Q1 2021 SeaSpine Holdings Corp Earnings Call

Welcome to <unk> 2021 first quarter.

Financial results conference call at this time, all participants are in a listen only mode. Following managements prepared remarks, well hold a Q&A session to ask a question and at that time. Please press star followed by one on your Touchtone telephone and.

If anyone has difficulty hearing the conference. Please press star zero for operator assistance as a reminder, this conference call is being recorded today may three 2021.

I would now like to turn the conference over to you and the Savo Investor Relations. Please go ahead.

Thank you and thank you for participating in today's call joining me from <unk>, CEO, Keith Valentine and CFO John bus Janssen.

Earlier today <unk> released full financial results for the first quarter ended March 31 2021.

During this conference call, we will make forward looking statements within the meaning of federal securities laws in regard to our business strategy expectations and plans our objectives for future operations and our future financial results and 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 may three 2020.

One.

For a description of risks and uncertainties that could cause material result 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 stepped up that that's C spine dotcom and it jumped up out that said that Gov.

Our discussion today will also include certain financial measures such as adjusted EBITDA losses that are not calculated in accordance with generally accepted accounting principles or GAAP.

Management believes that the presentation of these non G. A a P financial measures.

And provides important supplemental information and management and investors regarding financial and business trends relating to the companys results of operations.

Non-GAAP financial measures should not be considered a replacement score and should be read together with the most directly comparable GAAP financial measures.

Reconciliations to the most directly comparable GAAP measures are provided in the tables accompanying the press release, we issued earlier today I will now turn the call over to Keith Valentine.

Keith.

Thank you Leigh good afternoon, and thank you all for joining us.

Slow start for the first quarter due to restrictions on spine surgery.

And from the winter COVID-19 surge I couldn't be happier with how strongly we closed the quarter.

We saw a positive inflection point in late February and that momentum continued throughout March and April.

Our favorable outlook for more robust spinal surgery volumes for the remainder of 2020, one coupled with the anticipated contribution from our pending acquisition of 70 surgical and we're poised to continue to take market share and just.

Further accelerate revenue growth.

And we sit and 95 million equity financing, we closed in mid April and significantly strengthened our balance sheet and that will help fund the cash portion of the seven day surgical acquisition.

And while also providing additional growth capital for us to deploy more of our spinal implant set to meet the rising demand for those systems and to support the limited and full commercial launch of over it doesn't work for biologics products and spinal implant systems currently and our pipeline for 2020 one.

Those factors remain important and exciting catalysts for seaspan and to attract more exclusive distribution partners and for our existing distributors and sales reps to penetrate deeper and their territories.

For the client and COVID-19 cases, and the U S and and ever increasing population of individuals' getting vaccinated. We believe we now have enough confidence and our market visibility to provide revenue guidance for full year 2021 of 25% to 28% organic growth over 2020.

And 30% to 33% growth over the prior year, including approximately six months of anticipated revenue contribution from 70 sugarcoat once that acquisition closes.

Turning to our first quarter results in line with our announcement and April total revenue was $42 million.

<unk> 16 per cent increase compared to the prior year period, and the U S, where we generate approximately 90% of our total revenue, we posted 18% year over year growth.

In the U S growth was once again led by higher sales by our core distributors for recently launched products and line extensions.

Typically new recently launched products comprised 74% of U S spinal implant revenue and 39% of U S sports for biologics revenue once again, our growth came from increased spinal implant surgery volume and from higher revenue per case, we also benefited from increased utilization.

Utilization of our spinal implant systems, and ortho biologics pod products per procedure.

We believe EBIT results of the more complete and complementary product offerings, we market today for.

For the first quarter of 2021, there was an average of 1.9 C spine products and systems used per procedure compared to 1.8, and the first quarter of 2020.

For the first quarter of 'twenty, 'twenty, one and our core distributors collectively generated 59% of our total U S revenue, we expect to drive further growth and the U S from our tenured core distributors hiring additional sales reps to penetrate deeper into their existing territories as well as from recently on book.

<unk> core distributors and <unk>.

Previously under served markets.

Teaspoons reputation for constant innovation now coupled with the value proposition of the 70 surgical image guidance platform will be important catalyst and driving this progress.

And to 70 surgical and we remain on track to close the acquisition before the end of the second quarter and we've already started integration planning with the 70 gene.

In addition of 70, surgical's, enabling technology and experienced capital sales force to the C. Spine family has sparked a lot of new conversations and interest and see spine from current and potentially new distributor partners and surgeons.

The acquisition is also expected to give us even more flexibility to place units or 70 system.

And a capital efficient manner with hospitals and a S sees that may not have sufficient capital budget for the outright purchase of the unit.

