the opportunity if you've hadn't been here if you didn't have that $4 million headwind, would that $6 million of lateral growth turned into $10 million. I'm just really trying to understand kind of how much of this is really being driven by lateral alone.

Pat Miles -- Chairman & Chief Executive Officer

Yeah. I will not answer the specific numeric reflection to that. So I think what you're seeing is that you're seeing really kind of a very positive early adoption of a technique between. It is going to be profoundly relevant and if you look at everybody else in terms of what they're doing, every-- they're talking about 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 kind of the early adoption. And I think anytime someone adopts something early what they're going to do is they're going to do something that is been 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 kind of the early adoption,. The great part is is those people who've 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 of the adult deformity is a very challenging 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 reflected a more sophisticated intervention associated with PTP and we're starting to see those things transpired 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 continue to 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, it doesn't mean the LTP is going away in terms of lateral Transocean position surgery is 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 we can a qualitative. With that

Simon Adcock -- Chief Financial Officer

You know 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 kind of look at the demographics of our growth, where it was, the strength of the growth and the different procedures, I certainly would have expected some of that $4 million to be reflected in, 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 going to 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 healthcare setting as well as you're-- as you're adding new surgeons to Pat's point we're starting out with probably simpler pathologies. So you know 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%.

Kyle Rose -- Canaccord

Okay, thank you. 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 a year before that. When we think about all of the surgeon education and things that you've done that your surgeons are up 20% here in the -- or this year, how much of your user base is using PTP now.

Pat Miles -- Chairman & Chief Executive Officer

Well, it's a great question. I would say, I would say a fair amount is and in sort of not quantified it, it's one of the things which is like I think what compels people to come over here are things like PTP and so what happened in Canada normal 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 have a long history of serving then they become enamored with PTP because that's what broad in here. They have a great experience. They gain confidence as they leave here and they do work with us based upon the confidence created by their-- 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 a right approach in terms of building the foundation of a long-term successful company. They are going to come here to look at our cervical plate, is created our cervical plate is, they are not coming to look at the commentary walk away with the skill set that they didn't have before they came. And so the great part is we're giving it to them and that's speaks to again, long-term success.

Kyle Rose -- Canaccord

Great, thank you.

Pat Miles -- Chairman & Chief Executive Officer

Appreciate Kyle.

Operator

[Operator Closing Remarks]

Duration: 68 minutes

Call participants:

Pat Miles -- Chairman & Chief Executive Officer

Simon Adcock -- Chief Financial Officer

Unidentified Speaker

Brooks O'Neil -- Lake Street Capital Markets

Mathew Blackman -- Stifel

Jason Wittes -- Loop Capital

Analyst

Matthew O'Brien -- Piper Sandler

Kyle Rose -- Canaccord

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