Q2 2021 SeaSpine Holdings Corp Earnings Call

Ladies and gentlemen, thank you for standing by and welcome to the 6 points of any to any 1 second quarter financial results Conference call. At this time, all participants are in a listen only mode.

Later, we will conduct a question and answer session and if he would like to ask a question during that time simply press star 1 on your telephone keypad.

And once you require assistance during the conference. Please press star zero share.

A reminder, this conference call is being recorded today August 2.2021.

I would now like to turn the conference of Ritchie.

Lee Savo Investor Relations. Please go ahead.

Thank you and thank you for participating in today's call.

Joining me from C spine, and CEO, Keith Valentine and CFO John <unk>.

Earlier today define released full financial results for the quarter ended June 32021.

During this conference call, we will make forward looking statements within the meaning of federal Securities laws and regards 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.

And I should not to place undue reliance on forward looking statements.

Which are only predictions and reflect our beliefs based on current information and speak only as of today August 2020.1.

A description of risks and uncertainties that could cause material differences between our actual results and those stated or implied by the forward looking statements. Please see our news releases and periodic filings with the SEC, which are available on our corporate website and dumbed up jobs that you find dotcom and adapt up dot FCC dot Gov.

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

Management believes that the presentation of these non-GAAP financial measures provides important supplemental information to management and investors regarding financial and business trends relating to the companys results of operations.

These non-GAAP financial measures should not be considered replacements for and should be read together with the most directly comparable GAAP financial measures reconciliations to the most directly comparable GAAP measures are provided in the financial tables accompanying the press release, we issued today I'll now turn the call over to Keith Valentine Keith.

Yeah.

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

It was a quarter of significant achievement for sales force, we transformed the company with the acquisition of 70 surgical.

And it's enabling technology platforms, and meaningfully strengthened our balance sheet and 94 and a half million dollar of equity raise.

From a financial and operational results perspective.

So a continuation of the revenue growth and momentum that started in the back half of Q1, and we further expanded our gross margins.

Despite some pockets and COVID-19 related surgery disruptions that impacted some of our larger markets, we delivered a solid quarter of growth.

Through our commitment to innovation and customer experience, we took additional market share and both the spinal implants and ortho biologics market.

And we benefited from higher spine surgery volumes.

And it's worked through much of their backlog.

We've had a very strong quarter total growth.

And they are increasing 66% over the prior year period and then.

That's where we generate approximately 90% of our total revenue revenue increased 64% year over year and.

And then U S.

This was once again led by higher sales of our new and recently launched products, which comprised 74% of U S spinal implant revenue and more than 40% from U S sports and biologics revenue.

Surgery volumes increased by more than 50% compared to the second quarter of 2020 and.

And the low teens sequentially compared to first quarter of 2021, we.

We also generated slightly higher revenue per case, and further increase the utilization of our spinal implant systems and ortho biologics products per procedure.

For the second quarter of 2020.1 day.

Products and systems used per procedure average 1.9 compared to 1 point a year ago.

Turning to 70 surgical and we closed the acquisition and May 20th and we placed our first units under and the earn out arrangement during the second quarter.

We also are excited to receive FDA 5.10-K clearance for the percutaneous spine module for minimally invasive surgery and are on track to launch Mif's module later this month.

We have progressed rapidly to integrate the 7 day team and boy and into the C spine organization and to accelerate certain high priority development programs and also we revised the capital sales forces such as compensation plans to be agnostic to a capital sale or earn out arrangement.

As a result, we are already seeing greater percentage from the financially more attractive earn out opportunities and the U S pipeline than we originally anticipated.

With respect to our product launches, we recently initiated the alpha launches of the wave form lateral and wave form interior and 3 D. Printed interbody implant systems. We are now on track to alpha or fully launched more than 15 products and.

And line extensions in 2020.1.

We remain particularly excited about the next Y and extension of our foundational Mariner platform with an alpha launch of and adult deformity system expected late third quarter and.

And it's a full commercial launches from our Northstar <unk> G system for posterior cervical fixation.

And the interior plating system and expect it really fourth quarter and a way for them and see 3 D printed interbody implant system and expect this late fourth quarter.

This week, we began to deploy an additional 15 sets of what we believe is the true innovated and differentiated Northstar system and we plan to deploy an additional 50 said and 2 separate tranches, the third quarter and late fourth quarter.

Those full launches and particular are expected to be significant drivers of revenue growth in the fourth quarter of 2021.

Continued investment and product innovation and and the deployment of our high demand and foundational spinal implant systems combined with our best in class B and portfolio and market, leading flash navigation system, featuring 70 technology gives our expanding distribution network the assurance that we could support and their aggressive growth.

