SeaSpine Holdings Corporation

Welcome to C-SPAN's 2021 First Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. Following management's prepared remarks, we'll hold a Q&A session. To ask a question at that time, please press star followed by one on your touchtone telephone. If anyone has difficulty hearing the conference, please press star zero for operator assistance. As a reminder, this conference call is being recorded today, May 3rd, 2021. I would now like to turn the conference over to Lee Salvo, Investor Relations. Please go ahead.

Thank you, and thank you for participating in today's call. Joining me from C-SPINE is CEO Keith Valentine and CFO John Bostjanczyk. Earlier today, C-SPINE released full financial results for the first quarter ended March 31, 2021. During this conference call, we will make forward-looking statements within the meaning of federal securities laws in regard to our business strategy, expectations, and plans, our objectives for future operations, and our future financial results and conditions. All statements, other than statements of historical fact, are forward-looking statements. Such statements may include words such as believe, could, would, will, plan, intend, and similar expressions. You are cautioned not to place undue reliance on forward-looking statements, which are only predictions and reflect our beliefs based on current information, and speak only as of today, May 3, 2021. For description of risks and uncertainties that could cause material differences between our actual results and those stated or implied by the forward-looking statements, please see our news releases and periodic filings with the SEC, which are available on our corporate website, www.cspine.com and at www.sec.gov. Our discussion today will also include certain financial measures, such as adjusted EBITDA loss that are not calculated in accordance with generally accepted accounting principles or GAAP. Management believes that the presentation of these non-GAAP financial measures provides important supplemental information in management and investors regarding financial and business trends relating to the company's results of operations. These non-GAAP financial measures should not be considered replacements for and should be read together with the most directly comparable GAAP financial measures. Reconciliations to the most directly comparable GAAP measures are provided in the tables accompanying the press release we issued earlier today. I will now turn the call over to Keith Valentine. Keith?

Thank you, Lee. Good afternoon, and thank you all for joining us. Despite a slow start to the first quarter due to restrictions on spine surgeries resulting from the winter COVID surge, I couldn't be happier with how strongly we closed the quarter. We saw a positive inflection point in late February, and that momentum continued throughout March and April. With a favorable outlook for more robust spinal surgery volumes for the remainder of 2021, coupled with the anticipated contribution from our pending acquisition of 7D Surgical, we are poised to continue to take market share and to further accelerate revenue growth. The recent $95 million equity financing we closed in mid-April significantly strengthened our balance sheet and will help fund the cash portion of the 7D Surgical acquisition. while also providing additional growth capital for us to deploy more of our spinal implant sets to meet the rising demand for those systems and to support the limited and full commercial launch of over a dozen orthobiologics products and spinal implant systems currently in our pipeline for 2021. Those factors remain important and exciting catalysts for C-Spine to attract more exclusive distribution partners and for our existing distributors to add sales reps to penetrate deeper in their territories. With further declines in COVID cases in the US and an ever-increasing population of individuals getting vaccinated, we believe we now have enough confidence in our market visibility to provide revenue guidance for full year 2021 of 25% to 28% organic growth over 2020. 30 to 33% growth over the prior year, including approximately six months of anticipated revenue contribution from 70 surgical once that acquisition closes. Turning to our first quarter results, in line with our announcement in April, total revenue was $42 million, a 16% increase compared to the prior year period. In the U.S., Where we generate approximately 90% of our total revenue, we posted 18% year-over-year growth. In the U.S., growth is once again led by higher sales by our core distributors of recently launched products and line extensions. Specifically, new and recently launched products comprised 74% of U.S. spinal implant revenue and 39% of U.S. Orthobiologics revenue. Once again, Our growth came from increased spinal implant surgery volumes and from higher revenue per case. We also benefited from increased utilization of our spinal implant systems and orthobiologics products per procedure, which we believe is the result of the more complete and complimentary product offerings we market today. For the first quarter of 2021, There was an average of 1.9 C-spine products and systems used per procedure compared to 1.8 in the first quarter of 2020. For the first quarter of 2021, our core distributors collectively generated 59% of our total U.S. revenue. We expect to drive further growth in the U.S. from our tenured core distributors hiring additional sales reps to penetrate deeper into their existing territories as well as from recently onboarded core distributors in previously underserved markets. Cspine's reputation for constant innovation now coupled with the value proposition of the 7D Surgical Image Guidance Platform will be important catalysts in driving this progress. Turning to 7D Surgical, we remain on track to close the acquisition before the end of the second quarter and we've already started integration planning with the 7D team. The addition of 7D surgicals enabling technology and experienced capital sales force to the C-Spine family has sparked a lot of new conversations and interest in C-Spine from current and potentially new distributor partners and surgeons. The acquisition is also expected to give us even more flexibility to place units of 7D systems in a capital-efficient manner with hospitals and ASCs that may not have sufficient capital budgets for an outright purchase of the unit. Finally, we look forward to collaborating with 7D's software engineers to accelerate development programs to further extend the capabilities of the 7D platform, with preoperative planning software being a top priority. With respect to our product launches, during the first quarter of 2021, we initiated the alpha launches of the Waveform TA articulating and Waveform TO T-LIF oblique 3D printed antibody implant systems. We expect to launch two more 3D printed lumbar interbody systems in 2021, one for a lateral approach and another for an anterior approach. We also fully launched the Reef TO interbody system featuring nanometalline surface technology, and reef topography. Including the two more planned additions to our 3D printed inner body portfolio, we remain on track to deliver on our commitment to launch more than 12 products and line extensions in 2021. Some of the more notable launches include the alpha launch of the next line extension of our foundational Mariner platform with an adult deformity indication. and the full commercial launches of our Northstar OCT system for posterior cervical fixation, the Explorer TO expandable interbody device, the Waveform C 3D printed interbody implant system, and the Admiral anterior plating system. Those full launches, in particular, are expected to be significant contributors to revenue growth in 2021 and beyond. Continued investment in product innovation and in the deployment of more of our highly utilized foundational spinal implant systems combined with our best-in-class DBN portfolio gives our larger and increasingly exclusive distribution network confidence that we can support their aggressive growth plans as we emerge from the COVID-19 pandemic. Maintaining their confidence is so important to our efforts to further capture market share and And with the stronger balance sheet, we now have the recent financing. We have even more flexibility to opportunistically invest for growth. And now I'll turn the call over to John for more details on our financials and our financial outlook. Then I will wrap up. John?

