SeaSpine Holdings Corporation

Ladies and gentlemen, thank you for standing by, and welcome to the CSPine 2021 Second Quarter Financial Results Conference Call. At this time, all participants are in the listen-only mode. Later, we will conduct a question-and-answer session, and if you would like to ask a question during that time, simply press star 1 on your cell phone keypad. If anyone should require assistance during the conference, please press star 0. As a reminder, this conference call is being recorded today, August 2, 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 quarter ended June 30, 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 condition. 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, August 2, 2021. For a description of recent 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 at www.seaspine.com and at www.sec.gov. Our discussion today will include certain financial measures, such as adjusted EBITDA, loss, and adjusted gross margin, 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 to 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 financial tables accompanying the press release we issued today. I'll now turn the call over to Keith Valentine. Keith?

Thank you, Lee. Good afternoon, and thank you all for joining us. Q2 was a quarter of significant achievement for C-Spine. We transformed the company with the acquisition of 7D Surgical and its enabling technology platform and meaningfully strengthened our balance sheet with a $94.5 million equity raise. From a financial and operational results perspective, we saw a continuation of the revenue growth momentum that started in the back half of Q1 and we further expanded our gross margins. Despite pockets of COVID-related surgery disruptions that impacted some of our larger markets, we delivered a solid quarter of growth. Through our commitment to innovation and customer experience, we took additional market share in both the spinal implants and orthobiologics market And we benefited from higher spine surgery volumes as surgeons worked through much of their backlog. We've had a very strong quarter, with total revenue increasing 66% over the prior year period. In the U.S., where we generate approximately 90% of our total revenue, revenue increased 64% year over year. In the U.S., growth was once again led by higher sales of our new and recently launched products, which comprised 74% of U.S. spinal implant revenue and more than 40% of U.S. orthobiologics revenue. Surgery volumes increased by more than 50% compared to the second quarter of 2020 and in the low teens sequentially compared to first quarter of 2021. We also generated slightly higher revenue per case and further increased the utilization of our spinal implant systems and orthobiologics products per procedure. For the second quarter of 2021, C-spine products and systems used per procedure averaged 1.9 compared to 1.8 a year ago. Turning to 7D Surgical. We closed the acquisition on May 20th and we placed our first unit under an earn-out arrangement during the second quarter. We also are excited to receive FDA 510 clearance for the percutaneous spine module for minimally invasive surgery and are on track to launch the MIS module later this month. We have progressed rapidly to integrate the 7D team and brand into the C-SPIN organization and to accelerate certain high priority development programs. Also, we revised the capital sales force incentive compensation plans to be agnostic to a capital sale or an earn out arrangement. As a result, We are already seeing greater percentage of the financially more attractive burnout opportunities in the US pipeline than we originally anticipated. With respect to our product launches, we recently initiated the alpha launches of the waveform lateral and waveform anterior 3D printed inner body implant systems. We are now on track to alpha or fully launch more than 15 products and line extensions in 2021. We remain particularly excited about the next line extension of our foundational Mariner platform with an alpha launch of an adult deformity system expected late third quarter and the full commercial launches of our North Star OCT system for posterior cervical fixation. The Admiral anterior plating system expected early fourth quarter and the Waveform C system 3D printed inner body implant system, expected late fourth quarter. This week, we began to deploy an additional 15 sets of what we believe is the truly innovative and differentiated Northstar system, and we plan to deploy an additional 50 sets in two separate tranches, mid third quarter and late fourth quarter. Those full launches, in particular, are expected to be significant drivers of revenue growth in the fourth quarter of 2021. Continued investment in product innovation and in the deployment of our high-demand foundational spinal implant systems combined with our best-in-class PBM portfolio and market-leading flash navigation system featuring 7D technology gives our expanding distribution network the assurance that we can support their aggressive growth plans. Maintaining their confidence is so important to our efforts to further capture market share And with the stronger balance sheet we now have after the recent financing, we have even more capability to invest for growth. We remain cautiously optimistic that despite the recent escalation in the number of COVID-related hospitalizations, as more people get vaccinated, we will get a sustained return to pre-COVID spine surgery volumes during the second half of 2021. Confidence in the long-term opportunity, coupled with the expected contributions of upcoming product launches and the 7D surgical technology platform, continues to drive our investment decisions, the most notable of which is a significant increase in spinal implant sets. In total, we plan to invest nearly $40 million this year in the alpha and full commercial launches of numerous spinal implant systems as well as deploying more of the existing spinal implant sets that are in highest demand. These investments, which represent an almost 60% increase compared to 2020, solidify confidence with our distributors that we can comfortably support their ambitious growth plans for the second half of 2021 and beyond, and give us the confidence to increase the bottom end of our revenue guidance by $1 million to a range of $201 to $205 million. This reflects growth of 30% to 33% over full-year 2020 revenue and 26% to 29% over full-year 2019 revenue. And now I'll turn the call over to John for more details on our financials and our financial outlook. John?

