Good afternoon, everyone, and welcome to the webcast of ATEC's Second 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 non-GAAP or adjusted measures. Reconciliations of these measures to U.S. GAAP can be found in the supplemental financial table included in today's 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.

Thanks a lot, Danica, and thank you all for joining us today. I'll dive straight into the highlights for the second quarter of 2024. We've made another significant stride in our commitment to achieving profitable long-term sales growth. We ended the quarter with total revenue of $146 million, representing a 25% increase. Surgical revenue grew by 27%, which I believe is top-tier performance, with a 20% increase in new users, indicating strong expansion metrics, and a 15% growth in surgical volume. This reflects the gradual ramp-up as we enhance our sales team. I particularly appreciate the 10% growth in average surgical revenue per case, which underscores the success of our procedural strategy. We reached profitability with an adjusted EBITDA of $5.6 million and had 244 surgeon training engagements supported by our expansion efforts. The $50 million invested demonstrates our confidence in our strategic direction and our commitment to supporting growth. Lastly, I want to emphasize the successful on-time launch of EOS Insight, a significant milestone that represents years of hard work by many dedicated individuals. Our vision with EOS was to convert the most sought-after imaging in spine into an integrated tool, and I'm proud to say we have achieved that. Our aim at ATEC has been to create a powerful presence in the spine sector by providing value and advancing the field. We are committed to a focused and deliberate approach in this area, and our revenue reflects the effectiveness of this strategy. We have established a technological edge for ATEC in two main ways: through our procedural architecture and the focus on how informatics enhances predictability in spine surgery. A key aspect of our strategy involves increasing surgeon adoption by making surgeries better. If we are recognized for our clinical distinctions, we increase the chance that surgeons will want to use our products. An expanded distribution network and attracting top talent are also essential elements of our strategy, and we believe they are crucial to our success. In terms of procedural architecture, we leverage our history of creating value via informatics integration. Our information allows us to minimize clinical variables to enhance surgery. The innovation that we've introduced in lateral surgery is a vital growth driver, as it offers surgeons insights they may not have had access to before, particularly regarding neurological concerns. Our tools provide critical information, like the location and health of nerves, which is essential for informed surgical decisions. I hope that this illustrates how informatics can improve the predictability of spine surgery. Through our efforts, we've realized that having precise information is often a key factor in achieving predictability. This is at the heart of why we've invested in creating a comprehensive, integrated information ecosystem in spine care. Our goal is to enhance spine treatments, especially since spine surgery is notably complex, and the revision rates are unfortunately high. It is our responsibility to strive for improvements. At ATEC, we want to be known for fixing deformities, not causing them. The last thing a patient considering spine surgery needs is the significant chance of requiring future surgery. Our focus on minimizing these risks adds value. We've shown that collecting and utilizing information effectively enhances predictability. This has been achieved through EOS Insight, which looks at experiences before, during, and after surgery. This comprehensive project starts pre-operatively and extends through to post-operative care. Specifically, for the preoperative phase, many surgeons avoid planning surgeries due to the lengthy and imprecise nature of the process, often facing challenges with standard imaging techniques. EOS Insight simplifies this by providing AI-driven alignment measurements that assist in creating surgical plans. We believe precise