Q1 2022 SeaSpine Holdings Corp Earnings Call

Okay.

Okay.

Welcome to the <unk> 2022 first quarter financial results Conference call. At this time all participants are in a listen only mode. Following the management's prepared remarks, we'll hold a Q&A session to ask a question at that time. Please press star followed by one on your Touchtone telephone.

If anyone has difficulty hearing the conference. Please press star zero for operator assistance as a reminder, this conference call is being recorded today March 3rd Im sorry may three 2022.

I'd now like to turn the conference over to Lee Salvo Investor Relations. Please go ahead.

Okay.

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

Earlier today <unk> released full financial results for the first quarter ended March 31 2022.

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 2022.

For 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.

<unk> dot <unk> dot com and adapt that SEC dot Gov.

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

<unk> believes that the presentation of these non-GAAP financial measures provides important supplemental information to management and investors regarding financial and business trends relating to the company's financial results of operation.

These non-GAAP financial measures should not be considered replacements for and should be read together with the most directly comparable GAAP financial measures.

Reconciliations to the most directly comparable GAAP measures are provided in the tables accompanying the press release, we issued today.

That I will now turn the call over to Keith Valentine Keith.

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

First quarter results exceeded our own internal expectations. Despite the impact of significant COVID-19 related headwinds throughout the year.

Entire month of January .

Headwinds subsided spine procedure volumes increased in hospital staffing and millwork capacity quickly recovered in early February our momentum accelerated as the quarter progressed.

Translated into strong revenue growth for the full quarter and even more positive energy among our employees distributor partners and surgeon customers.

We remain excited and optimistic as the momentum continued into the second quarter I'd like to highlight some of our team's recent accomplishments that are fueling this optimism and they give us the confidence to raise our full year 2022 revenue guidance by $5 million.

In the first quarter, we grew total revenue, 21% over the prior year period to $57 million and exceeded the high end of our Q1 revenue guidance by $1 billion.

In the U S, where we generate approximately 90% of our total revenue. We saw revenue also increased 21% reached.

Reaching 45 5 billion.

<unk> revenue grew 16%.

The $5 2 million.

In March we celebrated our 58000 implantation of our nano metal in inner body device, which continues to be foundational to our future engineered okay.

It took nearly six years from the original launch to hit the 25.

5000.

Millstone, we were able to double that in just over two years.

Success of our nano mentally franchise.

With our introduction of our <unk> and wave form.

Inter body system demonstrates our team's commitment to advancing the development of differentiated surface materials a novel design.

We have continued to expand our product portfolio with the full commercial launch of four products and systems, including the explorer kit.

Al Expandable Interbody system.

Tore at DBM parties with excel bone matrix, the regatta lateral placed system and the Northstar fusion system.

In addition, we also launched flash navigation lumbar fusion, which marks our first spinal implant system develop an integrated with 70 technology.

We're particularly proud of the tour at launch which is upgrade to our market, leading Evo <unk> DBM putty that is packed in a dry state to improve osteo conductive potential and shelf life stability. This is yet. Another example of how <unk> continues to advance both spinal implants and <unk>.

So biologics portfolios through product development to help surgeons improve patient outcomes and by investing in scientific studies to differentiate our products and drive market share gains.

Turning to 70 surgical.

We generated $2 $3 million of enabling technology revenue in the first quarter of 2022 to date, we have closed or not for the 70 flash navigation technology, representing $2 million of annual revenue commitment.

There are now a total of 54 flash navigation systems deployed in the U S.

33 outside the U S. We are also starting to see more non contractual revenue pull through both spinal implant and ortho biologics products in select accounts that purchased flash navigation systems.

Pipeline is robust with a more balanced mix of earn outs first capital sales and the combined sales teams continue to work well together and generating cross selling opportunities across all portfolios.

Our increasing organizational focus on leveraging and expanding the 70 flash navigation platform technology combined with the exciting recent product launches I talked about earlier and those we plan to fully launch throughout the remainder of this year such as the entire wave forms three D printed interbody portfolio.

So the Mariner adult deformity system.

And the 70 S module are the key catalysts that are attracting an increasing number of large transformative distributors to see spine.

We have already executed on some of those new distributor additions and we are even more opportunities in the pipeline. Additionally.

This positions us very well to hire our first direct sales reps into white space areas, where we have not been able to identify an appropriate exclusive distribution partner and is consistent with the plan shared at our analyst day meeting in March.

Before handing off to John I want to offer some additional recent insights into market conditions that we're seeing is appeal with more positive news about COVID-19 receding and recent expert commentary that we're past the pandemic phase, we're seeing a sustained uptick in spinal surgery volumes across.

The entire United States and renewed confidence by our surgeon customers that we have finally turned the corner towards the degree of the old normal despite the lingering staffing shortage concerns. Additionally.

Additionally, we're positioning ourselves to take advantage of some of the new dynamics in the spine market that emerged during COVID-19, such as an increasing number of spine surgeries being performed in asps.

And increasing demand by small and mid size hospitals to acquire enabling technologies, such as our flash navigation technology, whether through outright purchase.

Or it capital efficient earn out mechanism.

In conclusion, I am confident that ceased buying now delivers best in class products across all our offerings from enabling technologies to spinal implants to GBM and was the primary factor underlying our first quarter revenue.

We have today a product portfolio that is attracting transformational distributors and provides us with a significant advantage.

We are now seeing competitive distributors contacting us to see what's happening it. Despite a shift that we believe is occurring because increasingly they want to be part of a team that is aggressively innovating and taking market share.

Our recent product launches specifically the explore expandable interbody and the wave form family of IBD have been game changers.

Now, it's our time the level of enthusiasm among surgeons and distributors is something I haven't experienced for years and it gives me great confidence to raise our full year 2022 revenue guidance by $5 million to a range of $231 million to $235 million.

This reflects growth of approximately 21% to 23% over full year 2021 and I believe there is still a long runway ahead, even this year as we continue to cultivate other increasing LIBOR substantial distribution opportunities and now I'll turn the call over to <unk>.

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 2022 was $57 million or 21% increase over the prior year.

In the U S. We posted 21% growth to $45 $5 million international revenue increased by 16% to $5 $2 million.

U S spinal implant and enabling technologies revenue in the first quarter increased $5 8 million or 31% to $24 $2 million.

With the 70 flash navigation platform contributing $1 $8 million of revenue.

Products launched or enhanced line extensions within the past five years continue to fuel revenue growth and drive market share gains and accounted for 74% of U S spinal implant revenue.

This continues to be a very encouraging indicator for sustained growth throughout 2022.

We slightly changed in this reporting metric starting this quarter as we previously reported the percentage of U S. Spinal implant revenue from products launched since the spin off in July of 2015.

U S orthopedic logics revenue in the first quarter increased 12% to $21 $3 million and continues to be driven by growth in the osteo strained plus fibers based DBM product line.

Sales of products launched within the past five years accounted for 43% of U S Sports Biologics revenue.

Our U S spinal implant surgery volumes increased 17% compared to the first quarter of 2021, while revenue per case increased low single digits compared to prior year.

Utilization of our spinal implant systems, and ortho biologics products increased to $2 one per procedure in the first quarter of 2022.

Compared to 2.0, a year ago.

We experienced low single digit average price declines in both the spinal implants, and ortho biologics portfolios consistent with prior years.

International revenue in the first quarter of 2022 totaled $5 $2 million, a 16% increase compared to the prior year period and included $600000 of enabling technologies capital sales revenue.

GAAP gross margin for the first quarter of 2022 was 59, 8% compared to 63, 4% for the first quarter of 2021 the.

The decrease in gross margin was primarily due to $700000 of technology related intangible asset amortization associated with the 70 surgical acquisition plus higher spinal implant excess and obsolete inventory charges associated with recent full commercial launches in additional set to platelets.