Finally, we look forward to collaborating with seven Gs software engineers to accelerate development programs to further extend the capabilities of the 17 platform with preoperative planning software being a top priority.

With respect to our product launches during the first quarter of 2021, we initiated the alpha launches of the wave form T. A articulating and wait for T. O T lift oblique three D printed interbody implant systems, we expect.

And to launch two more three D printed lumbar interbody systems in 2020, one and one for lateral approach and another for anterior approach. We also fully launched the week T O inter body system, featuring yeah, it'll mentally and surface technology and topography.

Including the two more planned additions to our three D printed interbody portfolio, we remain on track to deliver on our commitment to launch more than 12 products and line extensions in 2020 one.

Some of the more notable launches include the Alpha launch of the next line extension of our foundational Mariner platform with an adult deformity indication and the full commercial launches of our Northstar Oh C T system for posterior cervical fixation.

Sport T O expandable interbody device they'll wait for them and see three D printed interbody implant system and the Admiral anterior plating system.

Full launches in particular are expected to be significant contributors to revenue growth in 2020, one and beyond.

Continued investments and product innovation and and the development deployment, rather have more of our highly utilized foundational spinal implant systems combined with our best in class D. B and portfolio gives our larger and increasingly exclusive distribution network confidence that we could support there.

Crescive growth plans as we emerge from the COVID-19 pandemic maintaining their confidence is so important to our efforts to further capture market share and with a stronger balance sheet. We now have the recent financing we have even more flexibility and opportunistically invest for growth and <unk>.

Now I'll turn the call over to John for more details on our financials and our financial outlook, then I will wrap up John.

Thanks, Keith and good afternoon, everyone.

As Keith noted earlier total revenue for the first quarter of 2021 was $42 million and 18 for saying year over year increase and sales per day, which accounts for one additional selling day and the first quarter of 2020 compared to this year and a 16% increase as reported in the U S.

Posted a 20 per cent increase and sales per day, and 18% reported growth.

International revenue increased by four per se to $4 $5 million.

U S spinal implant revenue and the first quarter increased 29 per se on a sales per day basis for $18 $4 million.

That growth was led by new and recently launched products predominantly those products they were alpha or fully launched in 2020.

The rapid clinical adoption of our most recently launched products is a very encouraging sign for the growth. They can drive in 2020, one and <unk> and beyond.

Spinal implant surgery case volumes increased by more than 10 per cent and we were able to capture more revenue per procedure with our expanded portfolio.

U S ortho biologics revenue and the first quarter increased 12% on a sales per day basis to $19 $1 million and was once again driven by growth and the austere strength plus brown.

Gross margins for the first quarter of 2021 with $63 four per cent compared to 61 eight per cent for the same periods in 2020.

The increase in gross margin was primarily due to increased sales and the U S of a higher gross margin spinal implant products and lower excess and obsolete inventory provision in relation to revenue.

The anticipated shift to more full commercial launches for spinal implant systems, and 2021 is expected to generate higher excess and obsolete inventory charges relative to prior years from the substantial investment and outsized implant inventory required with the set builds.

However, if that impact notwithstanding we believe that we can continue to expand gross margins by 100 to 150 basis points per year over the next two to three years and before the impact of 70 surgical by 150 to 250 basis points. This year over 2020.

Operating expenses for the first quarter of 2021 totaled $39 $1 million or $4 $1 million increase compared to $35 million for the first quarter of 2020.

The increase in operating expenses was driven primarily by $2 $9 million and higher selling and marketing expenses, the substantial majority of which relates to selling commissions.

One $9 million and higher general and administrative.

<unk> expenses, which was driven by $1.3 million of legal and other professional fees incurred in connection with the pending 70 surgical acquisition.

And $600000 and higher research and development expenses.

These increases were partially offset by a $1.3 million noncash intangible asset impairment charge.

Associated with acquired technology, and we recorded in the first quarter of 2020.

Net loss for the first quarter of 2021 was $12 $7 million compared to a net loss of $12 $6 million for the first quarter of 2020.

Adjusted earnings before interest taxes, depreciation and amortization for the first quarter of 2000, and twenty-one improved by $1 million to a loss of $5 $2 million compared to a loss of $6 $2 million for the first quarter of 2020.

Adjusted EBITDA loss is a non-GAAP financial measure and we believe provides valuable information on our operating results and facilitates comparability of our core operating performance from period to period and against other companies and our industry.

A reconciliation of GAAP net loss to adjusted EBITDA loss was presented and the financial tables for the press release, we issued this afternoon.

Cash and cash equivalents at March 31, 2021 totaled $87 $8 million, and we had $20 million outstanding under our credit facility and $6 $2 million of loans outstanding under the Paycheck protection program.