Thanks, Keith, and good afternoon, everyone. As Keith noted earlier, total revenue for the first quarter of 2021 was $42 million, an 18% year-over-year increase in sales per day, which accounts for the one additional selling day in the first quarter of 2020 compared to this year, and a 16% increase as reported. In the U.S., we posted a 20% increase in sales per day and 18% reported growth, International revenue increased by 4% to $4.5 million. U.S. final employment revenue in the first quarter increased 29% on a sales per day basis to $18.4 million. That growth was led by new and recently launched products, predominantly those products that were alpha or fully launched in 2020. The rapid clinical adoption of our most recently launched products is a very encouraging sign for the growth they can drive in 2021 and beyond. Spinal implant surgery case volumes increased by more than 10%, and we were able to capture more revenue per procedure with our expanded portfolio. U.S. Orthobiologics revenue in the first quarter increased 12% on a sales-per-day basis, to $19.1 million and was once again driven by growth in the OsteoStrand Plus product. Gross margins for the first quarter of 2021 was 63.4% compared to 61.8% for the same period in 2020. The increase in gross margin was primarily due to increased sales in the U.S. of our higher gross margin spinal implant products and lower excess and obsolete inventory provisions in relation to revenue. The anticipated shift to more full commercial launches of spinal implant systems in 2021 is expected to generate higher excess and obsolete inventory charges relative to prior years from the substantial investment in odd-sized implant inventory required with these set bills. However, that impact notwithstanding, we believe that we can continue to expand gross margins by 100 to 150 basis points per year over the next two to three years and before the impact of 70 surgical by 150 to 250 basis points this year over 2020. Operating expenses for the first quarter of 2021 totaled $39.1 million, a $4.1 million increase compared to $35 million for the first quarter of 2020. The increase in operating expenses was driven primarily by $2.9 million in higher selling and marketing expenses the substantial majority of which relates to selling commissions, $1.9 million in higher general and administrative expenses, which was driven by $1.3 million of legal and other professional fees incurred in connection with a pending 70 surgical acquisition, and $600,000 in higher research and development expenses. These increases were partially offset by a $1.3 million non-cash intangible asset impairment charge associated with acquired technology that we recorded in the first quarter of 2020. Net loss for the first quarter of 2021 was $12.7 million compared to a net loss of $12.6 million for the first quarter of 2020. Adjusted earnings before interest, taxes, depreciation, and amortization for the first quarter of 2021 improved by $1 million to a loss of $5.2 million compared to a loss of $6.2 million for the first quarter of 2020. Adjusted EBITDA loss is a non-GAAP financial measure that we believe provides valuable information on our operating results that facilitates comparability of our core operating performance from period to period and against other companies in our industry. A reconciliation of GAAP net loss to adjusted EBITDA loss was presented in the financial tables of the press release we issued this afternoon. Cash-in-cash equivalents at March 31, 2021, totaled $87.8 million, and we had $20 million outstanding under our credit facility and $6.2 million of loans outstanding under the Paycheck Protection Program. These amounts do not include the $95 million of net proceeds received in April from the underwritten public offering of 5.2 million shares of our common stock, nor the subsequent repayment of the $20 million of credit facility borrowings in April. Our free cash flow burn, which includes operating cash flows and purchases of property and equipment, was $6.7 million for the first quarter of 2021, a $1.8 million increase compared to $4.9 million for the first quarter of 2020. That increase was attributable to higher investments in inventory and spinal implant set build and instrument capital expenditures. Turning to our financial outlook for 2021, we remain focused on expanding our gross margin and continuing to reduce cash-based G&A expenses as a percentage of revenue. However, we plan to continue to redeploy any operating leverage towards the sales, marketing, and R&D initiatives and inventory and spinal implant set-built capital expenditures that are critical to driving sustained accelerated revenue growth. As Kate noted earlier, we expect full-year 2021 revenue, before giving effect to the pending acquisition of 70 surgical, to be in the range of $193 to $198 million, reflecting growth of 25 to 28% compared to the prior year. Including the acquisition of 70 surgical, we expect full-year 2021 revenue to be in the range of $200 million to $205 million, reflecting growth of 30 to 33% compared to the prior year. We expect to further reduce our adjusted EBITDA loss in 2021 compared to last year, including the anticipated dilutive impact of 70 surgical on our P&L this year. We expect our free cash flow burden for 2021 to be modestly higher than the $40.7 million that we reported for 2020. This is due in part to anticipated adjusted EBITDA dilution from 70 surgical this year, but more significantly from a more than 50% planned increase in spinal implant inventory and instrument and set build CapEx investments to support the many full commercial launches slated for 2021 that will be critical to generate the accelerated growth expectations reflected in our revenue guidance. With respect to the 70 surgical acquisition, we expect certain 70 shareholders will elect to receive exchangeable shares at the closing, which allows them to defer certain taxable events until they tender those exchangeable shares for shares of C-Spine common stock. As a result, of the roughly 4.3 million shares of C-Spine common stock in total that will ultimately be issued to 70 shareholders, Any exchangeable shares issued will not be reflected in the denominator for our loss per share calculations until the 7D shareholders tender those exchangeable shares because of their anti-dilutive effect. Those exchangeable shares, which will be treated consistent with common stock equivalents like RSUs and stock options in the loss per share denominator, must be tendered within five years of their issuance. At this time, we can't predict the number of exchangeable shares that will be issued based on 70 shareholders' elections, nor the timing that each 70 shareholder will tender any such exchangeable shares issued, as that will likely be a decision each 70 shareholder makes based on their own personal tax planning. We will provide additional details on the expected impact of 70 surgical on our 2021 P&L and free cash flow burn after the transaction closes. With roughly $150 million in cash and cash equivalents we expect to have on hand after payment of the cash portion of the 70 surgical acquisition consideration, plus the additional liquidity that we can access through our $30 million credit facility, which we can elect to expand to $40 million, we have never been better capitalized to continue to invest confidently and aggressively for growth. At this point, I'd like to turn the call back over to Keith for closing comments.