Adjusted gross margin was 62% for the first quarter of 2022 compared to 64% for the first quarter of 2021.

Operating expenses for the first quarter of 2022 totaled $47 $2 million.

An $8 million increase compared to $39 $1 million for the first quarter of 2021 and included $3 4 million of operating expenses directly attributable to 70 surgical.

The increase in operating expenses was driven primarily by $6 $1 million and higher selling and marketing expenses. The substantial majority of which related to 70 surgical operating expenses and increased commissions on higher sales.

One 3 million of higher research and development expenses attributable to 70, surgical and $500000 in higher general and administrative expenses, which was primarily attributable to 70 surgical.

Net loss for the first quarter of 2022 was $16 6 million compared to a net loss of $12 $7 million for the first quarter of 2021.

Adjusted EBITDA loss for the first quarter of 2022 with a loss of $8 million.

Compared to a loss of $5 $2 million for the first quarter of 2021.

The increase in adjusted EBITDA loss was primarily the result of the dilutive impact of 70 surgical on the current quarter results.

Adjusted EBITDA loss is a non-GAAP financial measure 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 in our industry.

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

Cash and cash equivalents at March 31, 2022 totaled 81 4 million and included the proceeds of $25 million, we borrowed under our $30 million credit facility in March.

We are well into the process with wells Fargo is extending the credit facility through 2000, and April 2025, and expanding the total potential borrowing capacity to $40 million we.

To complete that during the second quarter.

Our free cash flow burn, which includes operating cash flows and purchases of property and equipment was $24 $3 million for the first quarter of 2022.

We anticipated this relatively heavy Q1 spend in the guidance we provided in March consistent with a large amount of inventory and set build capital expenditures needed for the recent and upcoming full product launches.

Forward revenue growth expectations.

Turning to our financial outlook for 2022 as Keith noted earlier, we now expect full year 2022 revenue to be in the range of 231 million to $235 million.

And which includes the $12 million to $13 million of anticipated revenue in the third quarter from the final EU spinal implant stocking orders.

And for U S spinal implants growth to exceed 20% for the year.

This compares to previous revenue guidance of 226 million to $230 million and expectations for U S. Spinal implants revenue growth to exceed 17 per se.

I'd like to further clarify what appeared to be some confusion as it relates to the impact of the final EU spinal implant stocking orders on our second half of 2022 revenue growth in the <unk>.

Context of our full year guidance.

While we expect the revenue generated by those stocking orders to approximate $12 million to $13 million in total that would likely translate into eight and a half to $95 million of incrementally higher European spinal implants revenue in full year 2022, compared to the $6 $2 million of EU.

Final appliance revenue, we generated for the full year of 2021.

So for those investors and analysts calculating an implied revenue growth rate, excluding <unk> spinal implants based on our revenue guidance. We suggest you used 14 five to $15 5 million of total revenue for 2022 with a reminder to exclude the $6 $2 billion of 2021.

<unk> EU spinal implants revenue in the denominator.

Excluding all EU spinal implants revenue, we anticipate that growth rates will be in the mid to high teens in the second and fourth quarters in the high teens or more in Q3.

Moving down the P&L, we still anticipate generating 150 to 200 basis points of adjusted gross margin expansion compared to the 63, 5% that we reported for 2021.

And to reduce our adjusted EBITDA loss by 15% to 20% compared to the $22 $9 million, we reported in 2021.

We expect to generate these operating improvements through a combination of more efficient revenue growth fueled by the on boarding of more exclusive and high quality distributor partners from the robust cadence of transformative product launches and from higher adjusted gross margins through an increasingly favorable sales mix and as we get them.

Fully realize the many gross margin upside opportunities that we outlined at our March analyst day.

For me inflation and supply chain perspective, there are plenty of macro risks for us to contend with however, we remain confident that we can achieve our revenue growth targets for 2022 as a result of the more committed and collaborative long term partnerships, we've built with our critical supplier base.

Those partnerships have been forged based on regular communications of our forecast by working proactively with our suppliers to ensure sufficient capacity for our expected growth.

By committing to longer term horizon order commitments that extend in some cases into early 2023.

Which has also helped to mitigate inflationary risk in the near term.

Additionally, the reputation we have built by delivering on all our order commitments over the past two years. Despite the risk of disruption of Covid on our business has added a critical layer of mutual trust between spine and our key suppliers.

We will continue to monitor for any new or emerging supply chain risks and work just as proactively in response to changes.

Likewise, our expectations for free cash flow burn in excess of $60 million for 2020 to remain the same as we plan to invest more than $40 million of growth capital in 2022, and the additional inventory and spinal implant sets needed to support the launch of more than 15, new products and line extensions this year.

Our higher revenue expectations.

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

Thank you John .

Today I'd like to congratulate John on his promotion.

The added responsibility Etsy, spuds, CLO and CFO .

CFO .

Focus on operational excellence will enable me to increase my customer facing presence in the field as well as ensuring our culture and people prosper in a post COVID-19 workplace.

In closing I want to reiterate our enthusiasm for the first quarter results, we achieved particularly in light of the struggles other spine implant providers experienced with either market share losses or revenue growth challenges.

The entire <unk> organization is feeding off this positive momentum as we continue to focus on the relentless execution that has brought us to this point. Our recent success represents the culmination of our continued and confident investment in product innovation and inventory throughout.

The past two years.

Despite the significant business risks risks and disruptions that COVID-19 had in particular on the spine market.

Truly believe that <unk> is at an inflection point to even faster and more efficient growth and we are confident that we are on track to deliver against or exceed the short and long term expectations. We set out in the March analyst day with that we will now open it up to questions.

Operator.

As a reminder to ask a question you will need to press star one on your telephone to withdraw your question. Please press the pound key our first question comes from Matt O'brien of Piper Sandler Your line is open.

Hi, guys. This is drew on for Matt and thanks for taking the questions and congrats on a good start to the year here.

I do just wanted to I wanted to start off on the guidance a couple of different components to that number. So maybe you could just help us break that down a little bit.

It looks like the changes are primarily related to an acceleration on the U S. Korean plant business, how much of that change is a change encumbered recovery expectations versus strength in the core business and then just on 70.

Any changes to how you're thinking about the revenue trajectory today and mix up her notes versus placements versus where we were a couple of a couple of months ago.

You have to give a little bit of kind of where our sound checks are in with surgeons for the marketplace. I think it's been pretty consistent that they have.

Have a reasonable backlog, but their backlogs, they're describing now most surgeons are describing it as their typical weakness that they see in their practice I don't think theres a huge additional backlog much beyond that I think there has been some recovery in the first quarter with some of that I think there's also been some.

Consistency in how hospitals are handling and I don't think we are getting the flex time or a great deal of extra time in the or but I do think that they're managing through and you know most surgeons I've talked to you would have a two to three months.

Needless to get in for surgery. So I think that's probably going to track pretty.

<unk> throughout the year I'll, let I'll, let Bob answer the second part of that question.

Yes, we're seeing in the pipeline for 70, what we expect a greater mix of earn out opportunities in that pipeline compared to just straight up capital sale as.

As we talked about earlier.

We've closed.

<unk> earn outs for that 70 technology and that represents now $2 million of annual revenue commitments on those earn outs.

We're seeing what we expected to see which would be ultimately more.

<unk> placements turning to earn out and if our pipeline comes to fruition as we see it now I think you'll see a greater even greater mix of earn outs going forward.

It's simply a function of the timing between capital sales cycle being six to nine months since the acquisition. If it makes sense that we'd see a higher percentage of earn outs because 70 capital sales team is equally incentivize for earn out or a capital sale and it had been since we closed the acquisition last year.

Okay.

I do want to follow up on 70 here.

The comment on and see more pull through maybe you could just expand a little bit on what are you tracking there and are you seeing an uptick in utilization in any halo effect as far as getting more surgeons, who had not historically used.