[noise] amounts do not include the $95 million of net proceeds received in April from the underwritten public offering a five point and 2 million shares of our common stock for the subsequent repayment of the $20 million credit facility borrowings in April.

Our free cash flow burn, which includes operating cash flows and purchases of property and equipment was $6 $7 million for the first quarter of 2021, a $1.8 million increase compared to $4 $9 million for the first quarter of 2020.

And that increase was attributable to higher investments and inventory and spinal implant set build and instrument capital expenditures.

Turning to our financial outlook for 2021, we remain focused on expanding our gross margin and continuing to reduce cash based G&A expenses as a percentage of revenue.

However, we plan to continue to redeploy any operating leverage towards the sales marketing and R&D initiatives and inventory and spinal implant set build capital expenditures that are critical to driving sustained accelerated revenue growth.

As Keith noted earlier, we expect for year 2021 revenue before giving effect to the pending acquisition of 70 surgical COVID-19.

And the range of $193 million to $198 million.

Collecting growth of 25 to 28 per cent compared to the prior year.

Including the acquisition of 70 surgical we expect full year 2021 revenue to be and a range of 200 million for $205 million.

Collecting growth of 30 to 33 per cent compared to the prior year.

We expect to further reduce our adjusted EBITDA loss in 2021 and compared to last year and.

Putting the anticipated dilutive impact of 70 surgical on our P&L this year.

We expect our free cash flow burn for 2021 to be modestly higher than the $47 million that we reported for 2020.

This is due in part to anticipated adjusted EBITDA dilution for 70 surgical this year.

But more significantly from our more than 50 per se and plan to increase in spinal implant inventory and instrument and set build capex investments to support the many full commercial launches slated for 2021 that will be critical to generate accelerated growth expectations reflected in our revenue guidance.

With respect to the 17th surgical acquisition, we expect certain and 70 shareholders elect to receive exchangeable shares at the closing which allows them and it's you defer certain taxable events until they tender those exchangeable shares for shares of seats by and common stock and.

As a result of the roughly $4 3 million shares of <unk> common stock in total that will ultimately be issued 270 shareholders any exchangeable shares issue will not be reflected in the zone. The denominator for a loss per share calculations until the seven day shareholders tendered and there was exchangeable share.

And because of their anti dilutive effect.

There was exchangeable shares which will be treated consistent with common stock equivalents like our issues and stock options and the loss per share denominator must be tendered within five years of their issuance.

At this time, we can't predict the number of exchangeable shares that will be issued and based on the 70 shareholders elections, nor the timing that each 70 shareholder will tender any such exchangeable shares issued and.

That will likely be a decision each 70 shareholder makes based on their own and her personal tax planning.

We will provide additional details on the expected impact of 70 surgical on our 2021, P&L and free cash flow burn after the transaction closes.

With roughly $150 million and cash and cash equivalents, we expect to have on hand after payment of the cash portion of the 70 surgical acquisition consideration.

The additional liquidity that we can access through our $30 million credit facility, which we can elect to expand to $40 million.

Never been better capitalized to continue to invest confidently and aggressively for growth and.

At this point I'd like to turn the call back over to Keith for closing comments.

Thank you John.

And we're all very excited to add the 70 surgical team to the piece my family and to be able to leverage their outstanding enabling technologies to spread our growth influence beyond just the operating room.

That would be additive to our commitment to execute at a high level and our foundational priorities the air transport and see spine and to the organization that we are today.

Namely to timely and effectively develop and launch clinically relevant products to increase the number of core distributors and their exclusivity to see spine.

And to generate above market revenue growth through more efficient utilization of our spinal implants set and to further expand our gross margins we.

We expect to sustain and further increase the double digit revenue growth, we delivered and the first quarter as we continued to emerge from the disruptive impacts of COVID-19 that optimism is fueled by more than 400 and soon to be.

More than 500, passionate and dedicated employees and see spine and 70 surgical and who are motivated by our past successes and are driven to deliver clinically superior cost effective procedural solutions that differentiate us with both surgeons and distributors in this competitive market.

With that we will now open it up to questions operator.

Thank you.

A reminder to ask a question press Star then one on your telephone to withdraw your question. Please press the pound key.

Our first question will come from the line right.

Hypersound.

No.

Oh afternoon, and thank you so much for taking my question, Keith you know the Guy and map.

And then.

And reinstated the guidance, obviously, great to see it as a marked acceleration and the last three quarters.

True.

Okay.

What you've done historically.

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

Yeah, So Matt I think and we've kind of came in a little bit in and out I'm not at the end of it but it sounds like you're just asking how does that shift and an acceleration from a growth perspective, and where it came from you know it really it really has come down to that investment that we kind of telegraphed last year that we would be.