Thank you, John. We are all very excited to add the 7D surgical team to the C-Spine family and to be able to leverage their outstanding enabling technologies to spread our growth influence beyond just the operating room. That will be additive to our commitment to execute at a high level on our foundational priorities that have transformed C-Spine into the organization that we are today, namely to timely and effectively develop and launch clinically relevant products to increase the number of core distributors and their exclusivity to C-spine, to generate above-market revenue growth through more efficient utilization of our spinal implant set, and to further expand our gross margins. We expect to sustain and further increase the double-digit revenue growth we delivered in the first quarter as we continue to emerge from the disruptive impacts of COVID-19. That optimism is fueled by more than 400 and soon to be more than 500 passionate and dedicated employees of C-Spine and 7D Surgical who are motivated by our past successes and are driven to deliver clinically superior yet cost-effective procedural solutions that differentiate us with both surgeons and distributors in this competitive market. With that, we will now open it up to questions. Operator?

Thank you. As a reminder, to ask a question, you'll need to press star, then one on your telephone. To withdraw your question, please press the pound key. Our first question comes from the line of Matthew Bryant, Piper Sandler. You're on sound.

Good afternoon. Thank you so much for taking the questions. Keith, you know, the guidance... Hey, Matt. Reinstating the guidance, obviously, great to see. It is a marked acceleration in the last three quarters versus what you've done historically.

So can you just talk a little bit about where that's coming from?