He's fine onto the platform because of 770 <unk>. Thank you.

Yes, it's two things.

Cross functional collaboration between the 70 sales force and our sales management team of distributors.

<unk> got great relationships and accounts, where they have already placed units they've made introductions to our teams that wouldn't have happened if not for the 17 introduction and we're starting to sell in those accounts and likewise, we've got strong relationships in our legacy accounts for spinal implants, and ortho biologics and we've helped 70 sales team get our foot in the door and we sold some 70 units.

There so.

And that dialogue has been happening it continues to happen and in select accounts as we shrink we're starting to see non contractual pull through.

Unit was sold in the accident rate was the street capital sale and we're seeing an increase in volume we're tracking.

Three and six months before the unit was placed in three months to six months. After it was placed so theres not a great deal in history, yet, but the initial signs in some accounts, where we're seeing a meaningful increase in revenue.

Kind of holds true that you can get 70 unit in the door.

Even on a capital sale theres going to be pull through opportunity for spinal implants, and ortho biologics, particularly as we make our spinal implants more seamlessly integrated with the 70 technology.

Good to hear thank you.

And our next question comes from Matthew Blackman of Stifel. Your line is open.

Good afternoon, everyone. Thanks for taking my questions.

John I had a couple for you let me start with just a clarification I want to make sure I heard you correctly I think you were talking about the second and the fourth quarter being up mid to high teens in the third quarter up high teens did I hear that correctly that that's number one.

Yes, Q2, and Q4 is mid to high teens, and then Q3 high teens or maybe even 20%.

Okay.

Delta Q3 last year.

Okay.

Got you and Thats and Thats for total revenue.

Correct Okay.

Okay.

Alright, and then sorry that was that was excluding the <unk>.

Impact of the spinal implants.

I'm just talking about sorry.

Okay, that's great.

Then another one for you.

I appreciate your commentary on Opex and gross margin I think you said that that <unk> spend was planned to be heavy just how should we think about the cadence here for gross margin for.

For the rest of the year and then I guess a similar question on on that phenomenon is 30 million the right sort of run rate since the start to lift off of or does it calibrate down again, because he had commissions. The first of all just any help on sort of the trajectory of each of those lines and I've got 170 follow up question.

Gross margin you should see that increase as the year progresses.

In Q4, we had a pretty big.

<unk> charge in Q1, we had a pretty big charge and that corresponds with the very large full product launches we've had in the spinal implant side right.

It's going to coincide with those so we don't anticipate.

Those type of charges continue at that level throughout the year. So we're going to have the benefit of all the gross margin expansion levers we talked about in the March analyst day, plus we should see a step down in the charges as we've got these products fully launched and they are going to be generating more revenue and that should take some pressure off.

So we think that will go down and Youll see a linear progression up on that.

The gross margin side.

From a sales and marketing perspective, right. We have added the cost of the 70 marketing and capital sales team.

And we are seeing some leverage on commissions not a lot yet, but recalling the March analyst day, we talked about our go direct strategy in the white spaces, where we can't find good exclusive distribution. So any continued leverage we get.

Distributor commissions over the rest of the year, we expect is going to be offset by the impact of that.

Essentially the guarantees that you'll need to pay a lot of the direct sales team as you hire them to sit out noncompete, where they have noncompete. So yeah, I think it's going to be a similar level for the rest of this year.

Commissions drive such a large chunk of that and we do have a full year's worth of 70 sales team and marketing team in there.

Okay really helpful. I appreciate that and then if I could squeeze in.

70 question and then you guys you brought up the pull through and I. Appreciate it's really early here.

When we talked to some other companies when they talk about their enabling technology portfolios in the potential pull through they see at accounts that are using the technology versus those that aren't they.

And here is sort of well, we get 15% to 20% higher utilization or higher even revenue generation.

Those accounts with the enabling technologies again I. Appreciate it's really early here, but is that a fair bogey to sort of be thinking about here at 70 scales is that a fair way to think about the potential pull through that you would get somewhere down the line.

Yes, I think that we're going to it is too early we don't have enough.

Installed placements on earn out, but we do view it the same way, we do view that potential the same way a lot of whats already been installed is in accounts that we have very little market share. So absolutely is going to enable us to not only gain market share, but gained some significant growth rates, especially year over year. So.

Yes, we look to those metrics, but it's too early for us to be saying that we're at those metrics yet.

Understood really appreciate it congrats on a good start to the year.

Thanks.

And our next question comes from Jeffrey Cohen of Ladenburg Thalmann. Your line is open.

Okay.

Hi, Keith and John how are you.

How are you.

Brian and John Congrats on the additional title just a few questions from our and so could you talk ruble explore too you said indicators reduce more mobile and.

Whereabouts are you finding most of the utilization on the <unk>.

Spine in history.

Is it being used in two levels at all or is that a.

Pursued our aspiration of yours.

Yeah.

Very good question exact.

After all.

I apologize, but I'll have to look at what the exact indications are from an FDA perspective, most most of our interbody opportunities are but that one's an interesting one due to the expanded ability so.

I believe its two levels.

By the time, we exit will have an exact answer for you okay.

That's super helpful.

As a follow up on that one or two of Matt's questions here one on.

70 side or more importantly on your question obligation lumbar side are there any.

Early findings that you can talk about.

Give us a sense of how many physicians are.

Number of placements.

Two centers.

Sure.

Any findings or that you can comment on.

So as we go.

Talked about before the number of units. We've got there's 54 units 70 units deployed in the U S and China.

<unk> number I think it's.

For the U S.

So we've seen good growth.

One thing that seems consistent with 70 as we place the unit, it's getting good utilization and in some accounts we've sold two units because the surgeons there like it so much in.

The radiation free profile of the technology in open procedures.

Now this is going to Miss module capability for it that go into full commercial launch.

And the fact that it.

Seamlessly into the workflow and instead of interrupting the surgery for 20 to 25 minutes and willing and O arm you can step on the pedal thats within the surgeons control in register or Reregistered patient during the surgery in 30 seconds or less so I think they're really understanding and seeking the clinical benefit safety profile and the fact that it's helping them utilize the <unk>.

More efficiently because we've got some initial studies that are set and the team is doing it shows it reduces surgery times.

Okay got it and maybe commentary on the flash.

With your limited launch thus far.

Oh the mis.

Yes.

Yes.

For that particular, new feature we have gone from alpha to beta. So it has successfully been expanded in use and we continue to be gathering some great clinical.

Data information and also obviously, we're working through how the easiest for setup the easiest for.

Seamless workflow I mean, one of the things I think that.

We have made sure to identify is that workflow in the O R needs to be seamless we don't need we don't want to be a technology that disrupts workflows stops were stopped stops work process and so we continue to advance it into beta and are looking forward to full launch as we continue the year.

Got it John .

John a question.

Inventories from it looks like the increase throughout the last year was approximately $2 million in inventory should we expect a similar type of increase on a percentage basis.

Page 23, as you continue to.

Good riddance from Alison Davis into launches.

Yeah, So last year the mix it was over $40 million of investment in spinal implant the instruments and sets and the inventory in the aggregate.

And as we said, we think we're going to spend more than $40 million to invest in that this year, but youll see a higher mix of that it was higher percentage should be on the inventory side, because we've deployed a lot of sense and you know our goal is to use those instrumentation sets more efficiently and with the revenue growth, obviously, it's going to require more inventory to get there.

To support that revenue growth, but I think youll see a greater percentage of that $40 million this year being an inventory versus capex compared to last year.

Okay and then.

One more.

Hold on one second we have a response to on the.

Explore is is you're correct. It is over to continuous contiguous levels. So that is from <unk> to US one is the indications.

Okay. That's super helpful and one more quick one in charge of southern housekeeping.

Could you give us a breakdown of the international bond the two segments or spinal instrumentation.