Thanks, Keith, and good afternoon, everyone. As Keith noted earlier, revenue for the second quarter of 2021 totaled $47.5 million, a 66% increase compared to the second quarter of 2020, and a 13% sequential increase compared to the first quarter of 2021. U.S. revenue totaled $42.6 million and included $600,000 of 70 surgical capital sales revenue, a 64% increase compared to the second quarter of 2020, and a 14% sequential increase compared to the first quarter of 2021. U.S. spinal implant and enabling technologies revenue in the second quarter of 2021 totaled $21.4 million, That growth was led by new and recently launched products, predominantly those that were launched alpha or fully in 2020 and the first half of 2021. The rapid clinical adoption of our most recently launched products is a very encouraging sign for the growth that they can drive in the second half of 2021, particularly in Q4. We continue to experience low to mid single digit declines in average selling prices common in the spine industry. U.S. Orthobiologics revenue in the second quarter of 2021 totaled $21.2 million, a 67% increase compared to the second quarter of 2020, and an 11% sequential increase compared to the first quarter of 2021. Those increases were once again driven by growth in the OsteoStrand Plus product. International revenue in the second quarter of 2021 totaled $4.9 million, an 81% increase compared to the second quarter of 2020, and a 9% sequential increase compared to the first quarter of 2021. In our press release, we also provide comparisons of our revenue results to the second quarter of 2019 as the impacts of COVID-19 on our business in the second quarter of 2020 make the comparison to the second quarter of 2019 a useful supplemental metric to measure growth. COVID-19 had a larger adverse impact on our U.S. orthobiologics business in the second quarter of 2020 compared to the spinal implant business, which resulted in atypical relative growth rates with orthobiologics growing faster than spinal implants by that measure. The growth rates compared to the second quarter of 2019 are more in line with the typical relative growth rates with spinal implants growing meaningfully faster than orthobiologics. Gap gross margin for the second quarter of 2021 was 63.2% compared to 59.2% for the second quarter of 2020. The increase in gross margin was primarily due to idle plant costs recorded in the second quarter of 2020 associated with the nearly two-month shutdown of Orthobiologics manufacturing operations at our Irvine facility. The year-over-year gross margin benefit from increased sales in the U.S. of our high-margin spinal implant products was mostly offset by two factors. Higher kitting and logistics costs incurred in preparation for the full commercial launches of the spinal implant systems expected in the second half of 2021 that Kate mentioned earlier, and from $300,000 of technology-related intangible asset amortization associated with the acquisition of 7D Surgical. Adjusted gross margin, which excludes technology-related intangible asset amortization and idle manufacturing plant costs, was 64.5% for the second quarter of 2021 compared to 63.5% for the second quarter of 2020. 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 those set bills. However, that impact notwithstanding, we believe that we can continue to expand adjusted gross margins by 100 to 150 basis points per year over the next two to three years. Operating expenses for the second quarter of 2021 totaled $41.1 million, a $10.5 million increase compared to $30.6 million for the second quarter of 2020, and included $1.6 million of 70 surgical operating expenses. The increase in operating expenses was driven primarily by $8.4 million in higher selling and marketing expenses, the majority of which relates to selling commissions, $1.1 million in higher general and administrative expenses, which included more than $500,000 in legal and other professional fees incurred in connection with the 70 surgical acquisition and integration, and $900,000 in higher research and development expenses. We recorded a $6.2 million non-operating gain in other income net in the second quarter of 2021, connection with the forgiveness by the SBA of the total amount outstanding of our Paycheck Protection Program loan. Net loss for the second quarter of 2021 was $5.2 million, compared to a net loss of $13.7 million for the second quarter of 2020. Adjusted earnings before interest, taxes, depreciation, and amortization for the second quarter of 2021 were improved by $4.3 million to a loss of $3.5 million, compared to a loss of $7.8 million for the second quarter of 2020. Adjusted gross margin and adjusted EBITDA loss are non-GAAP financial measures that we believe provide 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 gross margin to adjusted gross margin and of GAAP net loss to adjusted EBITDA loss was presented in the financial tables of the press release we issued this afternoon. Cash and cash equivalents at June 30, 2021, totaled $120.7 million, and we had no amounts outstanding under our credit facility. We received $94.5 million of net proceeds in April 2021 from an underwritten public offering of 5.2 million shares of our common stock. We paid $28.3 million in cash consideration in May 2021 in connection with the acquisition of 70 Surgical, and in April 2021, repaid the entire $20 million of outstanding borrowings under our credit facility. Our free cash flow burns, which includes operating cash flows and purchases of property and equipment, was $14.7 million for the second quarter of 2021, a $3.2 million increase compared to $11.5 million for the second quarter of 2020, and was $21.4 million for the first half of 2021, a $5 million increase compared to $16.4 million for the first half of 2020. Those increases were primarily attributable to higher investments in spinal implant set bills to support the greater number of full commercial launches in 2021. 