Plans and maintaining the confidence is so important to our efforts to further capture market share and with a stronger balance sheet. We now have after the recent financing we have even more capable capability to invest for growth.

We remain cautiously optimistic that despite the recent escalation and the number of Covid related hospitalization and more people get backs unaided and we will get a sustained return to pre COVID-19 spine surgery volumes during the second half of 'twenty 'twenty 1.

And it took a long term opportunity coupled with the expected contributions of upcoming product launches and the 70 surgical technology platform.

And here's to drive our investment decisions and the most notable of which is.

And there's a significant increase and spinal implant sets.

In total we plan to invest nearly $40 million this year, the alpha and full commercial launches of numerous spinal implant systems as well as deploying more of existing spinal implant sets that are in highest demand.

These investments, which represented almost 60% increase compared to 2020.

Lithophyte confidence with our distributors that we can comfortably support their ambitious growth plans for the second half of 'twenty, 'twenty, 1 and beyond and give us the confidence to increase the bottom and our revenue guidance by $1 million to a range of true $1 million to $205 million.

This reflects growth of 30% to 33% over full year, 'twenty, and 'twenty revenue and 26% to 29% over full year 2019 revenue.

And now I'll turn the call over to John for more details on our financials and our financial outlook John.

Okay.

Thanks, Keith and good afternoon, everyone as Keith noted earlier revenue for the second quarter of 2021 totaled $47.5 million or 66% increase compared to the second quarter of 2020 and and <unk>.

13% sequential increase compared to the first quarter of 2021.

U S revenue totaled $42.6 million and included $600000 of 70 surgical catheter sales revenue.

Ah, 64% increase compared to the second quarter of 2020, and a 14% sequential increase compared to the first quarter of 2021.

U S spinal implant and enabling technologies revenue and the second quarter of 2021 totaled $21.4 million or 62% increase compared to the second quarter of 2020 and its.

16% sequential increase compared to the first quarter of 2021.

That growth was led by new and recently launched products predominantly those that were launched alpha or fully in 2020, and the first half and 2021.

The rapid clinical adoption of Windows and recently launched products is a very encouraging sign for the growth that they can drive and the second half from 2021, particularly in Q4.

We continue to experience low to mid single digit declines and average selling prices and despite industry.

U S ortho biologics revenue and the second quarter of 2021 and totaled $21.2 million or 67% increase compared to the second quarter of 2020, and and 11% sequential increase compared to the first quarter of 2021.

Those increases were once again, driven by growth and the Osteo strength plus product.

International revenue and the second quarter of 2021 totaled $4.9 million and 81% increase compared to the second quarter of 2020, and a 9% sequential increase compared to the first quarter of 2021.

Air Press release, we also provide comparisons of our revenue results for the second quarter of 2019, and the impacts of COVID-19, and our business and the second quarter of 2020. It makes the comparison to the second quarter of 2019 is a useful supplemental metric to measure growth.

COVID-19 had a larger adverse impact on our U S biologics business and the second quarter of 2020 compared to the spinal implant business, which resulted in an atypical relative to growth rates with fourth the biologics growth faster than spinal implants by that measure.

The growth rates compared to the second quarter of 2019 are more in line with the typical relative growth rates with spinal implants growing meaningfully faster than north of biologics.

GAAP gross margin for the second quarter of 2021 was 63, 2% compared to 59, 2% for the second quarter of 2020.

The increase in gross margin was primarily due to idle plant costs reported in the second quarter of 2020 associated with the nearly 2 months shutdown of ortho biologics manufacturing operations at our Irvine facility.

The year over year gross margin benefit from increased sales and the U S of our high margin spinal implant products was mostly offset by 2 factors higher kitting and logistics costs and occurred in preparation for full commercial launches of the <unk>.

Spinal implant systems and expected in the second half of 2021 that Keith mentioned earlier and.

And from $300000 of technology related intangible asset amortization associated with the acquisition of a 70 surgical.

Adjusted gross margin, which excludes technology related intangible asset amortization and idle manufacturing plant costs was 64, 5% from the second quarter of 2021.

They're just 63, 5% for the second quarter of 2020.

And we anticipated shift to more full commercial launches of spinal implant systems in 2021 and is expected to generate higher excess and obsolete inventory charges relative to prior years from a substantial investment and outsized implant inventory required and it goes set builds.

However that impact and notwithstanding we believe that we can continue to expand adjusted gross margins by 100 to 150 basis points per year over the next 2 to 3 years.

Operating expenses for the second quarter of 2021 and totaled $41.1 million or $10.5 million dollar increase compared to $36 million for the second quarter of 2020 and included $1.6 million or 70 surgical operating expenses.

The increase in operating expenses was driven primarily by $8.4 million and higher selling and marketing expenses.

Charity of which relates to selling commissions.