<unk>.

Sure Ortho.

Was $2 2 million.

Spinal implants was 2.4 and a half.

And then 70 as we said was about 600000.

Okay that question first thanks for taking the questions.

Sure.

And our next question comes from Richard <unk> of <unk>. Your line is open.

Hi, Thanks for taking the questions guys and congrats on the momentum in the quarter Nice performance.

I wanted to.

Wanted to start off just on the underlying environment.

I appreciate that January <unk>.

Operator were weaker but it sounds like things picked up nicely and into March and Keith I was wondering if you could comment on the what the trend has been given since March and into April and more specifically what are your assumptions for whether its backlog work down or just underlying trends continue.

<unk> improvement.

From from March levels.

For the full year guide.

Yes.

Your question, we saw a strong April again with double digit growth in all categories.

We feel that the market is at a point of as I said the surgeons were talking to have wait list that are two to three months out they are talking about good clinic time, meaning that the patients coming through their office is.

As good as it's been and we're hearing positive signs at hospitals continue to be working through any kind of staffing shortages or staffing issues and that.

Being blight right, they're seeing greater light at the end of the tunnel so to speak so all of those spell very positive signs.

Not to mention that.

As we mentioned a number of new product introductions that are coming forward that there is a lot of excitement not only in our distributor teams, but also from the surgery surgeon side.

Committing that they will be trialing of new products as they are available.

Thanks for that color. That's helpful. Maybe just another one on the capital environment and I totally appreciate that.

You guys are are early on in the launch here.

And rollout.

But but but still I'd appreciate any perspective, you have both just on the overall environment.

Any you mentioned six to nine months capital purchasing cycles.

Any elongation of that.

Just just from a from the environment and potentially hospitals kind of reconsidering their.

Other priorities and spending but also from a competitive a decidedly equation just as the number of imaging technologies in China.

Various types of capital imaging robotics and other.

No.

That are getting launched in or moving into a more full scale launches in 2022 and beyond I'd be curious how you guys see 70 positioning there and if there was any.

Any any brewing system changing.

Capital of Trialing.

That would be helpful. Thanks.

Yes, we're certainly keeping a close eye on it obviously, we're painfully aware of what our competitors have been signaling on challenges. They may be having there is a component, though that we feel gives us an advantage and that is the price point that we fall in our navigation technology.

Is much more cost effective than some of the commitments that need to be made for our competitors. So that gives us I think a little bit more freedom of flexibility to create a better selling experience and consistent with maybe some of the pullback, but some of the hospitals may be seeing.

Still within our price point that becomes more affordable, but that said, we're certainly keeping an eye on it we have a great deal of items.

Tunnel and we also.

Are looking towards continuing focus on earn outs and earn outs are great opportunity as I mentioned earlier, because many accounts that were talking to we don't have a presence in and so this would give us some new presence on the implant and ortho biologic side as well.

Got it thanks, again and congrats on the performance.

Yes. Thanks.

And our next question comes from Ryan Zimmerman of <unk>.

Line is open.

Hey, this is Phil on for Brian can you hear me all right.

Yes, you bet has it gone.

Okay, Great Yeah, I've got just two questions here, one with the higher allocation to R&D in the past.

12% plus in FY 'twenty two 'twenty three do you have a sense for where you expect to allocate that spend among your product families.

Yeah, we've got a good outlook for it and historically it was 9% to 10% of our revenue, which is the spinal implants and ortho biologics and it was heavier.

Significantly heavier on the spinal implant side within that 10%.

And the 12% we're expecting this year of total revenue.

You could probably kind of backed away, it's going to be higher than 12% for the set of deep portfolio as a percentage of their revenue.

Because.

We're still going to be in sort of that 10% range on the legacy spinal implants with the biologics business, but more on the <unk> side as a percentage of their revenue just because there's so many exciting new technologies and product line enhancements that we're going to bring to the market.

We wanted to have the 70 team has worked as quickly as they can with the additional liquidity, we can provide to be able to accelerate those programs.

No that's great. Thanks for that color on the second one is in a similar vein with the vitality index of the company improving over the last several years you know, what's the right way to think about how high that can go in and what's the goal for a proportion of sales from new products.

I mean ultimately.

Emily.

Just trying to one side, our new products, we expect to get well above 90% because we've really.

Transformed the portfolio most significantly in the last two years or so.

When we spun off in 2015, so long ago seven years three quarters of our revenue came from products that were seven or eight years or older.

And now if you look at products that are seven years or less.

I believe we are close to 90% at this point.

And we're just going to continue to cannibalize, the legacy products and grow and take market share with new products and also convert surgeons using the legacy products to those.

Better.

Features and benefits and help ourselves to become more efficient less complex supply chain. So that we're managing fewer systems, but also making sure that surgeons have the best and most current products enhanced to take care of their patients with.

Okay makes sense and congrats again on the good quarter.

Thank you.

And our next question will come from Jason Wittes of loop capital. Your line is open.

Hi, Thanks for taking my questions.

So first of all in terms of cash flow did you kind of cash burn that is did you kind of indicate kind of where you think cash burn will be for this year and related to that you mentioned youre going to be doing some debt refinancing.

Where does that put you in terms of a cash position, especially in relation to I think you said.

Kind of pointed to the end of 2020 core are you, reaching EBITDA breakeven.

Yes, we're still expecting to.

Expand more than $60 million in free cash flow burn this year consistent with what we talked about in the analyst day as we invest $40 million of that is going to go to spinal implant inventory or biologics inventory.

Spinal implant sets the capital expenditures in the instrumentation. So we're still on track for that and.

The growth we put up in Q4 shows why that's a good investment because we got to make sure. We comfortably have enough sets to service current surgeons and distributors and we've got some really ambitious plans to onboard some new larger more transformative exclusive distributors. So it's really important to be able to hit the ground running and have enough said.

For them to grow their business and convert their business from day, one and not try to ramp it up over time, but trying to convert that as fast as we can and we feel like the portfolio is in a position now where we want to aggressively make those bets and flip that business because we know distributors have been waiting on the sidelines until these products go into full commercial launch.

And they can convert their business much quicker than we could have two years ago. So.

That's kind of what's driving the aggressive bet again, another year of $40 million plus on inventories because we know we've got the portfolio to take market share faster and we want to make sure. We're in a position to do so while continuing to serve as the legacy distributors, who are also growing their business.

Okay. That's helpful. Thank you and also in terms of if we summarize kind of your outlook for the year on revenue growth.

Just how much of that is new product.

Asps.

Related growth how much of that is salesforce distribution.

Expansion and how much of that is <unk> related.

Could just maybe summarize that the best you can I appreciate it.

Yeah, So asps as we talked about it consistently.

Consistently like many other spine companies low single digit declines so all of our growth is coming from volume growth.

It's really difficult to quantify where it comes from but Theres really three primarily primary legs of growth for us.

It's adding new distribution and we've got some good opportunities we've already begun on boarding this year and last late last year more opportunities in the pipeline for these more exclusive and transformative distributors. So it's going to be taking market share by bringing onboard new distributors.

Gonna be penetrating deeper into the territory of our existing distributors and I think we've been really successful in some regions, particularly in the west in flipping competitive reps to come join existing distributor shifts there.

Gruesomely, selling <unk> products and being able to grow the business that way based on.

The product innovation, we've launched and how well our distributors have received that technology and being able to grow their market share David would convince some competitive reps to come join their business and represents six might as well. So that's the second leg and the third leg is just more revenue per procedure and that can come from either.

Two areas.

Competing in more complex and deformity surgeries, and Thats, where mariner adult deformity and kind of reinvigorating that franchise is going to help us generate more growth or more revenue per procedure by participating in more complex into.

<unk> surgeries or by using more products and systems per procedure. So if we have the interbody, we want to make sure we have the fixation.