alignment is crucial for achieving durable, successful outcomes, and EOS Insight automates this process, offering a 3D model and surgical plan that optimizes the likelihood of success. Once the plan is set, we can identify which implants will best help restore spinal alignment according to normative age-related standards. The preoperative process becomes efficient and automated, requiring minimal effort from the surgeon. Moving on to the intraoperative phase, once the plan is ready, our ecosystem includes Valence, a navigation robotic system, combined with SafeOp, which allows for real-time assessments of nerve health and position. The EOS operative plan integrates seamlessly into our intraoperative alignment system, enabling real-time comparisons of surgical images to the preoperative plan, which assists surgeons in understanding their execution during surgery. This integration of high-caliber informatics and specialized tools not only highlights our capabilities in lateral surgery but also reinforces our commitment to advancing spinal care. An increase in average selling prices is another growth driver, as we continue to develop tools that reflect surgery's demands. Our innovative ecosystem positions us well to handle complex procedures, which could lead to advancements in deformity surgery. Our system now includes enhanced spinal cord monitoring tools, ensuring that intraoperative adherence to surgical plans is consistently maintained, which is essential in restorative surgeries. We're only in the early stages of our journey with patient-specific implants and other innovations, and I see a lot of potential ahead. Moreover, the automation provided by EOS Insight facilitates data collection without demanding extensive effort, enabling us to derive insights that can enhance future surgeries. This predictive analytics capability allows for improved surgical decision-making. We aim to move past theoretical discussions and demonstrate our plans in action. I would like to acknowledge Dr. Craig McMain and Dr. Dave Schwartz at OrthoIndy, who completed the first case with EOS Insight and utilized the EOS Edge for the initial patient scan. The automated alignment measures led to an AI-generated surgical plan tailored to the patient, including a custom surgical rod. This process is highly efficient and automated. We can then take this plan into the operating room and leverage it for real-time reconciliation against preoperative measurements. The post-operative phase also allows for comparing objective data from preoperative alignments to planned outcomes, which signifies our dedication to advancing spine surgery. We're immensely proud of the complexity of this effort and the successful launch timing. The realization of our clinical vision is becoming evident. Our focus now shifts to driving further adoption among surgeons, which is clearly happening. In Q2, we reached a record in surgeon training sessions and witnessed a 20% rise in the number of surgeon users, indicating the progress we've made. An important aspect of our strategy is ensuring we have the right talent in the field to meet surgeon demands. Our recruitment drive is ongoing, and market changes continue to favor our growth opportunities. We have a robust pipeline of experienced professionals to enhance our sales efforts, and we believe this market disruption represents a significant advantage over the long term. However, we recognize that growth is not always linear. An interesting observation from our year-to-date recruiting efforts is the impressive demographics of our new hires in 2024. Confidence stems from the 23% growth in established areas. Many of our long-standing team members have witnessed significant growth from the ground up, instilling confidence in new hires. We're executing well on our long-term commitments and are enthusiastic about our journey towards our 2027 goals of reaching $1 billion in revenue, $180 million in adjusted EBITDA, an 18% margin, and generating $65 million in free cash flow. We have considerable momentum and are addressing numerous clinical developments. This remains the core of our identity as a company, and I'm excited about where we find ourselves at this stage in 2024. Now, I will hand things over to Todd.