Yeah. So, Matt, I think we kind of came in a little bit in and out on the end of it, but it sounds like you're just asking how did that shift in acceleration from a growth perspective and where it came from? You know, it really has come down to that investment that we kind of telegraphed last year that we would be continuing to invest in instrument sets and implant trays in coordination with a great deal of alphas getting to market. And I think what you saw is There's certainly a pent-up demand by our distribution teams for new products. They have done a very good job of working with marketing on helping to get the required surgeries that we need, not only in alpha, but as we moved some of our products even to full launch. And I think what you see is that combination of the investment in that the CapEx investments in those trays coupled with great momentum from our distributors and even newer distributors that are coming aboard that have you know, an opportunity to really take some share in their marketplace for us.

Okay. And sorry, I had a bit of a frog in my throat there. So specifically, you know, again, the acceleration that you're expecting in the last three quarters is maybe a little bit of pent-up demand, but really more, is it more distributors specifically and adding some more of these folks, you know, just in greenfield areas? Is that really where it's coming from, or is it more of the set deployment that we saw last year?

It's both. And actually, some of the upcoming full launches, Matt, are going to help create that acceleration. So think about the products we launched last year that have been really successful and just an alpha launch, right? The Admiral Cervical Plate, the Meridian, ALIF, Interbody, the Northstar Posterior Cervical Fixation System, right? Those are the launches that will happen mid-year and I think one of those later in the year. But Those are going to be big catalysts for what we've been able to bring new distributors on board, but also as they're hiring competitive sales reps into their distributorship, those are some of the key systems that are attracting those sales reps and new distributors to want to work with C-Spine and the 3D Interbody portfolio now that we can address the entire market, the Explorer, expandable Interbody that gives us brand new access going to a full commercial launch to the expandable. So The good news, it's not just one system. It's a lot of systems going into full commercial launch. But if you look at the timing of those systems, that really coincides with the meaningful acceleration that you're pointing out for the rest of the year.

Got it. Okay. So it seems broad-based then. And then, John or Keith, a lot of people like to latch on to the instrument set deployment and with all this extra capital that you just raised. Can you talk about set launch numbers for this year? set launch numbers for next year? If you wouldn't mind, I don't know if you want to keep it close to the desk given competitive reasons.

Well, I mean, we've talked about it in the past, right? A typical alpha launch for us is 10 to 15 sets, and a typical full launch is 3x the number of sets. So, you know, we're probably in the 45 to 50 set range on average for a full commercial launch. But there are some systems that will probably deploy more, right, based on the demand expectations for those systems. So, I'd say, you know, 45 to 50 set is the average full launch, but we're likely to exceed that on some of these products just given the demand that we're expecting when we do fully launch them.

Okay, John, and I'm sorry, I wasn't very clear. Like, just an absolute number, we're going to, you know, we're going to deploy $5 million worth of sets in 2021 and $10 million next year. Any guidance on that?

Yeah, I mean, if you look at our... historical numbers in the cash flow, right? The set bill of CapEx last year was a little over $10 million that's embedded in the cash flow statement. And as I said on the call, we're looking to do more than 50% increase in set investments. That's going to be both on the CapEx side and the inventory side, right? Because you've got to make sure that sets have the inventory stock. So it's all in. The total investment last year in spinal implant sets and inventory was a little over $20 million. So, you know, a 50% increase on top of that is a pretty healthy number. But, again, it speaks to the confidence we have with the demand they're going to create, but also the financing, as you brought up, right? We've got a stronger balance sheet, so we're willing to take a little bit more of a calculated risk in deploying more sets because we're confident that the revenue is going to be there.

Got it. Very helpful. Thank you.

Sure. Yep. Thanks, Matt.

Thank you. Our next question comes from the line of Ryan Zimmerman with BTIG. Your line is now open.

Good afternoon. Thanks for taking the questions, and it's been quite an eventful first quarter for you guys. Congratulations. Keith, you mentioned a little bit about your distributor base and their expectation to hire, and I'm just wondering if you could put a finer point on that, just what kind of capacity or maybe kind of how big that core distributor force can grow from a sales head standpoint?

We haven't really given out the specific head count or feet on the street because it varies by distributor. That's why we remain focused on what percentage of the U.S. revenue is coming from core distributors. It was just short of 60% in the first quarter. And on one of our calls earlier this year, we had set expectations about two-thirds of our revenue, U.S. revenue, should be coming from these core, more exclusive distributors as we exit 2021. So we don't want to get into given numbers, the feet on the street within those distributors, but just stay focused on the percentage of revenue and ensure that it continues to increase, because obviously we want to work with the more exclusive folks and give them first priority to the sets.