The ortho biologics or vice versa. So the growth. The good news is coming from all those legs. It's just very difficult to try to quantify how much of it is going to come from what and with respect to 70, we've been.

Reluctant to provide any guidance in terms of how much <unk> is going to contribute to growth in terms of capital sales.

As I've said many times if every <unk> that we placed in the U S was under an earn out the capital sales would be zero, but it will be one of the happiest guy in the room, because we are locking in long term revenue commitments at new accounts, where growth in existing accounts because of those earn out so I don't want to put a number out there for <unk>, because we could miss it because.

We end up placing more units on an earn out which like I said long term earnings wise market share taking market share preservation wise.

That seven days a week.

Okay. That's helpful. And then just a couple of thoughts related to that.

First on 70.

How should we think about earn outs for them.

A replay system in terms of like an annual revenue number.

Potential there and then secondly, I think you mentioned this quarter.

You were kind of revenues growth was per case was low single digits.

So I assume that's kind of a good assumption going forward in the rest of the growth is 70 and sales force expansion to sort of close out the original question I had.

Yes.

Earn out commitments.

It's a range right and it depends on the account, but I don't want to get into too much detail.

<unk> purposes in terms of what we're looking for but it's good fair enough right.

One data point, we gave was we got for earn outs already completed and those represent over $2 million of annual revenue opportunity. So that'll give you a sense of at least what we've been able to achieve.

But yes, I don't want to get into too much detail. There and then the second part of that question was.

If I look at the quarter you mentioned I think you mentioned this quarter.

But your revenue per case was up I think low single digits.

I assume that's a reasonable assumption going forward. So the rest of the growth is coming from the other parts of the bucket that you've kind of highlighted.

Force expansion in 2017.

Yes fair question the bulk of the growth is going to come from bringing on new distributors.

As the number one source number two would be penetrating deeper into existing territories with existing distributors and then yes.

Products <unk> systems per procedure and participating in more complex and deformity surgeries would probably be a.

Tied for third.

And 70 is going to help us.

With growth across all of those different mics.

Very helpful and congrats on the promotion I'll jump back in queue.

Thank you. Thank you.

Sure.

And our next question comes from Ross My Osborne of Cantor Fitzgerald. Your line is open.

Hi, Brian Hi, Thanks for taking my question congrats on the quarter.

Just starting off on a year.

Yeah, It sounds like you're pretty comfortable with the new range, but just curious does that consider any new variant.

<unk> range or do you see him.

And improving operating environment for the balance of the year.

Yes, largely assumes no new variants.

<unk> talked about in the scripted comments.

It seems like a good landscape right lots of experts who are much smarter than us are talking about having moved past the pandemic phase we have seen an increase in case counts.

Banting around in the news lately, but the good news is we're not seeing any constraints in hospital staffing where hospital bed capacity notwithstanding the fact that cases have increased.

It does not contemplate a large.

Scale type of.

Very coming up that would disrupt surgeries again, but again, we say that with growing confidence based on how things have trended in the last four months that we're in a better spot and hopefully.

All of that disruption to our business is in the rearview mirror with vaccines and therapeutics, we now have in place.

Got it I think what additional color there.

Switching from the other products in your portfolio.

Back you'd share on north start full launch in <unk> last year and it may be ahead of the Mariner adult deformity system and <unk> transitioning to full launch.

Okay, great demand and limited markets, they're partners here.

So it was it was the back half of that question how do we.

How do we look at what those launches sorry.

Okay.

Given that they are in limited launch now how demand has been so far any feedback.

Transitioning into a full launch.

Yes, so north star's full launch.

And it's going extremely well.

As we kind of.

<unk> mentioned previously it was one that did it.

Beyond our expectations and alpha to the point that we were really stressing the system. How many surgeries were getting so we actually invested.

And more sets for launch.

And it is one of our hottest systems as far as demand and the excitement surgeons have with what features there are and the simplicity for implementation. It also works very nicely and seamlessly.

70, <unk>. So that's been a nice system for a difficult procedure, not only making it easier, but enabling surgeons to use the system with a better workflow.

Are the <unk>.

Entire implant portfolio.

All going to be at different stages of launch throughout the year, but it clearly is in high demand throughout the entire alphas. We were really pleased with not only how busy office had been but also the great feedback we're getting to make sure that we're making all the subtle refinements that we need for a complete launch.

And there was one other ones that you had mentioned some color on what was that.

Yeah, the last one that Mariner adult deformity system.

Yes, yes, and so that will that will advance as well and we have some exciting features that will also incorporate.

And make it easier and more seamless with 70, that's one area when you get into deformity surgery. The difficulty of the anatomy of the difficulty of how you need to pursue that anatomy and how much easier. It is made with 70 and giving feedback not only on screw trajectory, but also the <unk>.

Part is as Youre, making certain corrections and adjustments that 70 is able to keep up with you. So to speak it's able to keep up with it by constantly taking a look at the topography of the spine and making a combination so that that combined launch.

Very excited about and it's got some nice momentum.

As we've been going through prelaunch.

Yeah.

Sounds great. Thank you and congrats again on the strong quarter.

Your banks.

Yes.

I would now like to turn the conference back to Mr. Keith Valentine for closing remarks.

Well. Thank you everyone for joining us. This afternoon are approaching evening in some areas and I hope I wish you a good evening to everybody talk soon.

Yeah.

This concludes today's conference. Thank you for participating you may now disconnect.

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<unk>.

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Welcome to the six by 2022 first quarter financial results Conference call. At this time all participants are in a listen only mode. Following the management's prepared remarks, we'll hold a Q&A session to ask a question at that time. Please press star followed by one on your Touchtone telephone if anyone has difficulty.

Hearing the conference. Please press Star Zero for operator assistance as a reminder, this conference call is being recorded today March 3rd I'm, sorry may three 2022.

I'd now like to turn the conference over to Lisa Salvo Investor Relations. Please go ahead.

Yeah.

Thank you for participating in today's call joining me from C. Spine is CEO , Keith Valentine and CFO John Boss Janssen.

Earlier today <unk> released full financial results for the first quarter ended March 31 2022.

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 2022.

For 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 dumb dumb dumb dumb seek find dot com and adopt adapt at SEC Gov.

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

<unk> believes that the presentation of these non-GAAP financial measures provides important supplemental information to management and investors regarding financial and business trends relating to the company's financial results of operation.

These non-GAAP financial measures should not be considered replacements for and should be read together with the most directly comparable GAAP financial measures if.

Reconciliations to the most directly comparable GAAP measures are provided in the tables accompanying the press release, we issued today.

I will now turn the call over to Keith Valentine Keith.

Yeah.

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

First quarter results exceeded our own internal expectations. Despite the impact of significant COVID-19 related headwinds throughout the entire month of January when these headwinds subsided in spine procedure volumes increased its hospital staffing and overcapacity quickly recovered in early February our momentum accelerated as.

As the quarter progressed.

Which translated into strong revenue growth for the full quarter and even more positive energy among our employees distributor partners and surgeon customers.

We remain excited and optimistic as the momentum continued into the second quarter.

To highlight some of our team's recent accomplishments that are fueling this optimism and then Jim.

Confidence to raise our full year 2022 revenue guidance by $5 million.

In the first quarter, we grew total revenue, 21% over the prior year period to $57 million.

And exceeded the high end of our Q1 revenue guidance by $1 billion.

In the U S, where we generate approximately 90% of our total revenue. We saw revenue also increased 21% reaching.

Reaching $45 $5 million and international revenue grew 16% to $5 2 million.

In March we celebrated our 50000.

Plantation of our nano metal in inner body device, which continues to be foundational to our fusion engineered focus.

It took nearly six years from the original launch to hit the 25.

5000.

Millstone and we were able to double that in just over two years.

Except of our nano mentally franchise.

With our introduction of our <unk> and wave form.