Continuing to invest and and instrument sets and implants range and in coordination with a great deal of Alpha is getting to market and I and I see.

What you saw is there's certainly a pent up demand by our distribution teams for new products. They have done it very good job of working with marketing and helping to get the required surgeries that we need not only and alphabet as we moved some of our products even to full launch and I think what you see is a combination of the investment.

And in that the the Capex investments and those traits coupled with great momentum for.

From our distributors, even newer distributors that are coming aboard that have you know and.

And the opportunity to really take some share and their marketplace for us.

Okay, and sorry, and a bit of a for akamai threat there.

So specifically again, the acceleration that you're expecting and last three quarters is maybe a little bit of pent up demand, but but really more is it more distributors, specifically and adding some more of these folks I'm you know I'm, just and greenfield areas.

Is that really where and it's coming from or is it more and less debt.

Payment that we saw last year.

It's both and actually some of the upcoming full launch is men are going to help.

And.

Treat that acceleration so I'm.

Thinking about the products, we launched last year, they've been really successful and would just and alpha launch right.

Admiral cervical plate them, Rudy and a list inner body, the northstar posterior cervical fixation system right those are.

Launches that'll happen mid year, and then I think one of those later and a year, but those are going to be big catalysts for what we've been able to bring new distributors on board, but also was there hiring competitive sales reps and to their distributors ship. Those are some of the key systems that are attracting those sales reps and new distributors to want to work for cheese.

And you know that.

<unk> and nobody portfolio and now that we can address the entire market. The explore expandable interbody that gives US you know brand new access going into a full commercial launch to the expandable. So.

The good news and it's not just one system piece a lot of systems going into full commercial launch, but if you look at the time and you know the systems that really coincides with the meaningful acceleration and you're pointing out for the rest of the year.

Got it okay since.

And as he was broad based and then and then and then John or Keith and a lot of people like the latch onto the instrument set deployment and with all this extra capital that you. Just raised can you talk about that launch you know numbers for this year and watched numbers for next year. If you wouldn't mind I don't know if you want to keep it close to the basket.

Competitive reasons.

Well and we've talked about it and in the past or and a typical alpha launch for US is 10 to 15 cents and a typical phone launches three extra number of sets. So you know we're probably in the 45 to 50 set range on average for full commercial launch, but there are some systems that will probably deploy more rate based on the demand expectations.

For those systems. So I'd say you know 45 to 50 set is the average full launch, but we're likely to exceed that on some of these products just given the demand that we're expecting when we do for launch them.

Okay, and so on and I'm, sorry, I wasn't very clear and like just the absolute number and we're gonna and you know we're going to deploy.

Deployed $5 million worth and stopped in 'twenty, and 'twenty, one and $10 million next year or any any any guidance on that.

Yeah, I mean, if you look at our historical numbers and the cash flow and went to the set build capex last year was a little over 10.

$10 million, that's embedded in the cash flow statement and as I said and our call and we're looking to do it.

More than 60 per cent increase in set investments that's going to be both from the capex side and the inventory side, because you got it and make sure that that's had the inventory stocks. So.

It's all in the the total investment last year and spinal implant sets and inventory was a little over $20 million. So you know a 50 per cent increase on top of it that's a pretty healthy number but again it speaks to the confidence we have.

With the demand and they're gonna create but also the financing and and as you brought up right. We've got a stronger balance sheets, and we're willing to take a little bit more of a calculated risk in deploying more and that's because we're confident that for revenue is going to be there.

Got it very helpful. Thank you.

Sure.

And then.

Our next question comes from the line of Ryan Zimmerman with B P. I G. Your line is now open.

Good afternoon, and thanks for taking the questions and it's been quite eventful first quarter for you guys congratulation.

Maybe I can start.

You mentioned, a little bit about your distributor base and their expectation of higher and I'm. Just wondering if you could put a finer point on that just you know what kind of capacity or maybe you know kind of how big.

And that core distributor force can grow from a sales standpoint.

Yeah, we haven't really.

Given out the specific like head count or feet on the street because it varies by distributor. That's why we remain focused on what percentage of the U S revenue was coming from core distributors right. It was just short of 60% and the fourth I'm sorry, the first quarter.

And on one of our calls earlier this year, we had set expectations about two thirds of our revenue U S revenue should be coming from these core more exclusive distributors as we exit 2021.

So we don't want and get into given numbers for feed on the street within those distributors, but just stay focused on on the percentage of revenue and ensure that it continues to increase because obviously, we want to work with the more exclusive folks and get them first priority to the sets.

But it's fair to say that theres capacity for them to higher given the plans this year with the product cadence and Sac.

Investment.

Yeah.

For hiring.