Well, thank you, Pat, and good afternoon everyone. We appreciate you joining us on the call today. I'll begin with revenue. Second quarter total revenue was $145.6 million reflecting 25% growth compared to the prior year and up 5% sequentially. The $145.6 million in revenue was comprised of $130 million in surgical revenue and $15.5 million of EOS revenue. Second quarter surgical revenue of $130 million increased 27% year-over-year against a strong comparable of 41% growth in the prior year period. Surgical revenue growth was robust across the entire portfolio, particularly in lateral and expandable implants. We drove procedural volume per procedure growth of 10% compared to the prior year. Both metrics have shifted slightly relative to recent trends due to the meaningful sales force upgrades and additions that we are executing. We are upgrading some existing territories with new sales agencies to more strategically reflect the ATEC brand and align with the surgeons who are compelled by our procedural thesis. That generally increases average revenue per procedure in the territory. Yet, as new coverage ramps up, volumes related to the incumbent coverage wind down. As a result, there may be quarter-to-quarter lumpiness in the underlying dynamics of revenue growth as the upgraded tariff ramps. And specific to the second quarter, case volume growth was not as strong, while average revenue per procedure growth exceeded recent trends. Adjusting for this dynamic in the quarter, volume growth would have been about 300 basis points higher at 18%. Our long-term expectation is that the upgraded agencies will grow the territories contributing over time to sustainable improvements in territory revenue. The 20% growth in Q2 surgeon adoption corresponds well with this. Surgical revenue growth in the second quarter was also impacted by an additional more transient dynamic. We outgrew supply of one of our biologic offerings and one of our expandable implants. We have addressed both constraints and now have full supply available. EOS revenue in the second quarter was $15.5 million, up 6% compared to last year. Next, I'll turn to results for the remainder of the P&L. Second quarter non-GAAP gross margin was 71.2%, up 190 basis points compared to the prior year. The year-over-year increase continues to be driven by improved EOS gross margin and volume-driven leverage of our Memphis distribution facility. Second quarter non-GAAP R&D was $13.5 million and approximately 9% of sales compared to $13.1 million and 11% of sales in the prior year. We delivered 190 basis points of R&D leverage while continuing to invest in innovation and the future growth of the business. Non-GAAP R&D spending was roughly flat sequentially. Non-GAAP SG&A was $100 million and approximately 68.9% of sales in the second quarter compared to $81 million and 69.1% of sales in the prior year period, an improvement of 20 basis points. Included in SG&A is expected step up in depreciation related to the purchase of instrument sets. As a percent of sales, depreciation increased about 250 basis points year-over-year. Excluding that impact, SG&A improved by 270 basis points. Two-thirds of the improvement was driven by variable selling expense with the balance driven by infrastructure leverage. Total non-GAAP operating expenses amounted to $114 million and approximately 78% of sales in the second quarter compared to $94 million and 80% of sales in the prior year period, demonstrating 210 basis points of operating leverage year-over-year. Total non-GAAP operating expense was down $1 million sequentially. In the second quarter, we inflected to a positive adjusted EBITDA of $5.6 million and 3.8% of sales. This is compared to a loss of $3.1 million and 3% of sales in the prior year, reflecting a 650 basis points of improvement. Drop through of the year-over-year growth in revenue dollars to adjusted EBITDA was strong at 30%. That improvement was driven by 270 basis points of SG&A leverage followed by 190 basis points of R&D leverage and 190 basis points of gross margin leverage. The consistent adjusted EBITDA margin expansion that we are driving aligns solidly with our expectations. This gives us confidence that profitability will continue to expand in future quarters and fuel self-funded growth as we execute to our long-range plan commitments. Turning to the balance sheet, we ended the second quarter with $100 million in cash. Debt at carrying value was $531 million. Free cash use totaled $45 million with over $50 million deployed into inventory and instruments that support the expansion of our distribution footprint and new product launches. Managing the efficiency of those assets being deployed is proving to be slightly less linear than anticipated. As a result, working capital needs have been higher than we initially forecasted. Adopting more conservative working capital assumptions for the balance of the year will result in expected full-year cash use ranging between $125 million to $135 million. This is $25 million higher than the $100 million to $110 million previously expected. Approximately $10 million of the change relates to elevated day sales outstanding, while the remaining $15 million relates to inventory inefficiencies. We expect Q3 cash use of approximately $25 million to $30 million with Q4 inflecting cash generation of $5 million to $15 million. With a fully drawn revolver, we expect to end the year with approximately $100 million in cash on our balance sheet, which as we've communicated is sufficient for us to run the business. We continue to expect to achieve free cash flow breakeven in 2025. Turning to our updated outlook for the full year 2024. As Pat mentioned, the leading indicators of future revenue growth were exceptional in the second quarter with record surgeon training engagements and growth in new surgeon adoption of 20%. Both are testament to the surgeon demand that ATEC clinical distinction is earning in the field. We expect that to fuel total revenue growth of 25% to approximately $602 million. That includes 2024 surgical revenue growth of approximately 27% to $537 million and EOS revenue of approximately $65 million. Calibrating for the impact of territory upgrades that I mentioned earlier, we expect surgical volume growth to continue to be the greatest contributor to surgical revenue growth, increasing at a high-teens percent rate for the full year. Territory upgrades will also drive increased growth in revenue per surgery. So, we now expect a high single-digit percent growth rate for the full year. Sales growth continues to fuel leverage across our business and with the second quarter outperformance, we now expect a full year adjusted EBITDA of approximately $25.5 million, which equates to 610 basis points of margin expansion. That implies an approximately 29% drop through of the year-over-year growth in revenue dollars, a significant acceleration compared to the 22% drop through in 2023. I'll close my comments with this view. This chart depicts the deliberate and substantial profitability expansion that we have demonstrated over the last two and a half years. Over that time, adjusted EBITDA has increased substantially from a loss of $13 million and 18% of sales to a contribution of $6 million and 4% of sales over 2,000 basis points of improvement. Importantly, we are not done. We recognize that profitability and cash generation are crucial to value creation. The progress that we have delivered along with the drivers of that progress contributing the way in which we intended give us confidence in our future commitments. There's a lot of work left to do and a lot to be excited about. As usual, we have an active IR calendar in the next few months and are looking forward to connecting with you. With that, I'll turn the call back to Pat.