Inter body system demonstrates our team's commitment to advancing the development of differentiated surface material that novel designs.

We have continued to expand our product portfolio with the full commercial launch of four products and systems, including the explore T O.

Oh expandable Interbody system.

Tore at UBM parties with excel bone matrix, the regatta lateral placed system and the North Star for said fusion system.

In addition, we also launched flash navigation lumbar fusion, which marks our first spinal implant system develop an integrated with 70 technology.

We're particularly proud of the tour at launch, which is an upgrade to our market, leading Evo <unk> DBM putty that is packed in a dry state to improve osteo conductive potential and shelf life stability. This is yet. Another example of how <unk> continues to advance both in spinal implants and <unk>.

So biologics portfolios through product development to help surgeons improve patient outcomes and by investing in scientific studies to differentiate our products and drive market share gains.

Turning to 70 surgical.

Generated $2 $3 million of enabling technology revenue in the first quarter of 2022 to date, we have closed or announced for the 70 flash navigation technology, representing $2 million of annual revenue commitments.

There are now a total of 54 flash navigation systems deployed in the U S.

33 outside the U S. We are also starting to see more non contractual revenue pull through of both spinal implant and ortho biologics products in select accounts that purchased flash navigation systems.

Pipeline is robust with a more balanced mix of earn outs <unk> capital sales and the combined sales teams continue to work well together and generating cross selling opportunities across all portfolios.

Our increasing organizational focus on leveraging and expanding the 70 flash navigation platform technology combined with the exciting recent product launches I talked about earlier and those we plan to fully launched throughout the remainder of this year such as the entire wave forms three D printed interbody portfolio.

So the Mariner adult deformity system and the 70 S module are the key catalysts that are attracting an increasing number of large transformative distributors to see spot.

We have already executed on some of those new distributor additions and we are even more opportunities in the pipeline. Additionally.

This gives us very well to hire our first direct sales reps into white space areas, where we have not been able to identify an appropriate exclusive distribution partner and is consistent with the plan shared at our analyst day meeting in March.

Before handing off to John I want to offer some additional recent insights into market conditions that we're seeing in the field with more positive news about COVID-19, we seating and recent expert commentary that we're past the pandemic phase were skiing, a sustained uptick in spinal surgery volumes across.

The entire United States and renewed confidence by our surgeon customers that we have finally turned the corner towards the degree of the old normal.

Despite the lingering staffing shortage concerns. Additionally, we're positioning ourselves to take advantage of some of the new dynamics in the spine market that emerged during COVID-19, such as an increasing number of spine surgeries being performed in the ASC.

And increasing demand by small and mid size hospitals to acquire enabling technologies, such as our flash navigation technology, whether through outright purchase.

Or a capital efficient earn out mechanism.

Conclusion, I am confident that despite now delivers best in class products across all our offerings from enabling technology to spinal implants to GBM and was the primary factor underlying our first quarter revenue.

We have today a product portfolio that is attracting transformational distributors and provides us with a significant advantage. We are now seeing competitive distributors contacting us to see what's happening at least by the shifts that we believe is occurring because increasingly they want to be part of a team that is aggressively.

Innovating and taking market share.

Our recent product launches specifically, the explore expandable interbody and the wave form family of IBD.

Been game changers.

Now, it's our time.

Level of enthusiasm among surgeons and distributors is something I haven't experienced in years and it gives me.

Confidence to raise our full year 2022 revenue guidance by $5 million to a range of $231 million to $235 million. This reflects growth of approximately 21% to 23% over full year 2021, and I believe there is still a law.

Long runway ahead, even this year as we continue to cultivate other increasing lean more substantial distribution opportunities and 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 2022 was $50 $7 million or 21% increase over the prior year in the U S. We posted 21% growth to $45 $5 million international revenue increased by 16% to $5 $2 million.

U S spinal implant and enabling technologies revenue in the first quarter increased $5 8 million or 31% to $24 $2 million with a 70 flashed navigation platform contributing $1 $8 million of revenue.

Products launched or enhanced they are line extensions within the past five years continue to fuel revenue growth and drive market share gains and accounted for 74% of U S spinal implant revenue.

This continues to be a very encouraging indicator for sustained growth throughout 2022.

Note that we slightly changed this reporting metrics starting this quarter as we previously reported the percentage of U S. Spinal implant revenue from products launched since the spin off in July 2015.

U S ortho biologics revenue in the first quarter increased 12% to $21 $3 million and continues to be driven by growth in the Osteo strand, plus fibers based DBM product line.

Sales of products launched within the past five years accounted for 43% of U S for the biologics revenue.

Our U S spinal implant surgery volumes increased 17% compared to the first quarter of 2021, while revenue per case increased low single digits compared to prior year.

Utilization of our spinal implant systems, and ortho biologics products increased to $2 one per procedure in the first quarter of 2022 <unk>.

Compared to 2.0, a year ago.

We experienced low single digit average price declines in both the spinal implants, and ortho biologics portfolios consistent with prior years.

International revenue in the first quarter of 2022 totaled $5 $2 million, a 16% increase compared to the prior year period and included $600000 of enabling technologies capital sales revenue.

GAAP gross margin for the first quarter of 2022 was 59, 8% compared to 63, 4% for the first quarter of 2021.

The decrease in gross margin was primarily due to $700000 of technology related intangible asset amortization associated with the 70 surgical acquisition plus higher spinal implant excess and obsolete inventory charges associated with recent full commercial launches in additional set deployments.

Adjusted gross margin was 62% for the first quarter of 2022 compared to 64% for the first quarter of 2021.

Operating expenses for the first quarter of 2022 totaled $47 2 million.

And $8 million increase compared to $39 $1 million for the first quarter of 2021 and included $3 $4 million of operating expenses directly attributable to 70 surgical.

The increase in operating expenses was driven primarily by $6 $1 billion and higher selling and marketing expenses. The substantial majority of which related to 70 surgical operating expenses and increased commissions on higher sales.

$1.3 million of higher research and development expenses attributable to 70, surgical and $500000 in higher general and administrative expenses, which was primarily attributable to 70 surgical.

Net loss for the first quarter of 2022 was $16 $6 million compared to a net loss of $12 $7 million for the first quarter of 2021.

Adjusted EBITDA loss for the first quarter of 2022 with a loss of $8 million compared to a loss of $5 2 million for the first quarter of 2021.

The increase in adjusted EBITDA loss was primarily the result of the dilutive impact of 70 surgical on the current quarter results adjusted.

Adjusted EBITDA loss is a non-GAAP financial measure 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 in our industry.

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

Cash and cash equivalents at March 31, 2022 totaled 81 4 million and included the proceeds of $25 million, we borrowed under our $30 million credit facility in March.

We are well into the process with Wells Fargo is extending the credit facility through 2000 April 2025, and expanding the total potential borrowing capacity to $40 million, we expect to complete that during the second quarter.

Our free cash flow burn, which includes operating cash flows and purchases of property and equipment was $24 3 million for the first quarter of 2022.

We anticipated this relatively heavy Q1 spend in the guidance we provided in March consistent with a large amount of inventory and set build capital expenditures needed for the recent and upcoming full product launches and to support forward revenue growth expectations.

Turning to our financial outlook for 2022 as Keith noted earlier, we now expect full year 2022 revenue to be in the range of $231 million to $235 million.

Which includes the $12 million to $13 million of anticipated revenue in the third quarter from the final EU spinal implant stocking orders.

And for U S spinal implants growth to exceed 20% for the year.

This compares to previous revenue guidance of 226 million to $230 million and expectations for U S spinal implants revenue growth to exceed 17%.

I'd like to further clarify what appear to be some confusion as it relates to the impact of the final EU spinal implant stocking orders on our second half of 2022 revenue growth in the context of our full year guidance.