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-bill capital expenditures that are critical to driving the sustained accelerated revenue growth implied by our 2021 revenue guidance. As Keith noted earlier, we now expect full-year 2021 revenue to be in the range of $201 million to $205 million, reflecting growth of 30% to 33% compared to full-year 2020 revenue and 26% to 29% over full-year 2019 revenue. In addition to expressing our confidence via the $1 million increase in the bottom end of the revenue guidance range, we also want to provide more color on our expectations for quarterly revenue progression for the second half of 2021. Based on the number of factors, including surge in feedback regarding taking vacation time this summer, the timing of the North American Spine Society meeting in late September, and the rescheduling due to COVID-19 of other large industry trade shows into the third quarter, and a greater percentage of 7D placements expected under an earn-out arrangement than originally anticipated because of the new compensation model we introduced for the 7D sales team, we are now expecting more seasonality than we did earlier in the year. For Q3 2021, we now anticipate 16% to 18% year-over-year growth, and for Q4 2021, expect 33% to 39% year-over-year growth. That represents a roughly 5% to 8% sequential increase for the typically seasonally weak third quarter compared to the second quarter of 2021, which is typically one of the strongest quarters of the year. While the near-term impact of a higher-than-expected 70 earn-out placement assumption has the effect of lowering 70's anticipated contribution to third quarter 2021 revenue, It provides a much greater upside benefit to revenue and contribution margins for the fourth quarter of 2021 and for the next two to three years through the longer-term contractual relationship contemplated by the earn-out commitments from those accounts. 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 burn for 2021 to be between $46 and $49 million. That increase versus 2020 is due in part to anticipated adjusted EBITDA dilution from 70 surgical in 2021, but more significantly from the more than 60% planned increase to nearly $40 million in spinal implant inventory instrument and set-bill CapEx investments Keith mentioned earlier to support the many full commercial launches slated for 2021. With respect to the 70 surgical acquisition, certain 70 shareholders elected 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, a total of 1.3 million exchangeable shares that were actually issued will not be reflected in the denominator for loss per share calculations until the 70 shareholders tender those exchangeable shares because of their anti-deliver 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 timing that the 70 shareholders who elected to receive those 1.3 million exchangeable shares will tender them for shares of C-Spine common stock, as that will likely be a decision each 70 shareholder makes based on their own personal tax planning. With more than $120 million in cash and cash equivalents on hand, plus the additional liquidity that we can access through our $30 million credit facility, which we extended for at least one year to July 2022, and for 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 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 growing 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 attract and retain the highest quality distribution, to generate above-market revenue growth through more efficient utilization of our spinal implant sets, and to further expand our gross margins. Our mission is to collaborate with surgeons to develop cost-effective solutions to treat spinal disorders and improve patients' quality of life. And our goal is to be a market share taker and grow four to five times faster than the overall spine market. We believe that we have the right products and systems, a highly effective and growing distributor network, and the best team in the spine market to accomplish this. Today, C-Spine is an organization of more than 500 passionate and dedicated employees 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 the recent return to the office after nearly 15 months of working remote, we are re-energized and enjoying the face-to-face collaboration that is so important to our culture. That energy and excitement is palpable, and it has been noticed by the increasing number of surgeon and distributor visitors we've hosted the past couple of weeks. It's so great to be back. With that, we will now open it up to questions. Operator?