And they were last year I think as you go.

And the first COVID-19 surge, we saw them start to hire and and that's why we got the geographic diversification of our revenue footprint and the second half for the year that really helped us get through COVID-19, because some of our existing core distributors hired reps in geographies, where we had no presence before so that really helps.

And keep the growth going and the second half of last year and there's more to come this year. So yeah. We've got a track record for seeing them higher and and and as we have business review meetings with those distributors. Today, you know we know that they're they've got plans to continue to hire as well.

Okay.

Just second for me.

You made a comment I think around seven days impact to the gross margin I know you're going to give more color. When this closes. So it may be reluctant to give some color, but just you know can you just give us a little bit and potentially.

Potentially on the impact maybe the gross margins for and seventies contribution this year.

Yep. So so the capital side based on the historical financials. We have there are for our gross margins are on par with ours.

And have to work through the GAAP financial statements and conversion because they use private and Canadian company, GAAP and I don't anticipate that change and the overall gross margin profile and once we finalize those.

So I think apples to apples and we'll see a similar gross margin profile to our overall gross margin sort of and that mid sixties range.

As we generate more revenue under earn out arrangements and then we're gonna see the higher gross margins from what will most likely be spinal implants that generates net earn out revenue. So.

I think that could create a little bit of a tailwind for the gross margin as well.

But once we layer and the purchase accounting I suspect a lot of the intangible assets are going to get allocated to the technology and the amortization and that technology flows through Cogs and so we'll be sure to give sort of a.

View of what gross margin it looks like without that intangible amortization, because it likely will be dilutive on GAAP gross margins, but it's noncash expenses and we'll be sure to give color and a more consistent messaging with how our historical.

Historical gross margin shaped up to get rid of the noise of that amortization.

Okay, Oh, I'll leave it there and hopefully no loonies annuities and Canadian dollars from the seven day.

Sure.

And thanks guys.

Yep.

Yeah.

Thank you.

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

Great. Thank you very much gentlemen.

Wanted to see.

Take a step back and just talk a little bit about you know the overall dynamics and the market kind of going back a little bit to Matt's question, you know, obviously, you've seen a material.

Acceleration and growth and the U S market on the hardware side over the course of the last several quarters I think we have a good understanding of some and the new product contribution, but you know, 10% volume growth and the Q1's impressed and if you're talking about high twenties and of the 30 per cent range for the full year, maybe just help us understand how much of that and from a guidance perspective its volume.

And how much do you think of that it's going to come from pricing and just incremental mixing up on a per case basis, just really trying to understand the magnitude of the share taking your you're experiencing right now.

Yeah, I'd I'd expect most of it is going to come from volume just surgery volume increases.

And because the price component right, there's the seasonality as you get into Scully season, but that happens every year or so.

Hunter and anticipate a cigna.

The significant increase in price compared to prior years now second quarter last year wasn't a typical school season, and just because of all the COVID-19 shutdown. So maybe Q2, it's a little bit more than usual that you'll see that's true.

And ASP per procedure, increasing year over year, and a more meaningful basis, but I suspect, it's mostly going to be volume now we're participating more and the surgery right. We're able to do more complex surgery and support those with.

Mariner revision.

<unk> expected alpha launch and the Mariner adult deformity indications should give us higher revenue per case and factor.

Were seeing almost to cease mining products used per procedure as that continues to tick up and that should translate into higher revenue per procedure, but I still think that growth is going to be proud of and we're coming from a higher case counts.

Okay, Great and then I know that you will get additional color on 70.

After the close but maybe just help us frame out you know you did give us some incremental color with respect to guidance for this year, so talking about $7 million and majority coming and the second half, but you've also talked about you're pressing.

And the gas pedal down on the earn out model how should we think about you know what that $7 million really annualize into and represents on a on a go forward basis are you looking for people to to be modeling this out and as a discrete line item in your.

And your and your revenue builds moving forward should we expect growth on top of that or is that not fair because youre going to really be realized and the majority of that growth on the on the implant side help us think about that.

Yes.

We've been probably intentionally vague in terms of what that mix of revenue is going to look like and the $7 million.

We think it's gonna be a mix of capital and earn out revenue. So the capital will all hit as the units are sold the earn out and we're going to just be starting to get into you know what should be at a three year earn out and commitments. So.

The $7 million is a combination, but I still don't want to define the mix because there's a lot of irons and the fire in terms of capital sales, but you know as the year goes on and I suspect you will see a few more earn outs as a percentage of those total placements versus the outright capital sale. So I don't want to commit to a number and say you know 5 million and it's gonna be capital because of it.

Turns out for millions as capital, but $3 million is incremental revenue, we're getting from the earn outs that we would get and the absence of the 70 acquisition.