And $1.1 billion and higher general and administrative expenses, which included more than $500000 from a legal and other professional fees incurred in connection with a 70 surgical acquisition and integration and $900000 and higher research and development expenses.

We reported a $6.2 million non operating gains and other income net and the second quarter of 2021 and connection with the forgiveness by the SBA and the total amount outstanding of our Paycheck protection program loan.

Net loss for the second quarter of 2021 was $5.2 million compared to a net loss of $13.7 million for the second quarter of 2020.

Adjusted earnings before interest taxes, depreciation and amortization for the second quarter of 2021 and.

Proved by $4.3 million to a loss of $3.5 million compared to a loss of $7.8 million for the second quarter of 2020.

Adjusted gross margin and adjusted EBITDA loss, a non-GAAP financial measures that we believe provides valuable information on our operating results that facilitates comparability of our core operating performance from period to period and against other companies and our industry.

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

Cash and cash equivalents at June 32021, and totaled $127 million and we had no amounts outstanding under our credit facility.

And we received $90.494 $5 million of net proceeds in April 2021, and other.

And public offering of 5.2 million shares of our common stock.

We paid $28.3 million and cash consideration and May 2021, and connection with the acquisition of 70 surgical and in April 2021, repaid the entire $20 million of outstanding borrowings under our credit facility.

Our free cash flow burn, which includes operating cash flows and purchases of property and equipment was $14.7 million for the second quarter of 2021 of 3.

And $3.2 million increase compared to $11.5 million for the second quarter of 2020.

And it was $21.4 million for the first half of 2021, and a $5 million increase compared to $16.4 million for the first half of 2020.

Those increases were primarily attributable to higher investments and spinal implant set build and instrument capital expenditures and needed to support and greater number of full commercial launches in 2021.

Turning to our financial outlook for 2020 out and 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 the sustained accelerated revenue growth implied by our 2021 revenue guidance.

As Keith noted earlier, we now expect full year 2021 revenue to be and a range of 201 million to $205 million, reflecting growth of 30% to 33% compared to full year 2020 revenue and 26% to 29% over full year 2019 revenue.

In addition of expressing our confidence via the $1 billion increase and the bottom and other revenue guidance range. We also want to provide more color on our expectations for quarterly revenue progression for the second half of 2021.

Based on the number of factors, including surgeon feedback regarding taking vacation time this summer.

And the North American Spine Society meeting in late September and the rescheduling due to COVID-19, and other large industry trade shows into the third quarter.

And a greater percentage of 70 placements expected under an earn out arrangement than originally anticipated because of the new compensation model, we introduced for the 70 sales team.

We are now expecting more seasonality than we did earlier and the ear.

For Q3, 2021, and now anticipate 16 to April 18 per se year over year growth and free.

For Q4, 2021, and expect 33 to 30.90 per se year over year growth.

That represents a roughly 5% to 8% sequential increase for the typically seasonally weak third quarter compared to the second quarter of 2021, which is typically 1 of the strongest quarters of the year.

While the near term impact of the higher than expected 70 earn out placement assumption has the effect of lowering 70 and anticipated contribution to third quarter 2021 revenue.

It provides a much greater upside benefit to revenue and contribution margins for the fourth quarter of 2021 and for the next 2 to 3 years through the longer term contractual relationship contemplated by the earn out payments from those accounts.

We expect to further reduce our adjusted EBITDA loss from 2021 compared to last year include any anticipated dilutive impact of 70 surgical or a P and L. A this year.

We expect our free cash flow burn for 2021 to be between 46, and $49.9 billion.

That increase versus 2020 is due in part to anticipated adjusted EBITDA dilution from 70 surgical and 2021.

More significantly from the more than 60% planned increase to nearly $40 million and spinal implant inventory and instrument and set build capex investments and Keith mentioned earlier to support the and many full commercial launches slated for 2021.

With respect to the 70 surgical acquisition certain and 70 shareholders elected to receive exchangeable shares at the closing.

Which allows them to defer certain taxable events until they tender those exchangeable shares for shares of seats by and common stock.

As a result of the roughly $4.3 million shares of Seaspan and common stock and total that will ultimately be issued to 70 shareholders and.

Total 1.3 million exchangeable shares that were actually issued and will not be reflected in the denominator for loss per share calculations until we're 70 shareholders tender that was exchangeable shares because of the anti dilutive effect.

Those exchangeable shares which will be treated consistent with common stock equivalents like ours, Hughes and stock options and the loss per share denominator lusby tendered within 5 years of their issuance at.

At this time, we can't predict the timing 70 shareholders, who elected to receive it was $1.3 million exchangeable shares will tender for shares of seats by and common stock.