But it's fair to say that there's capacity for them to hire, given the plans this year with the product cadence and the investment. We should expect that those distributors will be hiring.

Yep. And they were last year, right? I think as we got out of the first COVID surge, we saw them start to hire. And that's why we got the geographic diversification of our revenue footprint in the second half of the year that really helped us get through COVID. because some of our existing core distributors hire reps in geographies where we had no presence before. So that really helped keep the growth going in the second half of last year, and there's more to come this year. So, yeah, we've got a track record for seeing them hire, and as we have business review meetings with those distributors today, we know that they've got plans to continue to hire as well. Okay.

And just a second for me. You made a comment, I think, around 70s impact to the gross margin. I know you're going to give more color when this closes, so you may be reluctant to give some color, but can you just give us a little bit potentially on the impact maybe to gross margins for a 70s contribution this year?

Yep. So the capital side, based on the historical financials we have, Their overall gross margins are on par with ours. We still have to work through the GAAP financial statements and conversion because they use private Canadian company GAAP, but I don't anticipate that change in the overall gross margin profile once we finalize those. So I think apples to apples, we'll see a similar gross margin profile to our overall gross margin, sort of in that mid-60s range. As we generate more revenue under earn-out arrangements, then we're going to see the higher gross margins from what will most likely be spinal implants that generates that earn-out revenue. So I think that could create a little bit of a tailwind for the gross margin as well. But once we layer in the purchase accounting, I suspect a lot of the intangible assets are going to get allocated to the technology, and the amortization of that technology flows through COGS. So we'll be sure to give sort of a a view of what gross margin looks like without that intangible amortization because it likely will be diluted on gap gross margins, but it's non-cash expense. So we'll be sure to give color in a more consistent messaging with how our, you know, historical gross margin shaped up to get rid of the noise of that amortization.

Okay. I'll leave it there and hopefully no loonies and toonies in Canadian dollars from the 70s. Thanks, guys. Yep, that's true.

Thank you. Our next question comes from the line of Kyle Rose with Panacord. Your line is now open.

Great. Thank you very much, gentlemen. I wanted to see if we could just take a step back and just talk a little bit about the overall dynamics of the market, kind of going back a little bit to Matt's question. Obviously, you've seen material acceleration and growth. in the U.S. market on the hardware side over the course of the last several quarters. I think we have a good understanding of some of the new product contribution, but 10% volume growth in the Q1 is impressive. You're talking about high 20s into the 30% range for the full year. Maybe just help us understand how much of that, from a guidance perspective, is volume. How much do you think of that is going to come from pricing and just incremental mix on a per-case basis? Just really trying to understand the magnitude of the share-taking you're experiencing right now.

Yeah, I'd expect most of it's going to come from volume, just surgery volume increases, because the price component, right, there's the seasonality as you get the scully season, but that happens every year, so I don't anticipate a significant increase in price compared to prior years. Now, second quarter last year wasn't the typical scully season, just because of all the COVID shutdowns, so Maybe Q2, it's a little bit more than usual that you'll see the total ASP per procedure increasing year over year in a more meaningful basis. But I suspect it's mostly going to be volume. Now, we are participating more in the surgery, right? We're able to do more complex surgery and support those with Mariner revision. The expected alpha launch of a Mariner adult deformity indication should give us higher revenue per case. The fact that we're seeing almost two C-spine products used per procedure, as that continues to tick up, right, that should translate into higher revenue per procedure. But I still think that growth is going to be probably coming from higher case counts.

Okay, great. And then I know that you will get additional color on 70 after the close, but maybe just help us frame out, you know, you did give us some incremental color with respect to guidance for this year. So talking about $7 million. majority coming in the second half, but you've also talked about pressing the gas pedal down on the earn-out model. How should we think about what that $7 million really annualizes into and represents on a go-forward basis? Are you looking for people to be modeling this out as a discrete line item in your revenue builds moving forward? Should we expect growth on top of that, or is that not fair because you're going to really be realizing the majority of that growth on the implant side? Help us think about that.

Yeah, we've been probably intentionally vague in terms of what that mix of revenue is going to look like in the $7 million. We think it's going to be a mix of capital and earn-out revenue, so the capital will all hit as the units are sold. The earn-out, we're going to just be starting to get into what should be a three-year earn-out commitment. So The $7 million is a combination, but I still don't want to define the mix because there's a lot of irons in the fire in terms of capital sales. But as the year goes on, I suspect we'll see a few more earnouts as a percentage of those total placements versus the outright capital sale. So I don't want to commit to a number and say $5 million if it's going to be capital because it turns out $4 million is capital, but $3 million is incremental revenue we're getting from the earnouts that we wouldn't get in the absence of the 70 acquisition. I don't want to set a number that people are disappointed we only did $4 million of capital, but we still hit our $7 million or exceeded that, right, because of the earn-out contribution. So I'm reluctant to give any kind of mix yet until we've done the acquisition and have a better chance to collaborate with the 7D leadership and sales team to define, you know, what the expectations should be for earn-out revenue versus capital. Okay, understood.