Thanks much, Todd. I would just conclude the call by saying prior to Q&A, that we have a track record of execution. This has been a deliberate spine-focused long game. And so, we're executing unique ecosystem in all of spine to inform better spine surgery. And I think it's unquestionable that we are advancing the field. And so, with that, we will take questions.

Great. We will now open the floor for questions. The first question comes from Vik Chopra with Wells Fargo. Please go ahead.

Hey, good afternoon Danica and thanks for taking the questions. So just on the cash burn, obviously higher than we were expecting. So just wanted to confirm, you're now expecting $125 million to $135 million cash burn for 2024. Is that right?

That's correct.

Okay. And just I guess to follow up to that, will we need to raise cash against the portfolio in cash flow breakeven in 2025? And then I had a follow-up.

Yeah, Vik. I think as we look at it and if you look at the growth next year, I think if you take where the Street is at, that's about $123 million of year-over-year revenue growth. Take about 35% of that, you get about $45 million of growth in adjusted EBITDA year-over-year. So, if you exit this year at $25.5 million, you add $45 million to that, you get about $70 million of adjusted EBITDA next year. That ultimately funds our working capital and our growth needs and our cash needs for next year. And so, I think going into next year, we feel very good about achieving our cash flow breakeven with our existing liquidity where we're at today. Because ultimately as we look at our current second half cash burn, thinking that we'll exit the year with a fully drawn revolver at about $100 million going into next year with the dynamics that I just laid out in terms of increased adjusted EBITDA on the basis of drop-through year-over-year revenue growth.

Okay. And then just a follow-up. Can you just talk about some of the expected hiring trends for 2024? And any color on the cadence of competitive rep recruitment? Thank you.

Yeah. Vik, thanks for the question. I would tell you that it's robust and kind of the approach that we've taken has been as geographic dependent as our needs are. And so, try to provide a little bit of color with the pie chart that just shows you clearly a fair amount from Globus, Nuva, but also Medtronic, J&J, and the rest. And so, it's been as we could take on as many people as I feel like we want to. The question becomes is what makes most sense in what geographies at what time? And so, as you appreciate, these things take significant investment. We got to make sure that all the instruments and implants are available to them so that they could start the process of turning on their business. And it's a lumpy exercise, but it's happening at the rate that we desire.

All right. I think we're going to go to the next caller. The next caller is Caitlin with Canaccord Genuity. Sorry about that. Please go ahead.

Hello, everyone. Thanks for taking the questions. Just starting with the territory upgrades, where are you in implementing these, and how many territories have you upgraded or expect to upgrade?

Yeah. It’s an interesting question just from the standpoint of where we are as a company. And so, I look at us as having 94% of the market to go. It means we're about a 6% market shareholder. And I would say that let's just say, we're probably well less than a third of the size of, say, a Medtronic sales force. We have opportunities for the next, I'd say eight years. And so, again, I think what is mistaken is that the disruption in the marketplace is a several-year tailwind. And the great part is that what sales reps want is they want surgeons who are compelled by new and exciting technology. And so, our opportunity to compel sales reps to come along with their surgeons who are inspired by our technology is available to us in space. What we're trying to do is march toward a operating company. And so, we're doing that in a very methodical way. And that means what we're doing is prioritizing those territories that are most opportune for significant expedient profitable growth.

Okay. Great. Thanks. And then just a follow-up on the competitive hires. Thanks for noting the breakdown of the hires. But, what's the most up-to-date number of the hires? I think the last that you mentioned was 50 reps.

Yeah. We're not going to share the quarter to quarter hiring practices. And our desire is to get a rep toward a $2 million a year type of a cadence. And so you could probably do the math and get to a place to where you feel reasonably well about kind of where we're heading. And so just from a pure volumetric perspective. But again, I would tell you that the people that make up our sales training classes are reflective of the pie chart that we had delivered and the volume of reps will continue to grow as we run toward a $1 billion.

And Caitlin, I think the greatest indicator for future sales growth ultimately becomes the surge in adoption that grew at 20% again in the second quarter and then clearly the surgeon engagements at 244, which was just a very significant quarter's worth.

Yeah. I would say just to add to Todd's point, which is a great one, which is you don't get near 250 surgeons to engage in your surgeon training event if there's not interest in what you're doing clinically. And to me, it's such an apparent dynamic and I feel like we're just trying to be as thoughtful and appropriate as we can with regard to who's coming through.

And I guess reflective of the territory upgrades and additions that we've been making.

Great. Thanks so much.

All right. Our next question comes from Josh Jennings with TD Cowen. Please go ahead.

Hi, guys. This is Eric on for Josh. Thanks for taking the question. I was hoping to just put a finer point on expectations for cash burn through the end of the year. I appreciate the color you gave around cash use through 3Q and 4Q. But if you could just talk through the drivers of that flip into positive cash use in 4Q that would be great. And then what risk do you see to that pathway?