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

With more than $120 million and cash and cash equivalents on hand, plus the additional liquidity that we can access through our $30 million credit facility, which we extended for at least 1 year to July 2022, and for which we can elect to expand to $40 million, we have never been better capitalized.

To continue to invest confidently and aggressively for growth at this point I'd like to turn the call over Keith for closing comments.

Thank you John.

We're all very excited to add the 70 surgical team to the Sis My family and.

We're able to leverage their outstanding and enabling technologies to spread our growing influence beyond just the operating room.

That would be additive to our commitment to execute at a high level on our fund notional priorities that have transformed and see us fine pitch and the organization that we are today.

Namely to timely and effectively develop and launch clinically relevant products to attract and retain the highest quality distribution.

And to generate above market revenue growth through more efficient utilization of our spinal implants and to further expand our gross margins. Our mission is to collaborate with surgeons to develop cost effective solutions to treat spinal disorders and improve patients' quality of life.

And our goal is to be a market share taker and grew 4% to 5 times faster than the overall spine market.

We believe that we have the right products and systems and highly effective and growing distributor network and the best team and the spine market to accomplish this.

Today, despite its an organization of more than 500 passionate and dedicated employees, 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.

Recent return to the office after nearly 15 months of working remote we have reenergized and enjoying the face to face collaboration that is so important to our culture.

That energy and exploit and that is palpable.

And it has been noticed by the increasing number of surgeon and distributor visitors. We posted the past couple of weeks. It's so great to be back with that we will now open it up to questions.

Later.

Thank you and at this time I would like to remind everyone in order to ask a question. Please press star 1 on your telephone keypad and again, that's just par wants to ask a question.

We have your first question from Matthew O'brien with Piper Sandler Your line is open.

Great. Thanks, so much for taking my questions and I'll stick with 2 although I've got many more than that but but Keith you know Keith or John just the the increase and you know implants and sets versus 2020 is pretty eye popping can you talk a little bit about you know is it more skewed toward.

And that is it more skewed towards implants, which are the 2 does that does it kind of you know weight weighted towards 1 or the other and then you know why is now the time to really increase this this investment what do you see as far as your your growth opportunities, both domestically and internationally and.

And this category.

Yeah, the biggest driver and math is.

Number and full commercial launches, we're doing this year compared to last year and.

And you know the the mix.

It's pretty even right there was a big investment in implant inventory, but also the instruments and accessories and that's the capital expenditure side of it but.

Biggest catalyst and just the number of impactful product launches. This year I mean, we have a number of alpha launches the wait for M C.

I'm sorry, the weight formed 3 D C. Nobody technology, but you know North Star is 1 that's been highly anticipated as you said, we've got 15 more sets coming out and 50 more to be deployed by the end of the year.

The explorer.

Expandable interbody.

And <unk> T O, which was full commercial launch and and even within the alpha launches in there and are adult deformity indication, which we expect to get in the near future.

As you know are very complex and expenses and even for alpha launch because the deformity aspect of it. So it's you know it's a sign of our confidence and the growth and net growth is going to be driven by some of these more impactful product launches and and that and that's what's really driving it.

2.2 to think about Matt as you know is the overlap of bringing aboard some larger distribution groups that require more of the inventory commitment and also on top of that for each of those earn outs that we're anticipating those earn outs are done you know much through the the newer systems.

And done through the excitement in and around the newer systems and so we want to make sure that whether it's 70 earn out or whether it's a new distributor coming aboard that we can instantly or quickly deploy sets that make them comfortable and make the hospital comfortable that theyre going to have the right equipment to either earn out from there right equipment to do so.

And to their new accounts.

Okay. That's helpful and just to push a little bit further here guys, just because I think investors are pretty.

Attuned to that.

Impact of new stuff.

More skewed on the side and really be the implant inventory sides of it you are able to support all of these new distribution groups.

And again, it's both because the sex get deployed with the you know what we called trapped inventory all the implants and the travel with the instrument sets to be able to conduct a surgery. So we're investing and both but then we also need to have inventory on the shelf to be able to replenish the implants. They're consumed. So you know it's not a 50.50 mix, but it is pretty even.

And in terms of the investment and both the capital expenditure side and and the inventory side, because you need both to be able to do with surgery and it was all travel with a set but then you've gotta habit and the replenishment inventory on the shelf, so that would distributors and consume the implants from ascent and want to move on to the next surgery, we can easily and readily replenish those inventories to maintain their confidence.

Got it and that's Super helpful and a follow up question.

And I'm, just talking about the earn out opportunity here.

Is it pretty much straight lined over a 2 or 3 year period as it back and loaded.

And just on how things go and then you know what you're getting at M. I S indication do we expect really more and be impact late Q4 into next year in terms of your placements are can you quickly update the system are provided and upgrade.

