SeaSpine Holdings Corporation

Welcome to C-SPAN's 2021 Third Quarter Financial Results Conference Call. At this time, all participants are on a listen-only mode. Following management-prepared remarks, we'll hold a question-and-answer session. To ask a question at that time, please press star followed by 1 on your touch-tone phone. If anyone has difficulty hearing the conference, please press star and 0 for operator assistance. As a reminder, this conference call is being recorded today, October 28, 2021. I would now like to turn the conference call over to Lee Salvo of Investor Relations. Please go ahead.

Thank you, and thank you for participating in today's call. Joining me from C-SPINE is CEO Keith Ballantyne and CFO John Bostranczyk. Earlier today, C-SPINE released full financial results for the quarter ended September 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 reflects our beliefs based on current information and speak only as of today, October 28, 2021. For a description of risks and uncertainties that could cause material differences between our actual results and those stated or replied 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.cspine.com and www.sec.gov. Our discussion today will also 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 tables accompanying the news release we issue today. I will now turn the call over to Keith Valentine. Keith?

Thank you, Lee. Good afternoon and thank you all for joining us. The third quarter was marked by sudden and significant disruption to our business starting in early August caused by restrictions on spine surgeries triggered by the rapid spread of the COVID-19 Delta variant. But we are encouraged by the increases in hospital bed capacity we started seeing in October in many of the hardest hit states as COVID cases continue to decline. However, we remain cautious on our fourth quarter outlook as we have recently seen an increase in hospital support staff shortages in certain pockets of the country that may impact fourth quarter surgery volumes. And while our past experience gives us confidence that our surging customers will eventually work through the surgery backlog that accumulated in Q3, we aren't anticipating upside to the fourth quarter because many surgeons' schedules are already full in what has historically been the busiest quarter of the year. While we fully expect to see surgeons work through this backlog of spine surgeries, we believe it will begin in the fourth quarter and take the first half of 2022 to fully play out. Notwithstanding our caution for the remainder of this year, we are very energized by the team's strong execution so far in 2021. Some of the highlights include Our great progress with integrating 7D Surgical into the C-Spine organization. With the ongoing collaboration between the two organizations' sales teams producing a number of leads that we expect to bear fruit in 2022. Our signing an exclusive distribution agreement with Orthopediatrics to further penetrate the pediatric spine market with 7D's flash navigation system technology. are introducing a number of exciting new products and technologies and adding more strategic distributors in key U.S. geographies that position us well to accelerate our market share gains in the spinal implants and orthobiologics markets in 2022. Key product introductions include the full commercial launch of the NorthStar posterior cervical fixation system and the alpha launches of the Mariner Adult Deformity System, four different waveform 3D printed inner body systems to support posterior, lateral, and anterior approaches, and 7D Surgical's percutaneous spine module for minimally invasive surgery. We remain on track to launch a number of new products in the fourth quarter, namely the Admiral Cervical Plate System and the Reef TA Inner Body System which will be important to our revenue growth goals in 2022. Turning to the results for the third quarter, total revenue increased 7.5% over the prior year period to $46.4 million. US revenue, which comprises approximately 90% of our total revenue, increased 5.5% year over year. Growth in the US was once again led by higher sales of our new and recently launched products, which comprised nearly 80% of US spinal implant revenue and more than 40% of US orthobiologics revenue. Surgery volumes increased by approximately 11% compared to the third quarter of 2020, but declined by roughly 5% sequentially Revenue per case declined in the mid-single digits compared to the prior year as COVID restrictions on inpatient and more complex surgeries shifted the revenue mix to a greater percentage of lower revenue cervical procedures. And we experienced mid-single digit average price declines consistent with the most recent quarter. We continue to increase utilization of our spinal implant systems and orthobiologics products per procedure, averaging two products used per procedure in the third quarter of 2021 compared to 1.9 a year ago. Turning to 7B Surgical, we generated $2.1 million of enabling technology revenue in the third quarter of 2021. The pipeline for the fourth quarter is quite robust. as the combined sales organization are capitalizing on the recent successful launch of the percutaneous spine module for minimally invasive surgery, which is generating additional interest and burnout opportunities. We also expect to shift our first 7D units to orthopediatrics during the fourth quarter. In September, we welcomed the return to a live, in-person North American Spine Society meeting. and we're thrilled to be able to feature the 7D