And I don't want to set a number that people are disappointed and we only did for millions of capital and we still hit our $7 million or exceeded that right because of the earn out contribution so I'm reluctant to give.

Any kind of mix yet until we've done the acquisition and have a better chance to collaborate with a 70 leadership and sales team to define and you know what the expectation should be for earn out revenue versus capital.

Okay understood.

And you're already getting more color yeah.

One additional item there Kyle I mean, just obviously thinking about how how 17th continuing to run their business.

Everything that that's sitting there hopper right now is from their traditional modeling right their traditional sales model and so theres plenty as Bob said that that's in certain stages of capital equipment.

Food processing and the process for hospital, usually goes through and I think we've already kind of manage to that process is often around a nine to 12 month process. So again.

Again, I think it'll be weighted more towards that and but then we do see an acceleration as time goes on.

And the ability for earn out.

Okay. That's very helpful. Thank you I'll, let it and I'll, let somebody else happened.

Okay.

Thank you. Our next question will come from the line of Mathew Blackman with Stifel. Your line is now open.

Good afternoon, everyone. Thanks for taking my questions I've got a couple.

And he keeps going up.

Curious can you just give us a little bit more color on that.

And the distribution partners, you mentioned and that we're onboarding and and what regions or geographies may allow you to enter where perhaps you would rather either under index or had no had no presence at all.

Yeah. So during you know in and around COVID-19.

We're.

Still aggressively going after new distribution for helping train distribution that was just coming aboard in and around that time, we feel really good about our teams on the West Coast, Colorado, specifically, we've advanced nicely.

Civic northwest, we're advancing nicely with with partners that have grown with us during.

And you know this pandemic time, we continue to have further investments and our Texas markets and our Florida markets. So we feel like there's even markets that we're in that our current distribution is going deeper or expanding with.

Additional hires Underrepresentation and we're clearly seeing we're seeing the same thing going on and in the Midwest for US. The Midwest has always been a traditional distributor area for us that continues to be exclusive and and driving our product lines. We still have a lot of opportunity and continue to have good conversations and continue the good times.

<unk> and the northeast and we view that as a growth opportunity for us moving forward over the next 18 to 24 months.

Alright, Thanks for that and and then my last question and and John just you sort of touched on it a little bit, but I was hoping you could frame the complex procedure opportunity still ahead for you.

And in the past you've said, it's something like 10% of your mix and as you've mentioned you've launched some systems for complex disease, and 2020 that will transition into full launches. This year, you'll launch the mariner revision and the adult deformity platform. So maybe just talk about whether you're getting closer to having the portfolio and to make meaningful inroads and what else you might need and I guess.

Most important how much of an incremental opportunity complex procedures could represent in 'twenty, one and beyond whether it's the mix of cases, and that's you're at now and where that could go or the revenue opportunity per complex cases versus your current sort of average AFC just help us understand some of the opportunities ahead of you and the complex arena.

Thanks.

It doesn't dramatically change from sort of that historical 10% makes it has increased probably a little bit because the mariner revision system allows us to participate in more complex and deformity, but getting the adult deformity specific indication for Mariner that we anticipate and mid year. This year.

We will give us a whole new entry into the deformity market and and that's going to be specifically for the adult deformity indication, it's going to be and alpha launch. So we're not gonna have a full launch out there it will contribute revenue, but I don't expect it to meaningfully shift the percentage of our revenue that comes from deformity for 'twenty two.

One only because it's an alpha launch and you're limited by the sense as.

As we move into a full commercial launch sometime likely in early 2022, that's where I think you can see the needle start to move a bit in terms of percentage growth from a revenue coming from the more complex and deformity procedures, but I don't anticipate a significant contribution this year because of the Avalon.

But again, it's one of those systems that is helping attract new distributors and I want to work with us and they understand during and Alpha phase. They may not have unfettered access to that system, but it's still something that's appealing to them to start to work with us knowing the full commercial launches coming down the road.

Got it thanks, so much guys.

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

Hi, it's Sam on for Kayla, Thanks for taking our questions. Just first to start off curious to hear about what conversations you're having with distributors and with regards to 70 and how you think that can augment your exclusive distributor force or adding additional high value distributors and then just.

We will all your distributors have initial access to the system or is it going to take time to expand production before COVID-19 has really able to be selling a system.

Yeah. So a couple of you have a couple of layers. There. The first one is we do feel good about our ability to expand supply.

And I think 70 has done a very good job of.

Working with the supplier that has the ability to scale there there is some.

Time consideration that we have to make for that scale, but it's not something that.

We think it's going to slow down our distribution team instead, I think it's more about us being sure that we're investing and the right products with the suppliers. So that we can have a more just in time or shutting down and lead times at least for how those products are.