While we expect the revenue generated by those stocking orders to approximate $12 million to $13 million in total that would likely translate into eight five to $9 $5 million of incrementally higher European spinal implants revenue in full year 2022, compared to the $6 $2 million of EU.

Spinal implants revenue, we generated for the full year of 2021.

So for those investors and analysts calculating an implied revenue growth rate, excluding EU spinal implants based on our revenue guidance. We suggest you used 14 five to $15 5 million of total revenue for 2022 with a reminder to exclude the $6 $2 million of 2021.

EU spinal implants revenue in the denominator.

Excluding all EU spinal implants revenue, we anticipate that growth rates will be in the mid to high teens in the second and fourth quarters in the high teens or more in Q3.

Moving down the P&L, we still anticipate generating 150 to 200 basis points of adjusted gross margin expansion compared to the 63, 5% we reported for 2021 and to reduce our adjusted EBITDA loss by 15% to 20% compared to $22 $9 million, we reported in.

2021.

We expect to generate these operating improvements through a combination of more efficient revenue growth fueled by the on boarding of more exclusive and high quality distributor partners from the robust cadence of transformative product launches and from higher adjusted gross margins through an increasingly favorable sales mix and as we begin to them.

More fully realize the many gross margin upside opportunities that we outlined in our March analyst day.

From a inflation and supply chain perspective, there are plenty of macro risks for us to contend with however, we remain confident that we can achieve our revenue growth targets for 2022 as a result of the more committed and collaborative long term partnerships, we've built with our critical supplier base.

Those partnerships have been forged based on regular communications of our forecast by working proactively with our suppliers to ensure sufficient capacity for our expected growth.

By committing to longer term horizon order commitments that extend in some cases into early 2023.

Which has also helped to mitigate inflationary risk in the near term.

Additionally, the reputation we have built by delivering on all our order commitments over the past two years, despite the risk and disruption of Covid on our business has added a critical layer of mutual trust between C spine and our key suppliers we.

We will continue to monitor for any new or emerging supply chain risks and we're just as proactively in response to changes.

Likewise, our expectations for free cash flow burn in excess of $60 million for 2020 to remain the same as we plan to invest more than $40 million of growth capital in 2022, and an additional inventory and spinal implant sets needed to support the launch of more than 15, new products and line extensions this year.

And our higher revenue expectations at.

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

Thank you John but also earlier today I would like to congratulate John on his promotion and added responsibility Etsy, Spuds, CLO and CFO <unk> <unk>.

Focus on operational excellence will enable me to increase my customer facing present in the field as well as ensuring our culture and people prosper in a post COVID-19 workplace.

In closing I want to reiterate our enthusiasm for the first quarter results, we achieved particularly in light of the struggles other spine implant providers experience with either market share losses or revenue growth challenges.

The entire <unk> organization is feeding off this positive momentum as we continue to focus on the relentless execution that has brought us to this point. Our recent success represents the culmination of our continued and confident investment in product innovation and inventory throughout the past.

Two years.

Despite the significant business risks risks and disruptions that COVID-19 had in particular on the spine market.

Truly believe that <unk> is at an inflection point to even faster and more efficient growth and we are confident that we are on track to deliver against or exceed the short and long term expectations. We set out in the March analyst day with that we will now open it up to questions.

Operator.

As a reminder to ask a question you will need to press star one on your telephone to withdraw your question. Please press the pound key our first question comes from Matt O'brien of Piper Sandler Your line is open.

Hi, guys. This is drew on for Matt and thanks for taking the questions and congrats on a good start to the year here.

But I do just want to I want to start off on the guidance you know a couple of different components into that number. So maybe you could just help us break those out a little bit.

It looks like the changes are primarily related to an acceleration on the U S core implant business how much of that change is it a change encumbered recovery expectations versus strength in the core business and then just on 70.

Any changes to how you're thinking about the revenue trajectory today and makes them earn outs versus placements versus where we were a couple of couple of months ago.

Yeah to give a little bit of kind of where our sound.

Sound checks are in with surgeons from the marketplace I think it's been pretty consistent that they have a reasonable backlog, but their backlogs, they're describing now most surgeons are describing it as their typical wait list that they see in their practice I don't think theres a huge additional backlog.

Much beyond that I think there has been some recovery in the first quarter with some of that I think there's also been some consistency in how hospitals are handling and I don't think we are getting the flex time or a great deal of extra time in the or but I do think that they're managing through in most surgeon I've talked to you to have a two to three months.

Wait list to get in for surgery. So I think that's probably going to track pretty consistently throughout the year I'll, let I'll, let <unk> answer the second part of that question.

Yes, we are seeing in the pipeline for 70, what we expected rate of a greater mix of earn out opportunities in that pipeline compared to just straight up capital sale.

We talked about earlier, we we've closed for earn outs for that 70 technology and that represents now $2 million of annual revenue commitments on those for earn outs.

So we're seeing what we expected to see which would be <unk>.

Italy more of the placements turn into earn out and if our pipeline comes to fruition as we see it now I think you'll see a greater even greater mix of earn outs going forward.

And simply this is a function of the timing between capital sales cycle being six to nine months since the acquisition right. It makes sense that we would see a higher percentage of earn outs because 70 capital sales team is equally incentivized for earn out or a capital sale and it had been since we closed the acquisition last year.

Okay. That's very helpful. And then I do want to follow up on 70 here.

The comment on and see more pull through maybe you could just expand a little bit on what are you tracking there and are you seeing an uptick in utilization and any IMO effect as far as getting more surgeons, who had not historically used.

This financing platform because of 770. Thank you.

Yes, it's two things.

<unk> functional collaboration between the 70 sales force and our sales management team and distributors.

<unk> got great relationships and accounts, where they have already placed units they've made introductions to our teams that wouldn't have happened if not for the 70 introduction and we're starting to sell in those accounts and likewise, we've got strong relationships in our legacy accounts for spinal implants, and ortho biologics and we've helped 70 sales team get our foot in the door and we sold some 70 <unk>.

Units in there so.

That dialogue has been happening it continues to happen and in select accounts as we said, we're starting to see non contractual pull through.

Unit was sold in the absence of rate was a straight capital sale and we are seeing an increase in volume we're tracking.

Three and six months before the unit was placed in three to six months. After it was placed so theres not a great deal in the history, yet, but the initial signs in some accounts, where we're seeing a meaningful increase in revenue.

Kind of holds true that if we can get a 70 unit in the door.

Even on a capital sale theres going to be pull through opportunity for spinal implants, and ortho biologics, particularly as we make our spinal implants more seamlessly integrated with the 70 technology.

Good to hear thank you.

And our next question comes from Matthew Blackman of Stifel. Your line is open.

Good afternoon, everyone. Thanks for taking my questions.

John I had a couple for you let me start with just a clarification I want to make sure I heard you correctly I think you were talking about the second and the fourth quarter being up mid to high teens in the third quarter.

<unk> did I hear that correctly that that's number one.

Yes, Q2, and Q4 is mid to high teens and in Q3 high teens or maybe even 20%.

With Delta Q3 last year.

And in fact this delta.

Got you and that's and that's for total revenue.

Correct, Okay, John I'm, sorry, and then sorry that was that was excluding the impact of the spinal implants.

He's gotten your stocking sorry yep.

Okay. That's that's great.

And then another one for you.

I appreciate your commentary on Opex and gross margin I think you said that that <unk> spend was planned to be heavy just how should we think about the cadence here for gross margin.

For the rest of the year and then I guess a similar question on on that cinema is 30 million the right sort of run rate to start to lift off of or does it calibrate down again, because he had commissions in the first quarter just any help on sort of the trajectory of each of those lines and I've got 170 follow up question.

Yes gross margin you should see that increase as the year progresses.

In Q4, we had a pretty big.

<unk> charge in Q1, we had a pretty big charge and that corresponds with the very large full product launches. We've had in the spinal implant side right now and thats going to coincide with those so we don't anticipate.