Thank you, Eric. As we look at the cash use and maybe I'll just take a minute to talk about the incremental 25 that we're assuming for the second half relative to previous experience or previous communications. That is really due to about $10 million of that due to day sales outstanding. So if you think about where we exited last year, which is kind of in the high 40s, Q2 was in the low 50s. We're about five days different than frankly I expected us to be at this point in time. So five days times $2 million a day gets you about $10 million. The remaining 15 of that has to do with inventory inefficiencies and really the confluence of growing a business at 25% to 30% a year, bringing the size and the volume of new sales agencies on ensuring that they have what they need when they need it. All of that is a lot of variables in that experience. And so when you're growing at a rate that we've been growing, there have definitely been some variability there. We've been less efficient in that than I expected. And so that's the drivers behind this. Ultimately, I think we get through that over time and we improve in those metrics. But I'm now assuming that we don't improve at the end of the year. And so that's really the dynamic that we're going through here. Ultimately, when you think about the inflection to cash, part of that is, we have invested significantly in the sets and the inventory in the first part of this year as you know. And so that obviously is a trend downwards through the second half of the year. And then as we inflect the profitability, that ultimately drives cash generation. And so, it's really the inflection of those two variables going in opposite directions that really inflects you from cash burn to cash generation. I mean, this is really all about sales growth and profitability growth flowing into cash flow here the rest of the year and into the future.

Okay. Appreciate that. And then on EOS, with the launch of Insight now in play, I was hoping to just get your thoughts on some of the inbound interest that you and the team have been fielding with that now up and out in the field. And just as a technical question on EOS, I believe it's a software-based platform. So, is upgrading existing EOS systems as simple as just pushing that software out to customers? Or is there something more involved required to get adapters up and running? Thanks for the questions.

Thank you, Eric. To start, we are currently working on a software upgrade for the machine, but we haven't deployed it yet. There are efforts underway that will allow us to roll out all software upgrades in the future. This is our first major software solution, and the reason I emphasized it is due to the integration of a highly sought-after image into an informative tool. This is quite significant, and similar to our focused approach with SafeOp in our lateral portfolio, the integration of EOS into spine care marks a major milestone. We are confident that it will develop over time. At this stage, it is a software solution that represents the beginning of a lengthy journey. Perhaps next time, I can share the expressions of the surgeons who visit us seeking the tools offered through EOS Insight, which would perfectly illustrate their enthusiasm for the platform.

Our next question comes from Matt Blackman with Stifel. Please go ahead.

Good afternoon, everybody. Can you hear me okay?

Yes, we can.

Great. So, Todd, I wanted to go back to the 15% volume growth. So, if I'm hearing you correctly, it sounds like there was some dislocation as you sort of switch territories around. I guess, why is it manifesting now, versus maybe a couple of quarters ago? Maybe it has something to do with the timing of instrument set deployments. But how long does this persist? I mean, Salesforce dislocation can be tricky to work your way through. It does seem like as I think about your guide, your updated guide for volume growth that you sort of baked it in for the remainder of the year. Is that how we should be thinking about it? Does it potentially bleed into 2025? And then I have one actual follow-up question.

Yeah. And I thank you for the question. I don't want to communicate that there is unexpected dislocation. This is a phenomenon where we added sales coverage, sales agents in a territory where we have new surgeon interest. That surgeon interest is in our most distinct portfolio, which is really the lateral portfolio. And ultimately, we are upgrading that territory sales agency, and ultimately the existing sales agents wind down. So that's the normal. They always wind down when the new guys wind up and come on. What was a little bit unexpected this time was the pace at which the existing guys wound their business down. Now the reality is the ASP of the business that has come on in that territory is lateral. So, it's 2x our average. That's a $15 million to $20 million procedural price. What walked away was a $3,000 to $5,000 procedural price. And so, when we attract surgeons who are most interested in our most distinct portfolio, ultimately, you drive a higher level of revenue per procedure. And you always do expect the existing business to ramp down at some point in time. I would just tell you that it happened a little bit faster than we anticipated this quarter. And so, does that make sense?

Yeah. No, it doesn't. Does that persist? It does seem like you're baking it in for the remainder of the year with the updated guidance. Does that persist for a quarter or two quarters? Obviously, I would expect it improves, but when do you think you'd get back on to that sort of typical trajectory of whether it's surgeon productivity or rep productivity in terms of volume growth as opposed to ASP growth?

I believe we are expecting high-teens volume growth in the second half, which aligns with what we observed here. In the second quarter, we had mid-teens growth, so we anticipate a slight increase in the latter half of the year. This suggests a recovery during that period. For Q3, the revenue per procedure is projected to be in the high single digits, while for Q4, it should return to mid-single digits. This is how we expect the remainder of the year to unfold in terms of price, revenue per procedure, and volume.