I look forward to getting more comments. Yeah, one additional item there, Kyle. I mean, just obviously thinking about how 70s continuing to run their business, everything that's in their hopper right now is from their traditional modeling, right? Their traditional sales modeling. So there's plenty, as Bob said, that's in certain stages of capital equipment processing and the process the hospital usually goes through. And I think we've already kind of managed to that process is often around a nine to 12 month process. So Again, I think it'll be weighted more towards that end, but then we do see an acceleration as time goes on of the ability for earn out.

Okay. That's very helpful. Thank you. I'll let somebody else hop in.

Okay.

Thank you. Our next question comes from the line of Matthew Blackman with Stiefel. Your line is now open.

Good afternoon, everyone. Thanks for taking my questions. I've got a couple. Maybe, Keith, I'm curious, can you just give us a little bit more color on the new distribution partners you mentioned that were onboarded and what regions or geographies they allow you to enter where perhaps you were either under-indexed or had no presence at all?

Yeah, so during, you know, in and around COVID, we were still aggressively going after new distribution or helping train distribution that was just coming aboard in and around that time. We feel really good about our teams on the West Coast, Colorado specifically. We've advanced nicely. Pacific Northwest, we're advancing nicely with partners that have grown with us during the pandemic time. We continue to have further investments in our Texas markets and our Florida markets. So we feel like There's even markets that we're in that our current distribution is going deeper or expanding with additional hires on their representation that we're clearly seeing. We're seeing the same thing going on in the Midwest for us. The Midwest has always been a traditional distributor area for us that continues to be exclusive in driving our product lines. We still have a lot of opportunity and continue to have good conversations and continue to have good conversations in the Northeast. And we view that as growth opportunity for us moving forward over the next 18 to 24 months. All right.

Thanks for that. And then my last question, and John, you sort of touched on it a little bit, but I was hoping you could frame the complex procedure opportunity still ahead for you. I think in the past you said it's something like 10% of your mix, but as you've mentioned, you've launched some systems for complex disease in 2020 that will transition into full launches this year. You'll launch the Mariner Revision and the Adult Deformity Platform. So maybe just talk about whether you're getting closer to having the portfolio to make meaningful inroads, what else you might need, and I guess most important, how much of an incremental opportunity complex procedures could represent in 21 and beyond, whether it's the mix of cases that you're at now and where that could go or the revenue opportunity per complex case versus your current sort of average ASP. Just help us understand some of the opportunities still ahead of you in the complex arena. Thanks.

Yep. It hasn't dramatically changed from sort of that historical 10% mix. It's increased probably a little bit because the Mariner revision system allows us to participate in more complex and deformity, but getting the adult deformity specific indication for Mariner that we anticipate in mid-year this year will give us a whole new entry into the deformity market, and that's going to be specifically for the adult deformity indication. It's going to be an alpha launch, so we're not going to have a full launch out there. It'll contribute revenue, but I don't expect it to meaningfully shift the percentage of our revenue that comes from deformity for 2021, only because it's an alpha launch and you're limited by the sets. As we move into a full commercial launch, sometime likely in early 2022, that's where I think you can see the needle start to move a bit in terms of the percentage growth of our revenue coming from the more complex and deformity procedures. But I don't anticipate a significant contribution this year because of the alpha launch. But again, it's one of those systems that's helping attract new distributors to want to work with us. And they understand during an alpha phase, They may not have unfettered access to that system, but it's still something that's appealing to them to start to work with us knowing the full commercial launch is coming down the road.

Got it. Thanks so much, guys.

Thank you. Our next question comes from the line of Kayla Crum with Truist Security. Your line is now open.

Hi, it's Sam on for Kayla. Thanks for taking our questions. Just first to start off... Curious to hear about what conversations you're having with distributors and with regards to 70 and how you think that can augment your exclusive distributor force or adding additional high value distributors. And then just will all your distributors have initial access to the system or is it going to take time to expand production before all of your distributors will be able to be selling the system?