And I wanted to get their hands on and that can be opened right now and and move quickly and M. I S.

Yeah. The first question is generally to the conversations we're having are more of a straight line impact of the revenue.

Doesn't mean, we wouldn't be flexible to something with a ramping escalation, but typically where were finding engagement with a straight line commitment over a 3 year period for the earn out revenue.

And then sorry. The second question was on the upgrade yeah, there's there'll be different options and if you buy a system new and.

As to whether you choose to have that module and then of course, there is opportunity for that.

Will they get introduced into existing and snow sleet, if they choose to purchase.

Got it thanks, so much.

Thank you.

We have your next question from Kyle Rose with Canaccord. Your line is open.

Thank you for taking the questions.

Wanted to talk about just the state of the sales force now and.

A comment about you know.

Bringing on a lot of new surgeons, and and new district distribution groups to the to.

To the company to.

And do training and education and things of that.

And then also dovetailing off of your answer to Matt's question, just about you know.

New sets to support some larger distributors, maybe just help us understand where are you and the lifecycle of upgrading the distribution talent, obviously, you've got ambitious goals and we're taking share.

And that comes from just having better products and solve versus you know you know and we'll have better distribution talent carry more weight and I'm in the market.

Yeah, I think really both continues to go on and I think as we start getting more and more of our legacy systems become obsolete, we're moving obviously to a greater amount of our revenue coming from new new new product introductions, and new product sales that that creates a better opportunity for us to continue to fill it and that.

<unk> space and it.

It solidifies.

Current distribution teams were working and some of our larger areas and some on some nice additions that are being added to the team either through combination or through hiring and so we feel like the reason for that is is absolutely because of what the pipeline is presenting and you know.

And <unk> technologies.

Certainly and important 1 that now we have a leading inter body portfolio.

And nano mentally and and we have the opportunity to also be able to offer 3 D across many many of our inner body platforms, and so again that that creates a different conversation and opportunity with new distribution, but most of the new distribution is going into white space and going into areas that we don't currently have.

Lucy and we're more focused distribution.

Great and then on 7 day.

Encouraging to see the M I S clearer.

Clearance come through and that's gonna roll out maybe when do you expect to.

Had the R&D teams such that you know you'll have new implant or instrument designs and are actually you know kind of.

And utilizing some of the 70 technology you know more directly when will we see those first you know R&D projects are you moving.

And to help launch.

We already have some some new instrumentation that is more a dedicated and focused on and on spine.

C spine specific but you know keep in mind and 1 of the beautiful things of of 70 is that it was it was set up originally to be agnostic and so really what we're talking about is it can it can be it's been able to be used on cspan instruments for quite a long time, but can be used not competitive.

And what you will see as we move forward as it becomes easier and easier to be integrated with the spine with software enhancements and other items that make it seamless to use our instrumentation and our instrumentation has very easy assembly onto.

Certain parts of the guidance platform $4.70, and so you'll continue to see that as we go and there'll be some some items and I'm sure you'll you'll notice it and asked is coming up but we view that as it's already going and the good news is it's going to continue to flow as we move into further software generations going forward.

Great and then just 1 last 1 and I'll hop back in the queue. You you commented about some of the quarterly progressions and.

And you know search and vacations and things and that's it.

But maybe just.

Date us on anything Youre, seeing and with respect to the recent increases and COVID-19 volumes across the United States is there anything from a delta Varian perspective, and you need to call out as far as what you've seen and the last couple of weeks.

Yeah. There is you know there was just recently the joint sections meeting in San Diego, So had a good opportunity to talk to talk to surgeons, there and not only talked to others.

Our industry, Yeah, They're spotty places certainly certainly Florida has just become a hot area and I know that Theres, a big neuro surgical meeting coming there and Orlando, specifically and Orlando as an a place of I think requiring masks now for that meeting and even having some elective surgeries slowed down and the Orlando area as we understand it from lately.

Last week. So yes, I think there are some accommodations being made and in some markets. We don't feel like yeah. It is something of the same concern that we've had previously but it is something we're keeping an eye on and certainly there are some markets where the delta there it does seem to be and at higher numbers.

And at numbers that certainly health authorities are starting to be concerned about whether they need to make a combinations at hospitals.

Thank you.

We have your next question from Ryan Zimmerman with B P. I G. Your line is open.

Afternoon, and thanks for taking the questions just a few from me following up from that and Carl's questions. Just Keith Dovetailing on that question on Kyle you you did make a comment about backlog dynamics and and you know I appreciate and all of the quarterly cadence.

Commentary that we have where are we at and your view from a backlog perspective, it sounds like some of the surgeons.

You're working with are working that down, but you know I'd love to just get your sense for kind of how long that tower and may potentially last.