Got it. And I guess to counter that, would be obviously we’re thinking bigger picture here, particularly given the amount of investment in new distributors, new reps, instrument sets, sort of hoping to see potentially some uptick in growth. Is the point and maybe it comes, maybe it doesn't, but maybe the point would be if we just look at in particular, maybe we're not seeing it in the actual dollars yet here in the first and the second quarter of ‘24, but we should be comforted by the fact that particularly here in the first half of the year, your surgeon training numbers are pretty substantial. And it then therefore, that's an indication that these reps are in fact bringing in new surgeons. And so, that is the real metric we should be sort of leaning on as we think about the outlook for growth from here. Is that fair?

Exactly the point, Matt. And as you look at that, the guide implies probably a $2 million sequential step up in our surgical revenue, I think. And so, when you look at that, I think that reflects the underlying confidence that we have in the growth of the business looking forward.

Yeah. It is a non-linear walk and I never thought that we'd be apologizing for 27% top line or surgical growth. But I totally understand your questions, but it is a put and take at every turn.

And maybe I'm just going to sneak in one more question, apologies to everyone else here. But just on EOS, I guess the simple question is, is EOS now at a point where it is a workhorse imaging system with all the enhancements? Or is there something else perhaps that we're waiting for in the near-term pipeline that really sort of moves this to, again, a workhorse imaging system that a physician can use across 70% of their procedures?

Yeah. I would say it's a workhorse imaging system that has no competitor. The problematic dynamic of imaging is that it is profoundly inconsistent with different magnification. It's imprecise. And just the ability to have a standard image out of EOS provides for opportunity of grand scale. I cannot communicate my enthusiasm more with regard to how we translate that image into an informatic tool that improves surgical care. We're well down the way of identifying the diagnostic platform whereby we can pull in different tools again to drive more clarity with regard to what patients require what surgery informed by a set of data that's derived in an automated way. It's like, these are things that have evaded spine in the 30 years I've been part of it. And so, to be able to be part of this and to support the architecture of it through the many, luminary surgeons who have kind of advised us is phenomenal. So, again, the proof's in the pudding, and we're going to be around it to show the pudding. It's an exciting time.

All right. Thanks, Pat. And apologies for the more than one question.

No issue.

All right. Our next question comes from Drew Ranieri from Morgan Stanley. Please go ahead.

Hi, thanks for taking my questions. I have a couple that I'll ask together. Todd, you mentioned some supply constraints that might have been resolved in biologics and expandables. Can you quantify how much that may have impacted your potential revenue for the quarter? Additionally, we've been hearing from investors who are concerned about the overall utilization environment, particularly regarding orthopedic and spine companies. With your 5% to 6% market share in the U.S., Pat or Todd, I'd like to hear your perspective on what you're observing in the market, especially in relation to surgeons with whom you have well-established relationships. Thanks for addressing my questions.

I'll take the first one and then Pat can take the second one on the utilization. So, Drew, relative to supply constraints, I did call out two items where we really outgrew our supply. Ultimately, that's now resolved. We're not going to quantify all of that, but suffice it to say, as we think about our sequential Q2 to Q3 in surgical revenue, I think our expectation would be to go from $130 million to $132 million sequentially. So, I think that should give you a sense for our level of confidence going into the third quarter and kind of sizing up and quantifying the overall impact of the dynamics we saw in the second quarter.

And with regard to utilization, there's really been like it's always tough. Like we're a 6% market share holder. We're a proxy for nothing. I always like to say just because it's like we don't have as wide of a visibility on the market per se. But I would say it's been pretty typical. And so at least kind of what we've seen exiting Q1 and through Q2, it's been a relatively typical time.

Okay. We'll go to the next caller, Brooks O'Neil with Lake Street Capital Markets. Please go ahead.

Hey, guys. This is Aaron on the line for Brooks. Thanks for taking the questions. I was wondering if you could just give us an update on Japan and maybe how you're thinking about that market timing-wise? I appreciate any existing penetration in Australia and New Zealand, but if you just could have any specific time horizons that you're thinking about either in the short or long term? Thank you.

Yeah. Super excited about Japan. A lot of the regulatory stuff is coming through. We hope to like at least say, hey, we've done a surgery in Japan in the fourth quarter. And so, if so much of I think who we are as an organization is making commitments on timetables. And that was a commitment that we made and we said, Q3 to Q4 of ‘24 for our first experience, and I like our chances. And so, that will be a market that we're going to expect a lot out of over a long period of time. We're going to give it the necessary tools and time to create the very market that we expect out of Japan. So anyway, super excited about Japan.