Flash technology at our analyst day and our NAS booth, where surgeon and distributor interest was high. We took advantage of this great opportunity to highlight prospective new surgeons and distributors the outstanding safety profile and extremely efficient workflow of the 7D Flash technology. The timing for when we plan to expand that system's capabilities beyond the OR into preoperative planning and postoperative data analytics and how we are integrating our spinal implants portfolio to work seamlessly with this enabling technology platform. The positive feedback we received further confirmed just how novel and how complementary the 7D technology is and how big the future opportunity can be for us. Before handing off to John, I want to reiterate our commitment to innovation and growth. Despite the adverse short-term impact the COVID-19 pandemic had on the third quarter revenue, we did not waver from our plan to invest in the people development projects. An additional inventory and spinal implant sets needed to take market share and consistently grow four to five times faster than the overall supply market. In the third quarter of 2021, we invested nearly $11 million in additional inventory and in spinal implant sets to support growth in the form of launching new products, deploying additional sets of our high-demand spinal implant systems, increasing safety stock for our Orthobiologics products, and building more 7D surgical systems year-to-date. That investment exceeds $32 million, which is more than double the amount invested in the comparable prior year period. Additionally, we recently accelerated various development programs to advance the 7D enabling technology platform beyond the operating room to include preoperative planning and to develop a second-generation camera system. And finally, within the past year, we have hired nearly 50 additional employees. not including the 7D surgical team, an increase of more than 10% to help enable that future growth. These investments are so important to fostering confidence with our expanding distribution network that we can support our and their aggressive growth plans as we emerge from the pandemic. 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 third quarter of 2021 totaled $46.4 million, a 7.5% increase compared to the prior year period. U.S. revenue totaled $41.2 million, a 5.5% increase compared to the third quarter of 2020, and included $1.5 million of enabling technologies capital sales revenue. U.S. spinal implant and enabling technologies revenue in the third quarter of 2021 totaled $21.1 million, a 10% increase compared to the prior year period. That growth was led by the acquired 7D surgical platform as well as new and recently launched products, predominantly those products that were alpha or fully launched within the past two years. The rapid clinical adoption of our most recently launched products is a very encouraging sign for the growth they can drive in 2022. U.S. orthobiologics revenue in the third quarter of 2021 totaled $20.1 million, a 1.3% increase compared to the third quarter of 2020. That increase was once again driven by growth in the OsteoStrand Plus product. International revenue in the third quarter of 2021 totaled $5.2 million, a 26% increase compared to the prior year period, and included $600,000 of enabling technologies capital sales revenue. Growth in Europe for spinal implants and orthobiologics was particularly strong due to timing of stocking orders. We recently informed our European distributor partners of our plans to reorganize our sales and marketing support for that market to be based from the US, similar to the successful model that we utilized to manage the Latin America and Asia Pacific markets. This restructuring, which will result in the closure of our Lyon, France office and the elimination of all the positions based in Lyon by the end of this year, is expected to generate more than $1 million in annual savings per year starting in 2022. We recorded severance and other restructuring charges totaling $1.7 million in the third quarter associated with this restructuring. In our news release, we also provide comparisons to our revenue results for the third quarter of 2019, as the impacts of COVID-19 on our business make the comparison to that period a useful supplemental metric to measure growth. Gap gross margin for the third quarter of 2021 was 60.6%, compared to 67.4% for the third quarter of 2020. The decrease in gross margin was primarily due to $1 million of technology-related intangible asset amortization and $400,000 of inventory purchase accounting fair market value adjustments associated with the 70 surgical acquisition, plus $1.3 million in higher excess and obsolete inventory charges recorded in the third quarter of 2021 in connection with the full commercial launches and additional set deployments of numerous spinal implant systems in 2021. Recall that in the third quarter of 2020, we were still limiting our investments in additional spinal implant sets due to the ongoing uncertainty with respect to COVID-19 and the unknown timing for when spinal implant surgery volumes would rebound and how sustained they would be which resulted in an unusually low amount of excess and obsolete inventory provisions recorded in that quarter. Adjusted gross margin, which excludes technology-related intangible asset amortization and inventory purchase accounting fair market value adjustments, was 64.3 percent for the third quarter of 2021, fairly consistent with the 64.5 percent recorded for the second quarter