Thank you. At this time, I would like to remind everyone, in order to ask a question, please press star 1 on your telephone keypad. Again, that is star 1 to ask a question. We have your first question from Matthew O'Brien with Piper Sandler. Your line is open.

Great. Thanks so much for taking the questions. I'll stick with two, although I've got many more than that. Keith or John, the increase in, you know, implants and sets versus 2020 is pretty eye popping. Can you talk a little bit about, you know, is it more skewed towards sets? Is it more skewed towards implants? Which of the two does that, is it kind of, um, you know, weight weighted towards one or the other? And then, you know, why is now the time to really increase this, uh, this investment? What do you see as far as your, your growth opportunities, both domestically and internationally, uh, in this category?

Yeah, the biggest driver, Matt, is the number of full commercial launches we're doing this year compared to last year. And, you know, the mix, it's pretty even, right? There's a big investment in implant inventory, but also the instruments and the sets, right? That's the capital expenditure side of it. But the biggest catalyst is just the number of impactful full product launches this year. I mean, we have a number of alpha launches that wait for them to see Sorry, the Waveform 3D interbody technology, but North Star is one that's been highly anticipated. As we said, we've got 15 more sets coming out, 50 more to be deployed by the end of the year. The Explorer expandable interbody, the Reef TO, which was a full commercial launch, and then even within the alpha launches, the Mariner adult deformity indication, which we expect to get in the near future, is you know, a very complex and expensive set even for alpha launch because of the deformity aspect of it. So it's, you know, it's a sign of our confidence in the growth, and that growth is going to be driven by some of these more impactful product launches, and that's what's really driving it.

I think the other thing, too, to think about, Matt, is, you know, the overlap of bringing aboard some larger distribution groups that require more of an inventory commitment, and also on top of that, For each of those earnouts that we're anticipating, those earnouts are done much through the newer systems and done through the excitement in and around the newer systems. And so we want to make sure that whether it's a 70 earnout or whether it's a new distributor coming aboard, that we can instantly or quickly deploy sets that make them comfortable and make the hospital comfortable, that they're going to have the right equipment to either earn out or the right equipment to sell into their new accounts.

Okay, that's helpful. And just to push a little bit further here, guys, just because I think investors are pretty attuned to, you know, the impact of new sets. Is it more skewed on the set side or really the implant inventory side so that you're able to support all these new distribution groups?

Again, it's both because the sets get deployed with the, you know, what we call trapped inventory, all the implants that travel with the instrument sets to be able to conduct the surgeries. So we're investing in both, but then we also need to have inventory on the shelf to be able to replenish the implants as they're consumed. So it's not a 50-50 mix, but it's pretty even in terms of the investment in both the capital expenditure side and the inventory side, because you need both to be able to do a surgery, and those all travel with a set. But then you've got to have the replenishment inventory on the shelf so that when distributors consume the implants from a set and want to move on to the next surgery, we can easily and readily replenish those inventories to maintain their confidence.

Got it. That's super helpful. For the follow-up question, just talking about the earn-out opportunity here, is it pretty much straight-lined over a two- or three-year period? Is it back-end loaded, kind of based on how things go? And then, you know, with you getting the MIS indication, Do we expect really more of the impact late Q4 into next year in terms of your placements, or can you quickly, you know, update the system or provide an upgrade for people that want to get their hands on 7B open right now and then move quickly into MIS?

Yeah, the first question is generally the conversations we're having are more of a straight-line impact to the revenue. It doesn't mean we wouldn't be flexible to something with a ramping escalation, but typically – We're finding engagement with a straight-line commitment over a three-year period for the earn-out revenue. And then, sorry, the second question was?

Yeah, on the upgrade, yeah, there'll be different options if you buy a system new as to whether you choose to have that module. And then, of course, there is opportunity for that module to get introduced into existing installs if they choose to purchase.

Got it. Thanks so much.

Thank you.

We have your next question from Kyle Rose with Concord.