It's a good question because it is a question that we asked our research and that comes through and it was asking and at the meeting even this past week.

And it certainly appears that most of the backlog is worked through I think there was a low there between what was out there on backlog and then what was <unk>.

Being slowed from the patient's office or from a surgeon's offices, meaning patients were being reluctant to go in and I think now there is low describing a day of a much better balance the backlog is largely being worked through.

They don't they don't feel like the backlog is going to be present for the entire third quarter and that's something you know slows things down but they also are acknowledging that they're getting much better patient flow into their offices and then they had before and so I think that spells to what we've been.

Trying to give some clarity to on the call is that you know fourth quarter is still looking and shaping up to be very robust from a surgery load perspective.

Okay I appreciate those comments and then.

Turning to 7 day for a little bit I have 2 questions from me around that just.

1 I think at the time of acquisition. It was roughly 54 systems and the field and so you know and love to understand kind of how those are working them through your place and systems, you're putting on and you know these earn out agreements in place from a new systems, but all of the 54 and they were there you know how many you were able to convert and Rite aid.

And the spine product or have the opportunity and ways.

To get some spine hardware and in front of us.

And then just for John and I'll, just ask my question upfront and the second 1 part of that is on the cost synergy side kind of where are we at and that process and what are your what are your expectations from a cost standpoint, and if if there are any synergies that you can work through thanks for taking the questions guys.

Yes, so on the first part right now all of those placed units were all placed outright sales and so we are participating in it and a few of those accounts and we're continuing to try to.

Drive drive further we've been really fortunate that over the course of the past couple of months a couple of accounts and specific have started using some some C spine product.

And some that we were already using or continuing to use it you're closer to 2 us locally so that that continues to go on but you know it's not it's not just a it's not an easy opportunity. It gives you a chance to to have the discussion about the C spine products, but keep in mind, there's no hooking. It if you will of them having to earn it out because they've already.

Purchased it so the opportunity will continue to present itself as the M. I S module can be talked about and and how we can approach that moving forward and there is also going to be additional new software and it continues to be launched that will help us have that better conversation, but we've had we've had a few successes and.

And our sales force has taken advantage of the fact that they have something new to talk about with those surgeons and there are more aware of us. Thanks to the 70 being in there there or and and knowing that it's 6 points behind that now.

And then on the synergy side right and it is still very much a <unk>.

1 plus 1 equals 3 revenue synergy opportunity there there are modest cost savings and things like trade shows and.

Driving more collaborative relationships with 70 suppliers with higher volume commitments over time with a stronger balance sheet that we can drive down cost of goods sold some too but really this is all about revenue play and it's taking more market share faster and growing because 70 is pretty much bolt on rate and they they have special.

Specialties that we don't have in terms of like product.

Product development and optics and software development so.

It's all complimentary to our base of strength and it's all about the revenue and market share taking opportunity.

Thank you for taking the questions.

Thanks, Ron.

Yeah.

We have your next question from Sam.

And <unk> with tourists your line's open.

Thanks for taking the question so.

First I, just want and I want to make sure I have my head wrapped around and around the impact of 70 and guidance or so and you mentioned that.

A greater mix from earn out coming and originally anticipated. So should we take that to think that maybe a little bit less and that $7 million comes into revenue from 70, and then backing that into the $1 million range and myeloma.

Should we think of that more strictly as.

The strength of the core business or how much is 70 incur.

Increasing increasing sales and there with 2000 and announce.

Yeah again.

Caution we took when we talked about 70 on our last call was to not give.

And assumption around the mix of that revenue that $7 million and incremental revenue between capital and earn out revenue, which is kind of the base business. So.

We're still not providing that mixed because we're incentivizing our sales team to convert as many of those opportunities to earn outs as possible as we set out on our scripted.

Scripted comments that the expectations of earn out models, we've been able to do more than originally anticipated, which does impact the short term capital sales revenue opportunity, particularly in the third quarter.

But you know when you say its 70 weaker with the base business stronger to bring up the bottom half million well its both the base business and stronger but part of the reason it's stronger is because the revenue pull through and we're gonna get from the 70 earn outs generating more spinal implants, and ortho biologic sales in those accounts and a more meaningful manner starting in Q4.

So.

We still have the same expectations that we've got that $7 million and upside, but we intentionally didn't give any color on the mix and the last call of what that $7 million comprised of capital versus implants.

Because of that very reason as we didn't have great visibility into what the earn out would be we had and assumption and the good news is.

What the pipeline is is the assumption for earn out opportunity is even greater than we originally anticipated which.

Which is good because that's exactly why we restructured the incentive plans from the sales team is to motivate them to focus on earn outs, because they're better long term financially long term in terms of maintaining access to accounts through contract period. So.