Yeah, so. You have a couple layers there. The first one is we do feel good about our ability to expand supply. I think 7D has done a very good job of working with a supplier that has the ability to scale. There is some time consideration that we have to make for that scale, but it's not something that we think is going to slow down our distribution team. Instead, I think it's more about us being sure that we're investing in the right products with that supplier so that we can have a more just in time or shorten down the lead times at least for how those products or, you know, how it can be built out and be available. Now that said, yes, the conversations with our distributor are quite exciting because obviously we had a different arrangement with 7D previous to this that really was more of a, you know, a discount off of list price, obviously now we would be making decisions on the cost of goods at a baseline and we can make the right decision on whether certain accounts it makes more sense to do an earn out or other accounts that have budgetary dollars, it certainly may make more sense to, of course, place the unit outright. And so our distributor is excited because I think it's a different economic equation and they can be much more competitive in the marketplace. And then lastly, yes, we are having even, I would say, more engaged conversations with new distribution, especially distribution that may have experience with enabling technology and their excitement to be able to provide this kind of, you know, radiation-free technology, which I think is becoming a bigger and bigger issue to hospitals, obviously, to surgeons, and certainly as patients become more aware, I think we're all comfortable that that it's going to be a big selling feature for, for patients as well.

Great. That's really helpful. And then on international first quarter growth there since last year, and we'd love to hear what you're seeing in those markets and how we should think about improving the cadence of improvement for the year. And then also how, how you think 70 can potentially impact or accelerate growth over time in the international market, given the uptake of what we've seen there.

Yeah, I think just to, I think 70 just got EU CE mark approval recently, so there's a new opportunity for them and us together in Europe. We have an infrastructure in place in Europe and good distributor relationships there, so I think we'll be able to bring more to the table in terms of Europe because we're just getting started there. They have a really healthy relationship already in Australia with a pretty large distributor, and they've sold a decent number of the 30-some units that they sold internationally to that Australian distributor. So I think there's opportunity to grow and place more systems there as demand increases. But also with the MIS module slated to get launched, you know, probably sometime in the third quarter once we get FDA 510K clearance, there's an opportunity to increase average ASPs, right, with the MIS module included, but also to go back to all of the customers who bought the unit without MIS and try to get them to purchase the MIS module. So I think there's upside obviously in both locations, probably more upside in the EU because they just are getting started there. But we've got a healthy relationship and a good presence in Australia ourselves. And I think that's where we've seen more clarity in terms of growth in 2021. I think 10% growth is pretty realistic place to start. For international this year, maybe we'll be able to exceed it, but I think there's still a decent amount of uncertainty in Europe in terms of when they finally emerge from COVID and we see sustained increases in surgery volumes. But starting off, again, it's only 10% of our revenue, but I think a 10% increased expectation for international this year, given the uncertainty, is probably where I'd place my marker now. And if things get better and they emerge from COVID quickly, then we could exceed that as well.

Thank you. Our next question comes from a line of Brandon folks with Cantor Fitzgerald. Your line is now open.

Hi, thanks for taking my question. Can you just elaborate a little bit in terms of the color you're seeing in revenue per case, even if it's just directionally, maybe in the quarter compared to sort of last year and then anything post the quarter as well? Thank you.

Sorry, you're looking for just sort of revenue per case.

Yeah, just some color, you know, even if it's just qualitative color.

Yeah, it continues to increase, right? The two things we're – well, the three things we're tracking is surgery volume increases, looking at the number of systems used per procedure, which also translates into higher revenue per case as we see more systems being used. but also as we're participating in more complex and deformity, that's something we're tracking. So as Keith talked about on the script, case growth was over, volume increase was over 10%. Revenue per case, it's typically been in the low to mid single digits, the revenue per growth. So it's nominally driving a little bit of upside, but in line with the question before, I think the growth expectations we've got for the rest of this year and beyond is mostly going to be coming from volume, from just having a presence in new markets.

Great. Thank you very much. Sure.

Thank you. Our next question comes from the line of Jeffrey Cohen with Bloomberg. Your line is now open.

Hi, Keith and boss. How are you?

Good. How are you, Jeff?

Just fine. Um, Can you help us tidy up Q2? You talked about 150 of cash shares were 27.9 plus the raise of 5.18, which is 33.1. And then the 4.29 from the 7D will appear over time as selected by the 7D holders. Is that what you're intimating?

Correct. Yes, it depends on whether they elect for cease-buy shares or exchangeable shares, and then if they elect for exchangeable shares, when do they tender those based on their own personal tax situation to convert it into cease-buy shares.

Okay, and that should be within five years?

It has to be within five years, yes. There's a mandatory tendering date five years after issuance.

Got it. And along those same lines, Boz, do you expect any – one-time charges associated with the closing expected for Q2, and where they may pop up on the financial statements.

