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.