of 2021, and a decline from 68 percent reported for the third quarter of 2020. The ongoing execution of more full commercial product launches of spinal implant systems in 2021 has generated 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 third quarter of 2021 totaled $46.4 million, a $10.6 million increase compared to $35.8 million for the third quarter of 2020, and included $3.4 million of operating expenses directly attributable to 70 surgical, and a $1.7 million charge related to the aforementioned restructuring of our European sales and marketing organization. The increase in operating expenses was driven primarily by $5.4 million in higher selling and marketing expenses, the substantial majority of which relates to 70 surgical operating expenses, plus increased commissions, headcount, travel, and trade show spending. $2.7 million in higher general administrative expenses, which included the $1.7 million restructuring charge for Europe, $400,000 of 70 surgical operating expenses, and $200,000 in legal and other professional fees incurred in connection with the 70 surgical acquisition integration, and $2.3 million in higher research and development expenses, which included $1.3 million of 70 surgical operating expenses and a $500,000 charge related to the acquisition of certain intellectual property applicable to our spinal implants portfolio. Net loss for the third quarter of 2021 was $17.6 million compared to a net loss of $6.6 million for the third quarter of 2020. Adjusted EBITDA for the third quarter of 2021 was a loss of $7.4 million compared to a loss of $100,000 for the third quarter of 2020. The increase in adjusted EBITDA loss was primarily the result of a number of items, including the adverse impact on our revenue from the COVID-19 pandemic compared to our original expectations for the third quarter, the $1.3 million increase in excess and obsolete charges I discussed previously, the roughly $1.7 million dilutive impact 70 surgical had on the quarter, and because we incurred significantly lower operating expenses in the third quarter of 2020 from essentially no travel or trade show activity, and as a result of the many targeted headcount and spending restrictions we had implemented due to the ongoing uncertainty with respect to COVID-19 at that time. As Keith mentioned earlier, we firmly believe that severe COVID-19-related restrictions on spine surgery volumes is a transitory event that will eventually pass, and therefore we have invested aggressively for the long term in the people, development programs, and assets we need to take market share and grow four to five times faster than the overall market. Adjusted gross margin and adjusted EBITDA loss. Our non-GAAP financial measures that we believe provide valuable information on our operating results that facilitate 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 news release we issued this afternoon. Cash and cash equivalents of September 30, 2021 totaled $102.4 million, and we had no amounts outstanding under our credit facility. Our free cash flow burn, which includes operating cash flows and purchases of property and equipment, was $17.9 million for the third quarter of 2021, a $10.7 million increase compared to $7.2 million for the third quarter of 2020, and was $39.3 million year-to-date 2021, a $15.7 million increase compared to $23.6 million for the comparable period of 2020. Those increases were primarily attributable to the larger adjusted EBITDA loss and higher investments in inventory and spinal implant set bills and instrument capital expenditures needed to support the greater number of full commercial launches in 2021 and our expectations for accelerated revenue growth in 2022. Turning to our financial outlook for 2021, we now expect fourth quarter 2021 revenue to be in the range of $54 to $55 million, reflecting growth of 16% to 18% compared to the prior year period, and 23% to 26%. revenue. For full year 2021, we expect revenue to be in the range of $190 to $191 million, reflecting growth of 23% to 24% compared to full year 2020 revenue and 19% to 20% over full year 2019 revenue. Our revenue guidance contemplates that While the situation is certainly improving and encouraging, there are longer-term effects that result from the immediate disruptions caused by COVID. We believe that even after the immediate and direct impacts subside, it will take more than one quarter to fully recover. In addition, COVID is still disrupting surgeries in certain geographies, and hospital staffing shortages will likely adversely impact the usual seasonal spike in spine surgery volumes we experienced in the fourth quarter. However, while we're not yet providing formal revenue guidance for 2022, we are more optimistic about spine surgery volumes returning to pre-COVID levels on a sustained basis in 2022, and that we will consistently grow four to five times faster than the overall spine market, as Keith mentioned earlier. We expect our free cash flow burn for full year 2021 to be between $55 million and $58 million, which is influenced both by the adverse impact of COVID-19 on our revenue this year, along with the continued investments we have and plan to continue to make in the fourth quarter, both in the form of additional inventory and spinal implant sets to support upcoming full commercial launches, such as Admiral and Reef TA, as well as the deployment of more sets of our higher-demand systems, such as our Northstar and Waveform 3D-printed inodontic systems. At this point, I'd like to turn the call back over to Keith.