Great. Appreciate it, Pat. Thank you.

Yeah. Thanks.

All right. Our next caller is David Saxon with Needham. Please go ahead.

Great. Good afternoon Pat and Todd. Thanks for taking my questions. Todd, I just wanted to follow-up on the free cash flow guidance change. So, what specifically is causing the DSOs to go up? How confident are you that the DSOs and inventory dynamics won't get worse? And I guess, do you still have confidence in the 2025 breakeven target? And I have just one quick follow-up.

Thank you, David. Regarding the DSO, I must say they haven't improved as much as we anticipated. We were in the mid to high 40s at the end of last year and saw a significant increase in Q1. This was likely influenced by some customer dynamics, including cybersecurity issues affecting certain customers that led to delayed payments. While we observed some improvement from Q1 to Q2, it hasn't been as pronounced as we expected. This may also be related to our overall customer mix and where we are experiencing growth. I don't expect us to see the improvements we had when we exited last year. There was a notable increase from Q4 to Q1, followed by a decrease from Q1 to Q2, which was not as significant as I had hoped. Thus, I anticipate no further improvement in this area. As for the inventory, our Days of Inventory on Hand or DOH was just over 400 in the second quarter. As we grow, the efficiency of distributing resources to each sales agent as they ramp up is crucial. While we are investing considerable effort to enhance this, I will assume we won't notice further improvements. To summarize, we did not see the advancements we expected in the first half of the year, and I don't foresee seeing them in the second half either. Now, do you want to follow up on the 2022 figures?

Yes.

So, as I think as we've said before, the belief in the cash flow and the cash breakeven is a function of the belief in the top line growth. The top line growth creates the opportunity then for us to expand profitability. The expansion of the profitability ultimately funds and feeds our cash flow. And so, if you think that we can look at consensus that's about $120 million $125 million of growth next year, 35% of that you get $45 million of adjusted EBITDA on the year-over-year drop through. So, if we enter this year at 25.5 and you add 45, you get $70 million. So that would be $7 million to essentially invest in sets of inventory and what you need next year. And so ultimately, we've got a lot of adjusted EBITDA that ultimately funds the working capital needs of the business in 2025. And so, my confidence in achieving cash flow was a function of my confidence in the top line growth, which is predicated on the surge in adoption that we're seeing and the strong competitive sales reps and hiring that we're seeing. My confidence in our ability to continue to expand profitability is founded in the fact that we've demonstrated it for the last eight quarters and it's happened in the way we expected it to. And I know the walk forward is consistent with what we've the way we've built the company. And so that's the confidence that I have. And then also knowing that we have invested significantly this year in sets of inventory, you also get a bit of a tailwind next year in the higher utilization of those assets next year, meaning you don't have to buy as much to meet your revenue target. So ultimately, that's how I sit here and feel comfortable with 2025.

Okay, great. So, if I could just quickly summarize. So even if these dynamics don't improve, maybe they do, but even if they don't, you guys have confidence in the top line growth and that'll drive profitability, which drives free cash flow to breakeven next year, still looks achievable. And then, maybe just confirm that that was a good summary. And then my follow-up, you kind of walked into, the $70 million you kind of talked through for 2025. I mean, should we kind of be thinking of that as late/early guidance or is that just an illustration? Thanks so much.

Yes. So, I can confirm your understanding. And the math I walked through, I think it's consistent with our long-range plan expectations. I think consensus is like $66 million based on those numbers. So, I feel like that's a reasonable place to be.

Okay, great. Thanks so much.

We're not giving guidance at this point, but I think the logic and we've laid out the framework in the long-range plan and you're applying that framework.

Okay, great. Thank you.

All right. Our last question comes from Jason Wittes with ROTH Capital. Please go ahead.

Hi. Thanks for taking the questions. So, congratulations on the launch of EOS Insight. I assume that's going to have a lot of relevance in deformity. And I'm curious kind of where are your deformity business is right now and what else should we expect from the launch? Or do you think you're fully prepared to go after that segment as with the EOS Insight launch?