Your line is open. Great. Thank you for taking the questions. I wanted to talk about just the state of the sales force now. I mean, the comment about bringing on a lot of new surgeons and new distribution groups to the to the company to, you know, do trainings and educations and things of that sort, you know, and then also dovetailing off of, you know, your answer to Matt's question just about, you know, new sets to support some larger distributors. Maybe just help us understand where are you in the life cycle of upgrading the distribution talent? Obviously, you've got, you know, ambitious goals for taking share. How much of that comes from just having, you know, better products to sell versus, you know, you now will have, you know, better distribution talent, you know, carrying more weight in the markets?

Yeah, I think really both continues to go on. I think as we start getting more and more of our legacy systems become obsolete, we're moving obviously to a greater amount of our revenue coming from new product introductions and new product sales. That creates a better opportunity for us to continue to fill in that white space. And it solidifies some of our current distribution teams. We're working in some of our larger areas on some nice additions that are being added to the team, either through combination or through hiring. And so we feel like the reason for that is absolutely because of what the pipeline is presenting. And 3D technology is certainly an important one that now we have a leading interbody portfolio. and nanometalline, and we have the opportunity to also be able to offer 3D across many, many of our interbody platforms. And so, again, that creates a different conversation and opportunity with new distribution. But most of the new distribution is going into white space and going into areas that we don't currently have exclusive or more focused distribution.

Great. And then on 7D, I mean, encouraging to see the MIS, you know, clearance come through, that's going to roll out. Maybe when do you expect to have the R&D teams such that, you know, you'll have new implant or instrument designs that are actually, you know, kind of utilizing some of the 7D technology, you know, more directly? When will we see those first, you know, R&D projects, you know, move into alpha launch?

We already have some new instrumentation that is more dedicated and focused on C-spine specific. But keep in mind, one of the beautiful things of 7D is that it was set up originally to be agnostic. And so really what we're talking about is it's been able to be used on C-spine instruments for quite a long time. It can be used on competitive. What you will see as we move forward is it becomes easier and easier to be integrated with C-spine with software enhancements, and other items that make it seamless to use our instrumentation. And our instrumentation has very easy assembly onto certain parts of the guidance platform for 7D. And so you'll continue to see that as we go. There'll be some items I'm sure you'll notice at NAS is coming up, but we view that as it's already going. And the good news is it's going to continue to flow as we move into further software generations going forward.

Great. And then just one last one, and then I'll hop back into queue. You commented about some of the quarterly progression and, you know, surge of vacations and things of that side. But maybe just update us on anything you're seeing with respect to the, you know, recent increases in COVID volumes across the United States. Is there anything from a Delta variant perspective that you need to call out as far as what you've seen in the last couple of weeks?

Yeah, there is. You know, there was just recently the joint sections meeting in San Diego, so I had a good opportunity to talk to surgeons there and not only talk to others in our industry. Yeah, they're spotty places. Certainly Florida has become a hot area, and I know that there's a big neurosurgical meeting coming there in Orlando. Specifically in Orlando is in a place of, I think, requiring masks now for that meeting, and even having some elective surgeries slowed down in the Orlando area, as we understand it from late last week. So, yes, I think there are some accommodations being made in some markets. We don't feel like yet. It's something of the same concern that we've had previously, but it is something we're keeping an eye on, and certainly there are some markets where the Delta variant does seem to be at higher numbers. and at numbers that certainly health authorities are starting to be concerned about whether they need to make accommodations at hospitals.

Thank you.

We have your next question from Ryan Zimmerman with BTIG. Your line's open.

Good afternoon. Thanks for taking the questions. Just a few for me, following up from Matt and Kyle's questions. Keith, dovetailing that question with Kyle, you did make a comment about backlog dynamics and I appreciate all the quarterly cadence commentary that we have. Where are we at in your view from a backlog perspective? It sounds like some of the surgeons you're working with are working that down, but I'd love to just get your sense for kind of how long that tailwind may potentially last.

Yeah, it's a good question because it's a question that we ask every surgeon that comes through and was asking it at the meeting even this past week. You know, it certainly appears that most of the backlog is worked through. I think there was a lull there between what was out there on backlog and then what was being slowed from the surgeon's offices, meaning patients were being reluctant to go in. I think now, as they're describing it, they have a much better balance. The backlog is largely being worked through. They don't feel like the backlog is going to be present for the entire third quarter unless something slows things down. but they also are acknowledging that they're getting much better patient flow into their offices than they had before. And so I think that spells to what we've been, you know, trying to give some clarity to on the call is that, you know, fourth quarter is still looking and shaping up to be very robust from a surgery load perspective.