Thank you, John. With the acquisition of 7D Surgical and the launch of many exciting and differentiated new products in 2021, we have transformed C-Spine into an organization that we believe has the most clinically relevant spinal implants and the most efficient and effective enabling technology to meet surgeons' evolving needs, and one that represents an attractive partner for distributors to grow their business with over the long term. Our commitment to invest for growth and innovation will not waver, and we will seek to remain a nimble and agile leader and market share taker in Spine. And none of this would be possible without the more than 500 focused and dedicated employees who embody the passion of what C-Spine has become. With that, we will now open it up to questions. Operator?

Ladies and gentlemen, to ask a question, you will need to press the start and the 1 key on your touch-tone telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A raster. Now, first question coming from the line of Matt O'Brien with Piper Sandler. Your line is open.

Hi, this is Karine on for Matt. Thanks for taking the question. So first on your commentary for Q4, can you just expand a little bit on some of the things you've been seeing that give you the confidence in that guidance range, but also touch on some of the softness in the guidance range versus prior expectations? And then also on your commentary around 2022, What are some of the trends that you're expecting to continue into the early parts of the year? And when should we start to see a return to more normalized volumes in 22? Thank you.

So, yeah, you bet. Thanks for the question. So, you know, probably the best way to answer is to give a little bit of insight on what we discovered at NASS, at the North American Spine Society, you know, spent years. time at the booth and was able to talk to a number of surgeons. And every surgeon kind of asked a similar question in that, you know, how does this compare to typical non-COVID-related Q4s? And that's why we have the comfort that everyone said that they're, you know, they're quite booked up through Q4. And the second part of that question for everyone was, you know, do you see after the recovery last year, A number of hospitals were going to additional hours in the OR and they were going to even weekend schedules. And so the question was, do you see some of that coming down the pike in the fourth quarter? And typically most were answering that, you know, listen, we don't have the staffing to be able to do that kind of stretch like we did last year. And so we're just focused on, you know, the typical OR schedule, that we have, and right now I'm completely booked up. So that's why the commentary behind that was we don't see kind of a huge stretch going on in Q4. And we're still dealing with some intermittent slowdowns, but largely not like we were last quarter. And so we still feel good about how the quarter will continue to wrap up. I mean, we do have to face Thanksgiving and Christmas where last year we That was a little bit higher of transmission going on, but it certainly appears that it's very promising how things are declining. So when you look at it for next year, kind of hard to tell. But our feeling is that most of that backlog should get consumed in the first quarter, if it is going to get consumed. And, you know, we fully expect it will. I just, again, we have to see that all hospitals are back and they feel comfortable from a staffing and from a, you know, beds perspective.

That's super helpful. Thank you. And then just one more on our end. Can you just talk a little bit about the pricing declines that you mentioned? Is this strictly just due to the case mix, or do you think this is a trend that might persist longer into 2022? Thank you.

Yeah, the pricing declines we talked to generally for the industry and even our own experience have been low to mid-single digits. More often than not, we see low single-digit price declines. This quarter was mid-single digit like the prior quarter, but I think it's too early to call it a trend because we are launching new products, and typically that's where you can get a price premium and maintain pricing. So I think we'll shift back to sort of the low single-digit price declines that we've seen in the past, and I think are slightly better than the overall spine industry, which is consistently seeing, you know, year-over-year price declines.

Thank you.

Our next question, coming from the line of Ryan Zimmerman with BCIT. Your line is open.

Hi, good afternoon. This is actually Carolyn on for Ryan. Thanks for taking my question. I just turned to biologics for a moment. Thanks. It just feels as though it's gotten a little less airtime as of late from the company. So can you discuss the biologics market a little bit? How is pricing holding in? Is the shift away from stem cell-based products ongoing? And any thoughts on non-DBM products in the portfolio? Thank you.

Yeah, I'll let Bob talk a little bit about the pricing side of things. But, yeah, there's still been a very heavy focus. We continue to be driving the science in and around, you know, what we have shown, market-leading DBMs. So we still feel very good about the market share-taking strategy. There absolutely continues, we feel, to be declines in opportunity because of the sell-based challenges there. In addition to that, yes, we are working on future opportunities, and we'll have product launches as we get through next year on the synthetic side. So we continue to invest in R&D on the orthobiologic side, but feel very good about the continued momentum of our DBMs for sure, and also feel good about our supply stream and the efficiency of our manufacturing.

And on the pricing side, that's been historically a more stable market in terms of pricing than the spinal implants market. And we're seeing, you know, continuation of that trajectory. No real change in terms of the pricing environment for orthobiologics. Pretty stable.

Thank you. Our next question coming from the line of Matthew Blacksmith with Stiefel, Yolanda Salfin.

Hi, Colin. I'm from Matt. We've spoken with a number of surgeons over the past month, and in particular, a number of regions hit hard by Delta, surgeons based out of those. And we're hearing that the surgical calendars are pretty much booked four to six weeks out, and that these docs in the hard hit areas particularly are hopeful that 4Q will be more like a pre-COVID environment with regard to volumes. So the first question is, what are you hearing on volumes? Is it more complex than what I kind of just outlined? And then second is, We're hearing about staffing shortages like you, but we really haven't found any docs who have called that out as an issue. Are there particular regions or types of facilities where this is a prominent issue? Just any more color there would be really helpful. Thanks.

Yeah, so I don't know if I can give you much more color than the previous question about us having consistent dialogue at NASS with the surgeons. You know, very consistently, each and every surgeon talked about having a very solid book of business for Q4, book of surgeries already scheduled. So I think that's consistent. I just had a dinner this week with a surgeon, and he mentioned the exact same thing from the Midwest area. So I do think that across the country, this is a typical Q4, but the challenge again goes to staffing? And do hospitals have the ability to flex and work longer hours in the OR or maybe even work weekends? And I think that's where we're seeing less and less hospitals saying that they're going to be able to flex time and actually bring in more of the elective surgeries that got pushed. And I do see that continuing in the fourth quarter pretty consistently across the country, but we'll see. I know having a conversation even a couple weeks ago In the Detroit area, they were commenting on the same thing, that feel great about how busy it is, but they really don't think they're going to get more hours or weekend time out of staffing challenges.