Yeah. It's kind of the strategic question. It's one of the things that's very apparent is that alignment and measures are relevant in short segment as well as long segment surgery. Clearly, when you think of deformity, you think of long segment surgery. Our relevance there has been muted. We've been just, I would say, somewhat, when you create a company that was broken from nothing to something, you go to the place that, in essence reflects the most immediate influence, and that was lateral surgery. And so, our ability to apply lateral in relatively short segment surgery was kind of the initial kickoff of the company. That's driven much of the growth. We've used that, that growth in essence to continue to expand the complexity of tools that ultimately accommodate the lateral approach, but also say, how do we become a relevant participant in deformity? And candidly, there hasn't been a ton of innovation in deformity. And the opportunity that we have in terms of bringing a relative innovation package to deformity is very apparent. And so, I think that EOS has an entree into our adult deformity and subsequently our idiopathic deformity and then early onset is such the right walk. And so right now, we have kind of the automated alignment measures. Next year, Q2 ‘25, we're sprinting at a bone quality measure through the same image acquisition as the automated alignment measures. And so, again, I think that these things give us a very relevant, informatic package that will drive a relevant in deformity surgery.

And in terms of just hardware in general, do you think you have a full offering, to put out in the field at this point or is it lacking in some places?

Yes. I would say in terms of adult and idiopathic, I would say we have a great offering. Really, we're in the very, very early phases some of the small stature stuff.

So, what milestones should we be looking for to see how you're progressing with deformity, because it's obviously a pretty it seems like what's going to double the revenue opportunity for the company?

Yeah. Really, what we've modeled is kind of the growth of the company requisite to the technological advancement of the field. And so, I think that the route to a $1 billion requires 20% or north growth and I think that it's contemplated in that number.

So, and, I mean, is this sort of you're just launching now. I assume this is a multiyear, process to really start to see I guess, real numbers being starting to be posted there. So, I know you've given you've kind of given two year or three year out at this point, I guess it's about a two and a half year out your outlook. Does that have much deformity in it, or is that pretty much all prefaced on the current state of business?

Yes. It has a growing reflection of deformity in it. But It's interesting, I think, that if anybody questions our long-term commitment to this field, I think EOS is a proxy for a long-term commitment. And I think that where spine surgery needs to go, it clearly needs to evolve. The revision rates are clearly way too high. And so, as we mitigate variables through informatic tools, it improves surgery and it will expand our footprint. And so, what we've done is we've contemplated that through the growth profile of the company. And so, this is a multiyear walk and an opportunity that is again unique to us because we've been willing to commit the effort, the resources, and the work to innovating in this space.

Great. I'll jump back in queue. Thanks a lot.

All right. Our last question comes from Sean Lee with H. C. Wainwright. Please go ahead.

Hey, good afternoon, guys, and thanks for taking my questions. I just have two quick ones. One for EOS Insight and the move towards deformity. Do you feel the company's goal is more towards getting enrolled with existing deformity surgeons or converting surgeons who don't do deformity yet into doing deformity surgery? And if it's the latter, have you seen any examples so far?

Yes. I would say that we're early in the experience. Just in terms of the way that the spine community evolves, I think there's going to be a focal assembly of surgeons who do the most complex of deformity surgery. So, we’re focusing on the young surgeons that are very technically and technology savvy, that are coming out of deformity programs. And so, I would tell you that that's a big part of our efforts and focus as well as I think the kind of the historically famous deformity surgeons have always been hugely pro EOS, and, candidly, they've been extraordinarily supportive of us acquiring it because they know that we're committed to evolving the information package. And so, I would say that my presumption is that what's going to happen is there's just going to be a narrowing of the volume of surgeons who ultimately take on the majority of the deformity, and those people will be extraordinarily relevant to our focus and efforts.

I understand, that's very informative. My second question is about the supply shortage of one-year Biologics that Todd mentioned. Is this just a temporary issue, or do you anticipate that Biologics will become a more significant part of your overall portfolio? Thank you, that's all my questions.

Thanks, Sean. I think as you know, biologics has been an area of growth for us really probably over the last certainly last 12 months, maybe last 18 months. And so, as we've continued to grow and drive a higher attach rate, we just outgrew our supply. And so, at the end of the day, it was a demand-created situation for us, which we've now recognized. And so, I wouldn't say that that's a trend per se, but clearly biologics has been a big growth driver for us over the last certainly last 12 months to 18 months.

I see. Thanks for the clarification.

All right. I will now turn the call back over to Pat Miles for closing remarks.

Thanks, Danica. Greatly appreciate everybody's support, and I hope shared enthusiasm over the whole EOS Insight launch. It is a significant one and one that we'll look back on with great pride. So anyway, I appreciate everybody's interest. Look forward to catching up. Thanks.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.