You know how it can be built out and be available now that said.

Yes, the conversations with our distributor are quite exciting because obviously, we had a different arrangement.

With 70 previous to this it really was more of a.

A discount off of list price, obviously, now we would be making decisions on the cost of cost of goods.

And a baseline and we can make the right decision on whether certain accounts. It makes more sense to do and earn out or other accounts that have budgetary dollars. It certainly may make more sense to of course place the unit outright and so our distributor is excited because I think it's a different economic equation and they can be much more competitive and the marketplace and then.

Lastly, yes, we are we are having even I would say more engaged conversations with new distribution, especially distribution that they have experienced with enabling technology and their excitement to be able to provide this kind of.

Radiation free technology, which I think is is becoming a bigger and bigger issue to two hospitals, obviously you saw.

Surgeons and and certainly as patients become more aware of and.

And I think we're all comfortable that it's going to be a big sell any future for for patients as well.

Great. That's really helpful. And then on international first quarter grew up there since last year and would love to hear what you're seeing and those markets and how we should think about improving the cadence of improvement and a year.

And then also how how do you think 70 can potentially.

Impact or accelerate growth over time and in the international market, given the uptake and what we've seen there.

Yeah, I think just to work backwards and I think 70, just got you and a CE Mark approval recently, so there's a new opportunity for them and us together and Europe right we have.

And infrastructure in place and Europe, and good distributor relationships. There. So I think we'll be able to bring more to the table in terms of Europe, because we're just getting started there.

They have a really healthy relationship already and Australia.

It's a pretty large distributor and they sold a decent number of 30 some units that they sold internationally to that Australia and distributors. So I think there is opportunity to grow and place more systems, there as demand increases, but also with the M. I S.

Module.

Weighted to get launched probably sometime in the third quarter and once we get FDA buy 10 get clearance there.

And as an opportunity to.

Increased average asps with the M. I S module included but also to go back to all of the.

Customers, who bought the unit went out and my S and and try to get them to purchase the NYSE and.

Module. So I think there is upside obviously in both locations probably more upside in the EU because they just for getting started there.

But we've got a healthy relationship.

And a good presence in Australia ourselves and I think that's where we've seen more clarity in terms of growth in 2021, I think 10% growth.

Is pretty realistic and place to start for international this year, maybe we have and exceed it but I think there's still a decent amount of uncertainty in Europe in terms of when they finally emerge from COVID-19 and we see sustained increases and surgery volumes, but starting off again, and it's only 10% of our revenue.

And I think a 10% increase expectation for international this year given the uncertainties it is probably where and place my marker now and.

Things get better and they emerge from COVID-19 quickly then we could exceed that as well.

Yeah.

Thank you.

Our next question comes from the line of Brandon Folkes with Cantor Fitzgerald. Your line is now open.

Hi, Thanks for taking my question.

Can you just elaborate a little bit in terms of for color Youre seeing and revenue per case and even if it's just directionally maybe in the quarter.

Compared to sort of.

Last year, and then anything close to cool, okay, and as well. Thank you.

Sorry, you're looking for just sort of.

Revenue per case yeah.

And you just said.

I'm kind of you know even if it's just day.

Quantitative color.

Yeah. It continues to increase right. The two things were the three things are tracking and surgery volume increases looking at the number of systems used per procedure, which also translates into higher revenue per cases, as we see more systems being used but also as we're participating in more complex and deformity and that's something we're tracking.

So as Keith talked about and the script rate case growth was over volume increase was over 10%.

Revenue per cases, it's sort of and it's typically been and the low to mid single digits.

Revenue per growth, so, it's nominally driving a little bit of upside but in line for the question before I think the growth expectations. We've got for the rest of year. The rest of this year and beyond it is mostly going to be coming from volume from just having a presence in new markets.

Alright, Thank you very much.

Sure.

Thank you. Our next question comes from the line of Jeffrey Cohen with Ladenburg.

Your line is now open.

Oh, Hi, Keith and boss for you.

And how are you Jeff.

Just fine.

And you hold close to tidy up for Q2, you talked about one <unk> per shares were <unk> 27, non close the range 5.1, and which is 33, one and then for point to and from the seven day will appear.

Appear over time and selected by the seven day holders is that where youre intimating.

Correct Yep it depends on when they whether they elect for Seaspan shares for exchangeable shares and then if they like for exchangeable shares when do they tender those based on their own personal tax situation to.

The converted indices fund shares, okay, and that should be within five years.

It has to be within five years, there's a mandatory tender and date and five years after issuance.

And along those same lines pause do you expect any one.

And one time charges associated with the closing expected for Q2.

And where they may pop up on the NIM.