Okay, thank you. And another question, you've made two commercial announcements on 7D these last couple of months with the Visian contract and the orthopediatric distribution agreement. Can you give us some context on the opportunities for each of these? and how big a potential contribution to your overall 70 business these two announcements could have over, say, the next 12 months?

Yeah, you know, I think that both of them present, I think, or demonstrate specifically the uniqueness of the technology and I think also the ability of this technology to continue to scale. And I think the Vizient certainly recognizes not only the importance of eliminating radiation, certainly reducing extremely limiting it, if not eliminating. And then secondarily, I think it's also about, you know, how consistent that team and that group have been about bringing out new technology, whether that's software upgrades or actual entire modules that get into new areas of spine care, such as the newest minimally invasive alpha launch that's going on. And I think that was a you know, a recognition. Now, what it presents is we get a different conversation with that Vizian group of hospitals. And so, we're excited about taking advantage of that. We're also excited about the fact that in a number of those accounts, we may not have very much business. And so, this gives us an opportunity to possibly have earn out or an outright sale. And, you know, again, the secondary one with orthopediatrics, I think that they have demonstrated a real leadership in the market in this, you know, this pediatric space. And I think it creates a real benefit for them to also be able to offer an earn-out possibility, not just only for pediatric spine, but also for other applications in their pediatric bag, if you will. And whether those are trauma-based or whether those are other bone fixation opportunities, we look forward to advancing the system so that it can also do other applications of orthopedic surgery in the pediatric setting. And we feel good that it's a strong partner. It's a partner that we also think is a very innovative company. And we feel that it's all about installed base. And if we have a partner out there that's helping with the installed base, It could be a win-win for both their product line but also for our product line, too, if it's sitting in that hospital.

Awesome. Thank you.

Our next question coming from the lineup, Kyle Rose with Canaccord. Your line is open.

Great. Thank you for taking the question. So I wanted to see if we could just touch on some of the trends, I guess, through the month of October as Delta has wound down a little bit. Are you seeing those complex cases come back and what the overall mix in procedures looks like? And then a little bit of a big picture on 7D. It's good to see the $2.1 million in the quarter. Help us understand really what does that look like as far as cross-selling and the type of opportunities you have from a longer-term perspective there and how we should think about that trending into 2022. Thank you.

Yep, on the first question, complex surgeries, yeah, I'd say midway through October we started seeing a shift back to a more traditional mix of procedure volumes on the more complex surgeries. I think that timed very well with our recent launch of the Mariner Adult Deformity System and Alpha launch, so it's great to be able to take advantage of the return of more complex surgeries with that shift. new platform and extending the Mariner technology into adult deformity. And, you know, without commenting too specifically on the October results, we are up over last year. If you recall last year, you know, it was a strong start to the fourth quarter. So I'm encouraged that despite the fact, as Keith said, there's still pockets of COVID-related disruptions throughout the country and staffing shortages seem to be becoming a bit more common in living the upside on surgeries. I'm still happy to say that we're up year over year, and I think that bodes well for the informed guidance we gave on how we think Q4 shapes up because COVID cases continue to decline and we continue to see week by week more and more hospital capacity. We're not at normal yet, but I think we're training in the right direction, which gives us the confidence for 2022, getting back to pre-COVID levels on a sustained basis.

And on the second part of that question, there was the opportunity with the Salesforce. I think as you remember, it's great that we've kept the Salesforce complete, meaning the capital equipment side of the Salesforce for 7D remains complete. And what we really focused on is continuing to better integrate with our sales management teams. Another item we're doing is making sure that when we have coast visits, whether that's for a distributor, whether that's for a surgeon, whatever guests come through the office, we have a 7D demonstration and opportunity as well. And so what we've seen is that there just isn't, being a smaller, newer player on the market, you can't present, there can't be more awareness, meaning you have to constantly be showing the technology and what its benefits are. And so we've been really excited by the fact that surgeons that are coming through, whether they're aware of it or not, end up being very impressed with how the system works and the necessity for radiation, right? We're doing a demonstration with no C-arm present. And that really makes a profound impact. And so we're seeing a great deal of leads being generated, and we're working together now as both an implant team and a 7D team to classify those leads and move them down the direction of whether it's an outright capital sale or whether it ends up being an earn-out. Great. Thank you.

And our next question coming from the lineup, Brandon Hooks with Cantor Fitzgerald, the Atlanta South Bend.

Hi. Thanks for taking my question. I just want to drill down a little bit more into the revised guidance for the year. You know, a lot of headwinds that are out there are obviously out of your control. But I'd love to get some commentary in terms of, you know, how do you feel about where procedures are getting done compared to, you know, your expectations at the beginning of the year for product usage? You talk about, I think, an average of two products per procedure during the quarter. Granted, it's up from last year. But I'd love to just get insight into how does this compare, you know, from your earlier expectations? How are you tracking? Would be great. Thank you.