Okay. Appreciate those comments. And then turning to 7D for a little bit, two questions for me around that just One, I think at the time of acquisition, there was roughly 54 systems in the field. And so, you know, I'd love to understand kind of how those are working through your placing systems, you're putting, you know, these earn-out agreements in place for the new systems. But of the 54 that were there, you know, how many were able to convert or ready to spine product or have the opportunity at least to, you know, get some spine hardware in front of those clients? And then just for John, and I'll just ask my question up front, the second one part of that is on the cost synergy side, kind of where are we at in that process and what are your expectations from a cost standpoint if there are any synergies that you can work through? Thanks for taking the questions, guys.

Yeah, so on the first part, you know, right now all of those placed units were all placed outright sales. So we are participating in a few of those accounts and we're continuing to try to drive further. We've been really fortunate that over the course of the past couple months, a couple accounts in specific have started using some C-Spine product, and some that we were already using are continuing to use it here closer to us locally. So that continues to go on, but it's not an easy opportunity. It gives you a chance to have the discussion and about the C-Spine products, but keep in mind there's no hook in it, if you will, of them having to earn it out because they've already purchased it. So the opportunity will continue to present itself as the MIS module can be talked about and how we can approach that moving forward. And there's also going to be additional new software that continues to be launched that will help us have that better conversation. But we've had a few successes, and I think that our sales force has taken advantage of the fact that they have something new to talk about with those surgeons. And they're more aware of us thanks to the 7D being in their OR and knowing that C-SPIN is behind that now.

And then on the synergy side, Ryan, this is still very much a one plus one equals three revenue synergy opportunity. There are modest cost savings in things like trade shows and driving more collaborative relationships with 7D suppliers with higher volume commitments over time. with our stronger balance sheet that we can drive down cost of goods sold some too, but really this is all about revenue play. It's, it's taking more market share faster and growing because 70 is, is pretty much bolt on, right? They, they have special, um, specialties that we don't have in terms of like, um, product development optics and software development. So it's all complimentary to our base of strength and it's all about the revenue and market share taking opportunity. Uh, Thank you for taking the questions.

Thanks, Ryan.

We have your next question from Sam Radotsky with Tourist. Your line is open.

Thanks for taking the question. So, first, I just want to make sure I have my head wrapped around the impact of 70 and guidance first. So, you mentioned that a greater mix from earn out coming than originally anticipated. So, should we take that to think that maybe a little bit less than that, $7 million comes into revenue from 7D, and then backing that into the $1 million raise on the low end. Should we think of that more strictly as strength of the core business, or how much is 7D increasing sales there through those earnouts?

Yeah, again, the caution we took when we talked about 7D on our last call was to not give an assumption around the mix of that revenue, that $7 million incremental revenue between capital and earn-out revenue, which is kind of the base business. So we're still not providing that mix because we're incentivizing the sales team to convert as many of those opportunities to earn-outs as possible. As we said on our scripted comments that The expectations of earn-out models, we've been able to do more than originally anticipated, which does impact the short-term capital sales revenue opportunity, particularly in the third quarter. But, you know, when you say is 7D weaker or the base business stronger to bring up the bottom half million, well, it's both. The base business is stronger, but part of the reason it's stronger is because the revenue – pull-through we're going to get from the 70 earnouts generating more spinal implants and orthobiologic sales in those accounts, you know, in a more meaningful manner starting in Q4. So we still have the same expectations that we've got that $7 million of upside, but we intentionally didn't give any color on the mix on the last call of what that $7 million is comprised of, capital versus implants, because of that very reason is we didn't have great visibility into what the earnout would be. We had an assumption, and the good news is What the pipeline is is the assumption for earn-out opportunities is even greater than we originally anticipated, which is good because that's exactly why we restructured the incentive plans for the sales team is to motivate them to focus on earn-outs because they're better long-term financially, long-term in terms of maintaining access to accounts through contract periods. So it's the same assumption, and we're just not going to provide color on that because it's a slight impact to the third quarter in terms of capital sales, but it's upside longer term.

Great. That makes perfect sense. Thank you. And then just on those earnouts, I'm curious to hear what you're hearing from your sales force. Obviously, restructuring it is going to have an impact on their activity, but are they seeing more interest from accounts now that potential customers have that earnout option, or do you think it's more are announced coming strictly from that change in the incentive model.