And it's it's it's the same assumption and and we're just not going to provide color on that because it's.

It's a slight impact from the third quarter.

In terms of capital sales, but it's upside longer term.

Okay that makes perfect sense. Thank you and then just because on those earn outs and would be curious to hear what you're hearing from your sales force, obviously, you know restructuring and and it's going to have an impact on their activity but.

Are they seeing more interest from accounts now and that <unk>.

Potential customers have that earn out option or do you think it's more.

Coming strictly from that from that changes and the incentive model. Thank you.

I think I think there is a there's and excitement that this is a very strong capital equipment sales team that has had the deal. Many many times with only 1 option and that option was they had to they had to get an entire sale and that cycle at a hospital can be quite.

Long and I think just the fact that they're able to offer either and get a hospital excited about possibly getting the equipment placed sooner than later has been you know very motivating, especially and accounts that they knew full well going in and they probably didn't have capital equipment allocated for it for at least a year or 9 months and now.

Now you know what we're working on is really shortening that cycle and getting an opportunity and I think the price points and features of 70 give us a real ability to have a very reasonable.

Earn out model that doesn't intimidate the hospital I think some of the earn outs for some new technology really intimidated for hospital and they're having difficulty feeling comfortable signing aboard and that's ours I think is much more reasonable and we're able to do that because of the feature to 2 cost consideration of 70.

And he and she is right as you see more surgeries moving there and we really especially with the M. I S application I think it opens up some new doors to S. Ease as we move forward and obviously that that the <unk> and.

And my <expletive> application will continue to get launched over the course of the next couple of quarters, but we do see it as something that will be interested in.

We have your next question from Jeffrey Cohen, with Ladenburg Thalmann, and your line's open.

Uh Huh, Keith and Don how are you good.

How are you.

And just fine so firstly for you too and I hate to.

Keep eating and certain do but perhaps give us a little flavor as far as and certain spinal Malibu spinal regions were procedures that youre seeing some uptake from and and how.

How that matches up with your current oil price as far as pull through.

Thank you.

Yeah.

And we're really excited about the 2 launches, we discussed and and and the call and that was you know Northstar has was our best Elf as far as numbers go.

And but keep in mind, we also committed to 2 a good size Elsa and we committed to having more users and we usually have an alpha just to make sure we run it through its paces and so we're excited we've had validation and launch labs.

Relatively recently and it's true.

Peter head and that that's going to be a nice procedure or a nice implant system for 70 technology and the cervical spine and the booster cervical spine. Additionally, the new deformity.

Products that are coming are also well aligned to what do you see a lot of folks using seventy-four enough. You know obviously the degenerative is the is the most procedures that are done and it's a very simple system to use for the standard degenerative work and so we take a look at all of that from an open perspective, there's a lot of things that.

We fall into especially with our launches of new systems, but I think that you know ideally the effort that will be made on the deformity side and on the on the cervical pushed era side will be a really interesting interplay with 7 day, and we'll talk a little bit more about that as well.

Jeff.

And so at the end of September we're going to have.

We're going to have the ability to not only have both present and for discussions, but we're also going to have a guest surgeon and that's driving this independent AFC just to get a perspective and and get a perspective of from someone who is relatively new on the learning curve and how it helped them at their ASC.

Got it and then second from me for for your Boss can you talk a little bit about efficiencies and leverage and look like Youre Your opex, which was.

600000, lower than what we estimated drove and 6% higher on your topline and 47.5 so it looks like you are pulling out some efficiencies and leverage could you talk about that a little bit is it beginning where you just happened to see more of it during this quarter.

Hi.

Little bit of both as we said right. We're focused on expanding gross margins getting more efficiency, which I think we've been historically pretty good at getting efficiencies out of G&A right G&A has grown I think on average.

Adjusted G&A by like 5% compared to 11% long term growth, but we're also starting to see more synergies net of sales and marketing like commission rates ticking a little bit lower as we expected. They would you made a lot of investments and marketing over the past 2 years to bring in more product managers because of the number of new products will launch.

<unk> and.

And to the market and and now that you know somewhere in and around the on the market and Alpha launch and go into full launch we don't need to continue to add marketing heads because we're I think we're in pretty good shape to have coverage. There. So we're getting the anticipated.

Leverage and efficiencies that we thought we would get and you know second quarter was just another example of how we stay focused on that and.

And then we continue to be committed to reinvesting those synergies and to more steps to drive higher revenue growth.

And Joe and what might that take the inventory up to towards the end of the year, you're looking at another 20% or so and current levels.

I don't know if it'll be that high because again, it's going to be a mix of ortho biologics and spinal implants.

But of the $40 million.

We gave it its not going to be.

And total increase.

It's pretty close to 50.50 between the $40 million going towards the spinal implant sets.