Yeah, I think the utilization of products and systems for procedures continue to creep up, which is exactly what we wanted and expected as we try to own the OR. If we're going to have the inner body case, we want to have the posterior fixation. And if we have the posterior fixation, we want to own the inner body. And in both of those examples, we want to own the orthobiologics part of the procedure. As we continue to expand the portfolio, I think we've got greater opportunity to participate in more of the procedure, and 70 only further enables that. So we're increasing as anticipated. In terms of surgery volumes for the fourth quarter compared to our original expectations for the year, you know, I'd say they're meaningfully down from where we thought we'd be, mostly because COVID, right? We know that there's certain pockets of the country where things are far from normal. They're still experiencing COVID-related disruptions because there's too many sick patients in the beds, which is unfortunate, but also because we're seeing, you know, an increasing number of staffing shortages that's not only impacting the ability to have upside, you know, procedures to work through the backlog, but, you know, our concern is it risks the typical seasonality pattern of Q4 being the most busy quarter of the year, as Keith indicated. You know, I think some institutions may be strain just to be able to service the usual amount of procedures you see in a Q4. And that's why the guidance we gave was, you know, I'd argue it's cautious, it's below our original expectations for a number of reasons, but I still think being able to take that kind of market share and grow in this environment is a testament to the great distribution we've added this year, to how we've really rounded out the portfolio and with our 3D printed inner bodies, now Mariner, Deformity, and all of the other products going into full launch this year, like Northstar, we feel like we're in a great position. And that's why we went through great pains to point out multiple times, we think we're going to consistently grow four to five times the market. I don't know where the market lands this year because of the COVID disruptions, but we feel confident we'll grow four to five times it. We're feeling more confident next year, right, as things continue in this trend, that we could get back to a typical pre-COVID level of surgeries, and whatever growth rate that is, we'll be growing four to five times that. So, you know, that's the confidence we're trying to convey, and where we're at as an organization with our products and distributions is to continue to aggressively take market share. But, you know, that being said, Q4 is definitely being impacted by COVID in certain pockets, whether it's, like I said, sick patients taking up beds and limiting hospital capacity, hospital's ability to do surgeries or staffing shortages that's limiting that. We're seeing it in various pockets of the country still.

Could I ask one more, if you don't mind? I think the staffing shortages you call out, I think we're hearing this across a number of industries. So I'd love to just get your color. How do you feel about your supply chain? Obviously, you keep a healthy inventory balance, but Is anything there we should be watching as we sort of look out to the growth in 2022 that sort of may have a knock-on effect in a couple months?

Yeah, it's something we've monitored closely since the beginning of COVID. I think the bigger or better relationships that we've developed with our suppliers on the spinal implant side has helped. The fact that we've placed orders since COVID started and have increased those orders as we've invested for growth And, you know, I assume we're one of the few customers that's been increasing volumes throughout the COVID uncertainty. So I think the fact that we've kept all orders intact, we've increased our ordering volume, we've tried to consolidate suppliers and become a bigger customer with those suppliers. We've, you know, added a lot of headcount to our supply chain team, particularly on the spinal implant side, so that we can pay closer attention to those suppliers and build better relationships. So fortunately, We have not seen any disruption and we know from talking to those suppliers week by week, day by day, they've had some production capacity issues because of sick employees because of COVID. But thankfully we have not missed a beat because we've been on top of it from day one and continue to stay on top of it. So I feel good about what we've done there and the relationships we've built. That being said, there's still obviously, you know, risk in the supply chain that we need to continue to monitor. One other topic we brought up in the past is just, you know, the chip shortage globally. It does potentially have an impact on 7D, but right now we have enough chips in-house and chips on order and expected to get chips in that it should not interfere with our growth plans for 7D. But again, it's something very real that we're continuing to monitor demand versus supply and know that we've got orders in with those suppliers and based on their time for feedback to us on lead times, we don't anticipate it creating any issues, but it's something else we'll continue to monitor.

Right. Thank you very much. Sure.

Our next question coming from the line of Jeffrey Cullen with Lattenberg Tallman.

Hi, Keith and John. Thank you. This is actually destiny on for Jeff this afternoon. Just a quick. Hi, I just want to circle back to a couple of questions on 70. I know you've already gotten a ton, but I'm curious. Is your sales force noticing a more rapid progression from the time of interest through the, the full process to the signing of a contract, given that these hospitals are booked up, understaffed, and looking for efficiency?