Thank you. I think there is an excitement that this is a very strong capital equipment sales team that has had to deal many, many times with only one option. And that option was they had to get an entire sale. And that cycle at a hospital can be quite long. And I think just the fact that they're able to offer either and get a hospital excited about possibly getting the equipment placed sooner than later has been very motivating, especially in accounts that they knew full well going in that they probably didn't have capital equipment allocated for it for at least a year or nine months. And now what we're working on is really shortening that cycle and getting an opportunity. And I think the price point and features of 7D give us a real ability to have a very reasonable opportunity earn-out model that doesn't intimidate the hospital. I think some of the earn-outs for some new technology really intimidates the hospital, and they have a difficulty feeling comfortable signing a board, and ours, I think, is much more reasonable, and we're able to do that because of the feature to cost consideration that 70 has. Particularly in ASCs, right?

We see more surgeries moving there.

Yeah, we really, especially with the MIS application, I think it opens up some new doors to ASCs as we move forward, and obviously that MIS application will continue to get launched over the course of the next couple quarters, but we do see it as something that ASCs will be interested in.

We have your next question from Jeffrey Cohen with Ladenburg-Tonlin. Your line is open.

Hi, Keith and John. How are you?

Good, Jeff. How are you?

Just fine. So firstly for you, I hate to keep beating on 7D, but perhaps give us a little flavor as far as certain spinal levels, spinal regions, or procedures that you're seeing some uptake from and how that matches up with your current offerings as far as pull-through. That would be helpful. Thank you.

Yeah, I mean, we're really excited about the two launches we discussed in the call, and that was, you know, Northstar was our best alpha as far as numbers go. But keep in mind, we also committed to a good-sized alpha, and we committed to having more users than we usually have on alpha just to make sure we run it through its paces. And so we're excited. We've had validation in Launch Lab's. relatively recently, and it's, you know, full speed ahead. And that's going to be a nice procedure or a nice implant system for 7D technology in the cervical spine and the posterior cervical spine. Additionally, the new deformity products that are coming are also well aligned to what you see a lot of folks using 7D for. You know, obviously, the degenerative is the most procedures that are done, and it's a very simple system to use for just standard degenerative work. And so we take a look at all of that from an open perspective. There's a lot of things that we fall into, especially with our launches of new systems. But I think that, you know, ideally the effort that will be made on the deformity side and on the cervical posterior side will be a really interesting interplay with 7D. And we'll talk a little bit more about that as well, Jeff, at NASP. So at the end of September, We're going to have the ability to not only have Bo present for discussions, but we're also going to have a guest surgeon that's driving this at an ASC just to get a perspective and get a perspective from someone who's relatively new on the learning curve and how it's helped them at their ASC.

Yep, got it. And then second for me, for you, Boz, can you talk a little bit about efficiencies and leverage? You look like you're – your OPEX, which was like $600,000 lower than what we estimated, drove in 6% higher on your top line at $47,500. So it looks like you're pulling out some efficiencies and leverage. Could you talk about that a little bit? Is it beginning, or you just happen to see more of it during this quarter?

Thanks. A little bit of both. As we've said, right, we're focused on expanding gross margins, getting more efficiency, which I think we've been historically pretty good at getting efficiencies out of GNA, right? GNA has grown, I think, on average, adjusted GNA by like 5% compared to 11% long-term growth. But we're also starting to see more synergies out of sales and marketing, right? Commission rates ticking a little bit lower as we expected they would. We made a lot of investments in marketing over the past two years to bring in more product managers because of the number of new products we're launching and into the market, and now that so many are on the market in alpha launch and going to full launch, we don't need to continue to add marketing heads because I think we're in pretty good shape to have coverage there. So we're getting the anticipated leverage and efficiencies that we thought we would get, and second quarter was just another example of how we stay focused on that, and then we continue to be committed to reinvesting those synergies into more sets to drive higher revenue growth.

And, John, what might that take the inventory up to toward the end of the year? Are you looking at another 20% or so on current levels?

I don't know if it'll be that high because, again, it's going to be a mix of orthobiologists and spinal implants. But, you know, of the 40 million we gave, it's not going to be, you know, a total increase. Well, it's pretty close to 50-50 between the 40 million going towards spinal implant sets and which is the capital expenditure side and the other half going towards inventory. So that's the rough breakdown of how that spend should hit the balance sheet.

Yep. Okay. Got it. Thanks for taking the questions, guys. Nice quarter.