Which is the capital expenditure side and the other half going towards inventories. So that that's the rough breakdown and how that spend should hit the balance sheet.

Okay got it thanks for taking my questions guys nice quarter.

Got it thanks, Thanks, Jeff.

We have your next question from Mathew Blackman with Stifel. Your line is open.

Hi, good afternoon, everyone. Thanks for taking my questions I think I've got 2.

Maybe just to start off on <unk> I'm, just curious what the net really reception has been so far now that channel.

You have it fully and your hands and then when we think about cross selling which is a bigger opportunity in the near term is it.

Current 70 customer pull through or is it placing 70 and currency spine customers just help us think through those those 2 buckets and then I'll just I'll ask my my second question right upfront and I think Keith you sort of touched on it but just wanted to ask about Nash what to expect you are hosting an analyst day, and obviously, we're going to hear more about 70.

But anything else.

Note that we should be paying attention to heading into the meeting. Thanks. So much.

Yeah, yes. So the first the first part is I think Youre just kind of get your arms around is it a bigger opportunity to place these units.

And in existing accounts or is there you know how much of it is new and I would say when you look at it both our opportunities and both seem to be.

Making their way to the top there are some existing accounts and we already have a relationship with that this gives us a chance to expand if they choose to earn out and then there's also a number of accounts that we're talking to that we really don't have a presence and and so I think the sales force is approaching it that.

Both ways.

And this could be a great way to get further market penetration and market share and accounts that we already have friends with.

And through other products or our this is our first licensed to kind of hot so to speak and a brand new accounts and even even 1 that we're talking to it would give us.

You need opportunity to get in on a account that were already not not approved on but this would be and approval to use our implants as well so it could be interesting way to to open the door to be exclusive or nonexclusive.

Another provider for an already limited provider accounts. So those are all good things when you take a look at it at NASS.

We're gonna be talking about not only 70.

Experiences in and around 8.

And rather new user and at AFC.

And how that learning curve went and where they see the advantages are so far and they're at a S. C. We're also gonna have a discussion and some other new products and the new products and you'll see it and asked that are either going into full launch and we're growing in and alpha launch in and around that late third quarter fourth quarter timeframe.

The only other thing I think to look out for us I think that again, there's going to be a lot of different enabling technologies that we talked about and some are further along obviously than they were the last time, we were we were face to face it and asked meeting.

Thanks I appreciate it.

We have your next question from Brandon Folkes with Cantor Fitzgerald.

Fitzgerald Your line is open.

Okay.

Hi, Thanks for taking my question and congratulations on another good quarter.

And just wanted to talk about expert and maybe.

Revenue.

Right.

Yeah, I believe you mentioned that it's sort of slightly up any cash.

And in terms of how this is trending versus your expectations longer term, where you can get this too and you bring in these new products and just trying to put into context, how much of a tailwind we should think of the new product.

Contributing to revenue growth from a price.

And gone to that you know you're also picking up on me.

Usage.

Procedure. Thank you.

Yes so.

Revenue per case has gone up low single digits in pretty consistently in recent quarters.

And that's because we're able to participate.

And more complex procedures with a you know that.

The entire Mariner portfolio.

So we're seeing a consistent uptick there I think the other thing it does in terms of price is.

It mitigates what is typically mid single digit price declines I think which is kind of the norm for spine, having the new products helps us maintain price. So we typically see the low single digit price declines because of the innovation, we're constantly making to the portfolio. So I don't think we see the same price.

And other companies that are less innovative.

Getting.

And but the also the other thing we can't track is it worth the biologic usage and every surgery right. Because there was a percentage of our ortho biologics revenue of about a third of that revenue is direct stocking orders and it's pretty consistently been the case for a number of years. So if they if they do a stocking order and we don't see the ortho biologics.

On the charge sheet for surgery, and our spinal implants were used so to the extent, we're tracking revenue and products our system.

Systems and products used per case, we're approaching 2.

But we know it's higher than that we just don't know exactly how much higher because when the ortho biologics is using and account that buys it direct through a Po. We just don't have that visibility, but you know the good news is the revenue per case is increasing because we're participating more complex surgeries with mariner adult deformity indication on the near term horizon that hope.

Things up even more opportunities to take market share and some of these higher rent.

Revenue per case procedures.

And her out rigor right that revision system allows us to do longer constructs. So we're seeing good growth in the revenue per case and low single digits kind of consistently every quarter for a number of quarters now.

Great. Thank you very much and that's very helpful.

Sure.

I'm showing no further questions at this time I would now like to turn the conference back to Mr. Keith <unk>.

And time for any closing remarks.

Yeah. Thank you everyone for joining us today and I hope everyone has a great evening.

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

Yes.

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