Are you talking about from a sales cycle for 7D or for general implants as well? 7D, thanks. Yeah. Yeah, we haven't noticed a significant lag. I mean, you know, it's kind of interesting that if you look at all the different leads that that some progress at a relatively predictable pace, others may get pushed, right? So the capital equipment budget or how they're looking at other technologies may push it longer. We've had a couple just recently that also actually progressed quite rapidly. So when you look at it, I don't know if we're able to say there's a specific trend at present.

Okay, got it. Thank you. And then I'm just curious, for the sales and marketing around 70, it is significant. So I'm wondering, how long do you think that type of investment is going to be required in order to really gain the commercial traction you believe you can gain?

I think we'll continue to make investments at that level, but we also anticipate there's going to be a payoff where we see increasing volumes of 70 units being sold or placed under an earn-out. So I think it's just similar to the spinal implants business from a few years ago, we need more scale, right? We want to continue to make those investments in the sales team, the infrastructure, the marketing team, because we just need more scale to grow. And I think that's what the point of those investments are. And I don't anticipate the level changing, but I do anticipate the revenue increasing, which would make them less dilutive in the near term.

Right. Got it. Thank you. That's very helpful. I'll jump back in queue.

Next question coming from the lineup. Hi, guys.

Thanks for taking the question. I'll just start off with 7D here. And if there's any sort of operating metrics you can give us around the system or any color you can give us sort of around what you're seeing in terms of utilization per system or the mix of C-spine implants being utilized per case on the system? Just any kind of commentary you could give there would be really helpful.

Yeah, I think the one thing I'll say is even in the absence of an earn-out where we've sold a unit, it might have been a unit sold in the past or one that the team is working on now, The 70 capital sales team has introduced our sales management team and our local spinal implants and orthobiologics distributors, and we've seen non-contractual pull through, you know, even in the absence of an earn-out. So those introductions are turning into sales, and I think we've had a couple of nice wins in the northeast of recent months. So, you know, we're getting traction because of those introductions, and some of those are units that were sold a year, year and a half ago, right, where we've got a, the 7D team has a great relationship, and they're introducing our distributors because the surgeon really likes the technology, and we get an opportunity to show them how we're integrating our implants to work seamlessly with 7D's system, and it really, you know, catches their interest, and vice versa. We'll have a surgeon come here for one of our COSA visits where we give them a, you know, a one-day overview of our products and systems, We have a 7D demo unit here. We've got one in the lab. In a lot of cases, they may not come here very interested in the technology because they're more focused on our spinal implants and orthobiologics, but we put it as part of the agenda. Once they see the technology, they're surprised with just how good the technology is and the no radiation, how seamlessly it fits into the workflow, being able to register patients in 30 days. I think those, you know, it's working both ways. The introductions of the 7D team to our distributors is paying off, and the introduction of surgeons to the 7D technology from a visit to C-Spine to focus on the orthobiologists and spinal implants is paying off as well.

Great. That's really helpful. Thanks. And then just with the, you know, congrats on the 2.1 million in the first full cohort here. You know, we kind of think about that being about four units sold out, right? I mean, would that, does that sound about right to you? And then sort of any color you may have on placements from earnouts and then just, you know, pulling back a little bit. Any kind of color on the broader capital environment, you know, with these staffing shortages coming up and, you know, a lot of resources being dedicated towards that side of the aisle in hospitals. Are you seeing anything coming out of capital budgets in your discussions?

Hasn't come up as a gating item or an issue. As Keith said before, we still see the sales cycle about being the same. And we're, what, five months into the acquisition now where both teams are fully integrated and working on the pipeline. So I suspect we'll see more earnouts in the coming months just because given a nine to 12-month sales cycle on the capital side, a lot of those deals that we're closing on now are already in the pipeline for capital deals, but now both sides The 70 sales team and our sales team were incentivized equally for an earn-out versus a capital sale. So I think now you'll start to see an increase in some of the earn-out opportunities given the typical sales cycle timeline for a piece of capital.

Got it. And then I know you've answered a lot of questions about staff shortages already, but I'll just hopefully ask you one more to put a pin on it. I know a lot of the discussion has been about inability to flex up capacity and that limiting the ability to realize backlog, but you know, in your eyes, is there, is there any risk of, you know, increasing staff shortages leading to 2022, not being able to grow in line with more historical ranges, or is it strictly a risk towards the backlog realization at this point in your eyes? Thanks for taking the question.

Yeah, I think at the, at the levels we've seen and, you know, anecdotal feedback from talking to our distributors and our sales teams, I think the level of staff shortages that we've seen now is more of a constraining event on upside to Q4 or being able to hit the relatively high Q4 volumes. I don't see a big risk at this point unless something meaningfully changes in the future. I don't see the staffing shortages that we've seen and the impact they've had so far being a material limiter for next year because Q1 is typically the slowest quarter per year in terms of spine surgery volumes. Q2, there is a big pickup, but we've still got five or six months before that becomes a risk. But I think, again, just based on the anecdotal evidence we've got, it's just more of a limiter to the upside of Q4 and even being able to sustain the typically high Q4 surgery schedules is all we're seeing the risk for now.