You bet.

Thanks. Thanks, Jeff.

We have your next question from Matthew Blackman with Stifel. Your line's open.

Hi. Good afternoon, everyone. Thanks for taking my questions. I think I've got two. Maybe just to start on 7D. I'm just curious what the early reception has been so far now that you have it fully in your hands. And then when we think about cross-selling, which is a bigger opportunity in the near term? Is it the current 7D customer pull-through, or is it placing 7D in current C-spine customers? Just help us think through those two buckets. And then I'll ask my second question right up front. And I think, Keith, you sort of touched on it, but I just wanted to ask about NAS, what to expect. You are hosting an analyst day. Obviously, we're going to hear more about 7D. But anything else of note that we should be paying attention to heading into the meeting? Thanks so much.

Yeah, yes. So the first part is, I think you're just going to get your arms around, is it a bigger opportunity to place these units in an existing account or is there, you know, how much of it is new? And I would say when you look at it, both are opportunities and both seem to be making their way to the top. There are some existing accounts that we already have a relationship with that this gives us a chance to expand if they choose to earn out. And then there's also a number of accounts that we're talking to that we really don't have a presence in. And so I think the sales force is approaching it both ways, that this could be a great way to get further market penetration and market share in accounts that we already are friends with through other products, or this is our first license to kind of hunt, so to speak, in a brand new account. And even one that we're talking to, it would give us a unique opportunity to get in on an account that we're already not approved on, but this would be an approval to use our implants as well. So it could be an interesting way to open the door to be an exclusive, or not exclusive, but another provider for an already limited provider account. So those are all good things. When you take a look at NAS, we're going to be talking about not only 7D, the experiences in and around a rather new user at ASC and how that learning curve went and where they see the advantages so far there at ASC. We're also going to have a discussion on some of the new products and the new products that you'll see at NASP that are either going into full launch or going into alpha launch in and around that late third quarter, fourth quarter timeframe. The only other thing I think to look out for is I think that, again, there's going to be a lot of different enabling technologies that will be talked about, and some are further along, obviously, than they were the last time we were face-to-face at a NAS meeting.

Thanks. Appreciate it.

We have your next question from Brandon Fulks with Hunter Fitzgerald. Your line is open. Thank you.

Hi, thanks for taking my question and congratulations on another good quarter. I just want to talk about the revenue per case. I saw you mentioned that it's sort of slightly up. Any color in terms of how this is trending versus your expectations longer term of where you can get this to as you bring in these new products? Just try to put into context how much of a tailwind we should think of the new product contributing to revenue growth from a pricing perspective, granted that you're also picking up on the usage procedure. Thank you.

Yep. So revenue per case has gone up low single digits pretty consistently in recent quarters. And that's because we're able to participate in more complex procedures with the entire Mariner portfolio. So we're seeing a consistent uptick there. I think the other thing it does in terms of price is it mitigates what is typically mid-single-digit price declines, I think, which is kind of the norm for Spine. Having the new products helps us maintain price. So we typically see the low single digit price declines because of the innovation we're constantly making to the portfolio. So I don't think we see the same price declines other companies that are less innovative are getting. But also the other thing we can't track is the orthobiologic usage in every surgery, right? Because there is a percentage of our orthobiologics revenue, about a third of that revenue is direct stocking orders. And it's pretty consistently been the case for a number of years. So if they do a stocking order, we don't see the Orthobiologics on the charge sheet for a surgery when our spinal implants are used. So to the extent we're tracking revenue and products or systems and products used per case, we're approaching two, but we know it's higher than that. We just don't know exactly how much higher because when the Orthobiologics is used in an account that buys it direct through a PO, we just don't have that visibility. But, you know, the good news is the revenue per case is increasing because we're participating in more complex surgeries. With Mariner adult deformity indication on the near-term horizon, that opens up, you know, even more opportunities to take market share in some of these higher revenue per case procedures. Mariner Outrigger, right, that revision system allows us to do longer constructs. So we're seeing good growth in the revenue per case, you know, low single digits kind of consistently every quarter for a number of quarters now.

Great. Thank you very much. That's very helpful.

Sure.

I'm showing no further questions at this time. I would now like to turn the conference back to Mr. Keith Valentine for any closing remarks.

Yeah, thank you, everyone, for joining us today, and I hope everyone has a great evening. Cheers.

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