The bulk of the costs were incurred in Q1, right? We talked about the $1.3 million of legal and other professional fees. Just because of the follow-up activity in Q2 with the shareholder meeting and getting court approval from the Canadian courts, There'll be some residual legal and professional fees that come through in the second quarter that we'll give clarity to. But, you know, I would anticipate a third to half of what we saw in the first quarter. But we'll also be investing a few more dollars in the integration effort as well. But I don't anticipate it's going to be, you know, more than half of what we incurred in the first quarter because that was all the, you know, prep work and due diligence and drafting of documents that got us to those numbers.

Okay, got it. And then lastly, for me, Keith, any commentary on April specifically, as far as trends, procedures and backlog at hospitals? Did you pick up anything out of Texas from last quarter? And any areas of strength geographically here?

Yeah, so I think as we tried to give some color to, we viewed March and April as being very similar in the sense that there is backlog that's being worked through. I think the other good thing is that more and more patients are going to see their doctors for care so they're able to get scheduled. We're hearing still the same kind of feedback from the surgeons that are visiting that they still feel like they're getting through some backlog, they're being scheduled out throughout the entire quarter, and, you know, they feel really good that this will continue, especially with their office load, if you will, continuing to see more and more patients. So everything, you know, seems to be an indication that it's still a robust time as far as getting caught up as well as getting new patients into the stream.

Okay, got it. And lastly for me, if I could throw one more in. Any commentary on the biologic platforms out there? And have you taken any price increases? And have you seen anything more recent or competitive in nature as far as offerings or pricing?

Yeah, I would say we're not really seeing anything I would view as market changing from pricing. We continue to be getting more and more opportunities into larger buying group hospitals or being put onto the ability to compete on minimal number of vendors. And so with that sometimes does come some more aggressive ways we have to think about how we're going to approach those accounts. But I wouldn't say that that's anything different than a new opportunity at a new store, so to speak. It's not something that we're seeing in the marketplace as if there's a giant erosion on the pricing side for our DBMs specifically. I think there's still the higher technology DBMs and the ones that we know have more unique features, we are still able to get a premium on, but we also feel like we can be very competitive where we need to be in those larger buying groups.

Okay, got it. Nice quarter, nice readout, Alec. I appreciate it.

You bet. Thanks, Jeff.

Thank you. We do have a follow-up question from the line of Matthew O'Brien with Piper Sandler. Your line is now open.

Hey, guys. Thanks for taking the follow-up. I guess, Bob, I just wanted to – oh, thanks. I just wanted to talk about the spend outlook. I guess the only thing that some folks may look at from the quarter is the EBIT loss. And I know you spend a lot in Q1 and you're stepping on the gas and everything. But I'm wondering, and you're talking about a little bit more free cash flow burn this year versus last year. So I'm just thinking investors may think, okay, we're going to see an elevated spend level over a multi-year period. that kind of changes how I was thinking about, you know, them getting to profitability. Is it fair to think about, you know, look, we see a lot of really good things here in 21, 22. We're going to invest really heavily and then you'll get a lot more leverage to the EBIT line in 23 and 24. So just bear with us for two years as we spend a bunch of money because we can see all this opportunity and then you'll get that leverage that you're hoping for still kind of in the timeframe you're hoping for, which is 23 and 24.

Yeah, no change to those expectations longer term in terms of getting adjusted EBITDA break-even and then free cash flow break-even, right? And that last one sort of still at the $275 million revenue mark. That being said, the free cash flow burn increase that we're projecting for this year over last year, it's all expected to be driven by higher investments in inventory and CapEx, like we talked about earlier. but the adjusted EBITDA loss we're anticipating is going to continue to decline this year versus full year last year because we are already seeing some of that leverage. Most of it's in the gross margin line, but I think we're also doing a pretty good job managing the G&A line, but reinvesting in more R&D, sales and marketing, and the inventory capex. But the free cash flow burn increase this year is going to be a little bit of dilution from 7D, their contribution in the second half of this year, But overall, still forecasting for reduced adjusted EBITDA losses. But the free cash flow burn increase is going to come entirely from higher growth investments in sets and inventory to build the scale we need to achieve those efficiencies. Because while Orthobiologics today is a free cash flow positive business because of the less complex supply chain, you're not investing in the sets and lower commission rates overall. We want to invest our way to growth on spinal implants to get to the scale that we need to get free cash flow break-even on that. And that's why with the financing, we have a little more confidence to opportunistically invest in growth that kind of underlies the accelerated revenue growth we've got in the back half of this year and longer-term expectations. But fundamentally, we haven't changed our assumptions around getting a free cash flow break-even at that $275 million revenue mark.

Got it. Thank you.

Thank you. There are no further questions.

Thank you very much for joining us, and we'll be in touch with you at the end of the second quarter. Thanks.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.