Our next question coming from the lineup, Jason with Loop Capital. Your line is open.

Hi, thanks for the questions. So you guys have been working pretty hard to upgrade and expand distribution. I wanted to know what the latest was on that and specifically, I'm sure it's affecting this quarter, but is the anticipation that the dividends will be greater next year? given the amount of time and et cetera it takes to get people back on board and expand the relationship.

Sorry, Jason, you were cutting up there. Can you hit the last part of that question again?

Oh, sure. I was asking about distribution and sales in terms of the progress you've made thus far and whether sort of what inning we're in in terms of do we expect a further expansion next year or also some of the changes you've made, are they more likely to pay dividends into next year than into this year, given the amount of time it takes to onboard and expand some of the distribution.

Yeah, I think you're thinking about that spot on, that a lot of the bigger moves that we made this year were getting momentum, but see that next year will be the opportunity to really get them being past, if you will, that learning stage. Yes, and we are also planning and continuing to recruit, you know, quite aggressively on larger distributor models. And so we feel good about it. We feel good about how they want to partner, how they want to commit. And it kind of gives a good backdrop to why we're making the investments we're making on the inventory side to make sure that when we bring these folks aboard, they're comfortable that we can keep up with their demands.

Okay. So if I think about the growth you saw this quarter, obviously COVID was an impact, but is there, from a general ballpark standpoint, I mean, how much of it related to distribution, how much related to all the new products that you're introducing?

It's impossible to quantify. I mean, the mid part of August, all throughout September were meaningfully disrupted by COVID. You know, not just the surgery vines, which is most impactful to revenue, but, you know, it also limited surgeons' ability to travel, right? Their hospitals were limiting their travel schedules. So the surgeons and distributors that we wanted to get into Carlsbad weren't able to get in to get their hands on the product, right, to learn more about C-Spine, which, you know, those are co-services or company overviews. That's one of the greatest you know, recruiting tools for distributors and spine surgeons is just get them in our lab, get their hands on the product, meet the management team, meet the company, and understand our culture and spend a day here in Carlsbad. So there was a pretty big gap in, you know, some of the surgeon visits we had scheduled that got canceled and we're rescheduling. So the encouraging thing is we're rescheduling them and, you know, we're hosting multiple surgeons and distributors Every week we've actually got a distributor here today and an unrelated surgeon here today. So we're seeing those come back and get rescheduled. It's just there was a time period in August and September where not just spine surgery volumes were impacted, but just the opportunity to meet new surgeons and distributors is going to impact the fourth quarter growth because we just couldn't get them in because of the travel restrictions.

Okay. Yeah, and I think, too, that the other difficulty to it, too, is the distributors are coming aboard, and some of the larger ones that have an opportunity are dealing with kind of these fits and starts that are going on. But that said, I also think that they're also the ones that are most bullish on the conversations they're having with surgeons on how the recovery will look. So, you know, again, we feel good that as long as we don't get another uptick, that we're going to see continued strength for the fourth quarter until we then get some of that surgical backlog sifted through at the beginning of next year.

Okay. That's very helpful, actually. And on the orthopedics-pediatrics relationship, is 7D now fully functional and to work with some of the trauma products, et cetera, or is there some development work that still needs to be done there?

There'll be some development work. That's part of the partnership is to, you know, customize some features of the system working with the pediatrics team. So some of that to come.

Okay. And I don't know. I think you were initially when you acquired 70 did give some kind of revenue contribution for this year. Obviously, August, et cetera, changed a lot of the outlook for a lot of companies, including yours. I don't know. Did you give an indication for what the 70 impact or contribution might be for the fourth quarter in the guidance that you provided?

We have not. We have not. We did provide 70 revenue contributions back in March when we initially announced the – sorry, in May when we announced the closing of the acquisition, but Obviously, COVID had an impact on all those expectations back from May, and we're not providing color on center capital contributions because, as we've said on a lot of prior calls, if every unit we place is under an earn-out, I'll be the happiest person in the room because of the ability to access accounts, stay in those accounts through an earn-out period. I don't want to set expectations for a capital revenue number, and if we end up placing more units under an earn-out, we might miss that capital revenue, but it's better long-term financially to have those earn-outs. So we're not going to provide that kind of color on 70 capital revenue contributions.

Okay, understood. Thank you very much. I'll jump back on cue.

Great, thanks.

I'm showing up for the questions at this time. I would now like to send a call back over to Mr. Keith Valentine for any closing remarks.

So, again, thank you, everyone, for joining us, and we will chat again sometime in the early first quarter. Thanks again.

Ladies and gentlemen, that's our conference for today. Thank you for your participation. You may now disconnect.