For instance.

The bulk of the costs were incurred in Q1, right. We talked about the $1 3 million of legal and other professional fees just because of the follow up activity in Q2 with the shareholder meeting and getting court approval from the Canadian ports.

There'll be some residual legal and professional fees that come through and the second quarter net will give clarity to but I would anticipate.

A third to half of what we saw and the first quarter, but will also be investing a few more dollars and the integration effort as well, but I don't anticipate it's going to be more than half of what we incurred and the first quarter because that was all day.

Prep work and due diligence and drafting of documents that got us for those numbers.

Okay got it and then lastly for me.

Keith any commentary on April specifically.

As far as trends procedures and backlog at hospitals could you pick up anything out of Texas from last quarter and any areas of strength geographically here.

Yeah. So you know I think.

And we tried to give some some color.

Color too we viewed March and April as being very similar and the sense that there is backlog that's being worked through I think the other good thing is that more and more patients are going to see their doctors for care, so they're able to get scheduled.

We're hearing still the same kind of feedback from the surgeons that are visiting them, there and they still feel like they're getting through some backlog and they're being scheduled out throughout the entire quarter.

And they feel really good that that.

And this will continue especially with their office load if you will continuing to see more and more patients. So.

Everything seems to be an indication that it's still a robust time as far as getting caught up as well as getting new patients into the stream.

Okay got it and then lastly for me if I could for one more and then any commentary on the the biologic platforms out there and have you seen have you taken any price increases and have you seen anything more recent are competitive in nature as far as offerings for pricing.

Yeah, I wouldn't say, we're not really seeing anything I would I would view as market changing from pricing I do we continue to be getting more and more opportunities into larger buying group hospitals for or being put onto the ability to compete and minimal number.

Vendors and so with that sometimes does come some more aggressive ways. We have to think about how we're going to approach those accounts, but I wouldn't say that that's anything different than a new opportunity at a new a new store so to speak.

It's it's not something that we're seeing and the marketplaces, if there's a giant erosion on the on the pricing side for our D. B and specifically I think theres still the higher.

The higher technology, Dbms and the ones that we know have.

More unique features we were still able to get a premium on but we also feel like we can be very competitive where we need to be and those larger buying groups.

Okay got it nice quarter nice read out now and look I appreciate it.

Thanks, Joe.

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

Hey, guys. Thanks for taking the follow up I guess.

Wanted to and thanks.

So I just wanted to talk about the spend outlook I guess, the only thing that some folks may look at from the quarter as the EBIT losses, and I know you spend a lot and Q1 and you're stepping on the gas and and.

And everything but I'm, just wondering you know and you're talking about a little bit more free cash flow burn. This this year versus last year. So I'm, just thinking and investors may think okay.

We're going to see and elevated spend level over a multiyear period.

And that kind of changes how I was thinking about you know them getting to profitability is it fair to think about you know look we see a lot of really good things here in 'twenty one 'twenty two.

And that's really heavily and then you'll get a lot more leverage and the EBIT line and 23 and 24, So just bear with us for two years as we spend a bunch of money because we could see all of this opportunity and then you'll get that leverage that you're hoping for still kind of and the timeframe you were hoping for and which is 23 and 'twenty four.

Yeah, no change to those expectations longer term in terms of getting net adjusted EBITDA breakeven and then free cash flow breakeven right and and that last one sort of still up for 275 million revenue Mark.

That being said the free cash flow burn increase that were projecting for this year over last year, it's all expected to be driven by higher investments and inventory and capex like we talked about earlier, but the adjusted EBITDA loss. We are anticipating is going to continue to decline this year versus for.

Year last year.

Because we are already seeing some of that leverage most of its and the gross margin line, but I think we're also doing a pretty good job managing the G&A line.

But reinvesting and more R&D sales and marketing and and and the inventory capex, but but the free cash flow burn increase this year is going to be a little bit of dilution from seven day right. There their contribution and the second half for this year, but overall still forecasting for reduced adjusted EBITDA losses.

But the free cash flow burn increase is going to come.

Entirely from higher growth investments and sets and inventory to build the scale, we need to achieve those efficiencies because while ortho biologics today is a free cash flow positive business because of the less complex supply chain right, you're not investing and the sets and and lower commission rates overall.

We want to invest our way to grow from spinal implants to get to the scale that we need to get free cash flow breakeven on that and that's why with the financing we have a little more confidence to opportunistically invest in growth and kind of underlies the accelerated revenue growth. We've got in the back half of this year and longer term expectations, but.

Italy, we haven't changed our assumptions around getting to free cash flow breakeven at that $275 million revenue Mark.

Got it thank you.

Yep.

Thank you and there are no further questions.

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

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

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