Seeing those type of charges continue at that level throughout the year. So we're going to have the benefit of all the gross margin expansion levers we talked about in the March analyst day, plus we should see a step down in the <unk> charges as we've got these products fully launched and theyre going to be generating more revenue and that should take some pressure off the <unk>.

We think that will go down and Youll see a linear progression up on that.

The gross margin side.

From a sales and marketing perspective, right. We have added the cost of the 70 marketing and capital sales team.

And we are seeing some leverage on conditions not a lot yet but recall in the March analyst day, we talked about our go direct strategy in the white spaces, where we can't find good dish exclusive distribution. So any continued leverage we get.

Out of distributor commissions over the rest of the year, we expect is going to be offset by the impact of that.

Essentially the guarantees that youll need to pay a lot of the direct sales team as you hire them to sit out noncompete, where they have noncompete. So yeah, I think it's going to be a similar level for the rest of this year as commissions drive such a large chunk of that and we do have a full years worth of 70 sales team and marketing team in there okay.

Really helpful. I appreciate that and then if I could squeeze a 70 question and then you guys you brought up the pull through and I. Appreciate it's really early here.

But when we talk to some other companies are when they talk about their enabling technology portfolios in the potential pull through they see at accounts that are using the technology versus those that aren't they.

Often here.

Well, we get 15% to 20% higher utilization or higher even revenue generation.

Those accounts with the enabling technologies again I. Appreciate it's really early here, but is that a fair bogey to sort of be thinking about here at 70 scales is that a fair way to think about the potential pull through that you would get somewhere down the line.

Yes, I think that we're going to it is too early we don't have enough.

Stalled placements on earn out, but we do view it the same way, we do view that potential the same way a lot of whats already been installed is in accounts that we have very little market share. So this absolutely is going to enable us to not only gain market share, but gained some significant growth rates, especially year over year. So yes.

We look to those metrics, but it's too early for us to be saying that we're at those metrics yet.

Understood really appreciate it congrats on a good start to the year.

Thanks.

And our next question comes from Jeffrey Cohen.

Ladenburg Thalmann your line is open.

Hi, Keith and John how are you.

Good how are you.

Just fine John Congrats on the additional title.

A few questions from our and so could you talk ruble explore too you said indicators reduce warm level.

We're about to find reverse of the utilization on the spine or new story.

Is it being used in two levels at all or just other pursued or aspiration years.

Yeah.

Very good question exact.

After.

I apologize, but I will have to look at what the exact indications are from an FDA perspective most.

Most of our Interbody opportunities are but that one's an interesting one due to the expanded ability so.

I believe its two levels.

At the time, we exit will have an exact answer for you okay.

That's super helpful.

Follow up on one or two of them that's question Sue them.

On the 70 side or more importantly on your question obligation Bombora side are there any.

Early findings that you can talk about.

Give us a sense of how many physicians are number two.

Two centers or the use of your technology.

The decline next year.

No.

So as we've talked about before the number of units. We've got there's 54 units 70 units deployed in the U S and China comp number I think it's 30.

24 O U S.

So we've seen good growth in the field.

One thing that seems consistent with 70 as we place the unit, it's getting good utilization and in some accounts we've sold two units.

Does the surgeons there like it so much in <unk>.

<unk>.

<unk> three profile of the technology in open procedures.

Now that is going to Miss module capability for it that going to full commercial launch.

And the fact that it.

<unk> seamlessly into the workflow and instead of interrupting the surgery for 2025 minutes and willing and O arm you can step on the pedal. This within the surgeons control in register or Reregistered patient during the surgery in 30 seconds or less so I think they are really understanding and seeing the clinical benefits of the safety profile and the fact that it's helping them utilize the <unk>.

More efficiently because we've got some initial studies that are set each team's doing it shows it reduces surgery times.

Okay got it and then any commentary on the flash CIS.

With your limited launch thus far.

So the Miss.

Yes.

Yes, so we.

For that particular, new feature we have gone from alpha to beta. So it has successfully been expanded in use and we continue to be gathering some great clinical.

Data information and also obviously, we're working through how the easiest for setup the easiest for.

Seamless workflow I mean, one of the things I think that.

We have made sure to identify is that workflow in the <unk> needs to be seamless we don't need we don't want to be a technology that disrupts workflows stops work stopped stop short process.

So we continue to advance it into beta and are looking forward to full launches as we continue the year.

Got it John .

John .

On the inventories for our model it looks like two crews throughout the last year was approximately $2 million of inventory should we expect.

Similar type of increase on a percentage boost your aggregate basis 23 as you continue to.

The units from Alison Davis into cohort launches.

Yes, so last year the mix it was over $40 million of investment in spinal implant the instruments and sets and the inventory in the aggregate and as we said, we think we're going to spend more than $40 million to invest in that this year, but youll see a higher mix of there is higher percentage should be on the inventory side.

Because we've deployed a lot of the sets and our goal is to use those instrumentation sets more efficiently and with the revenue growth. Obviously, it's going to require more inventory to get the support that revenue growth, but I think youll see a greater percentage of that $40 million this year being an inventory versus capex compared to last year.

Okay, and then one more.

Hold on one second we have a response to on the on the explore it as we were correct. It is over to continuous contiguous levels. So and that is from L. Two to S. One is the indications.

Okay. That's super helpful. One more quick one in charge of summer housekeeping.

Could you give us a breakdown of the.

The international by the two segments or spinal instrumentation for the quarter.

Sure Ortho.

Was $2 2 million.

Spinal implants was 2.4 and a half.

And then 70 as we said was about 600000.

Okay that goes from <unk>, thanks for taking my questions.

Sure.

Yes.

And our next question comes from Richard <unk> of <unk>. Your line is open.

Hi, Thanks for taking the questions guys and congrats on the momentum in the quarter Nice performance.

Wanted.

Wanted to start off just on the underlying environment.

Appreciate that January and February were weaker.

It sounds like things picked up basically and into March and Keith I was wondering if you could comment on the what the trend has been given since March and into April and more specifically what are your assumptions for whether its backlog work down or just underlying trend of continued improvement.

From from March levels.

For the full year guide.

Yes so.

Your question, we saw a strong April again with double digit growth in all categories.

We feel that the market is at a point of as I said the surgeons were talking to have wait lists that are two to three months out. They are talking about good clinic time, meaning that the patients coming through their office.

As good as it's been and we're hearing positive signs at hospitals continue to be working through any kind of staffing shortages or staffing issues and that.

Being light right, they're seeing greater light at the end of the tunnel so to speak so all of those spell very positive signs.

Not to mention that.

As we mentioned a number of new product introductions that are coming forward that there is a lot of excitement not only in our distributor teams, but also from the surgery surgeon side.

Committing that they will be trialing of new products as they are available.

Thanks for that color. That's helpful. Maybe just another one on the capital environment and I totally appreciate that.

You guys are are early on in the launch here.

And rollout.

But but but still I'd appreciate any perspective, you have both just on the overall environment.

Any you mentioned six nine months capital purchasing cycles.

Any elongation of that.

Just just promote from from the environment potentially hospitals kind of reconsidering their priorities and spending but also from a competitive.

Side of the equation, just as the number of imaging technologies and kind of various types of capital imaging robotics that are.

That are getting launched in or moving into more full scale launches in 2022 and beyond I'd be curious how you guys see 70 positioning there and if there's any any any any brewing system changing in capital or Trialling there'll.

That would be helpful. Thanks.

Yes, we're certainly keeping a close eye on it obviously, we are painfully aware of what our competitors have been signaling on challenges. They may be having there is a component, though that we feel gives us an advantage and that is the price point that we fall in our navigation technology.

Is much more cost effective than some of the commitments that need to be made for our competitors. So that gives us I think a little bit more freedom of flexibility to create a.

Better selling experience and consistent with maybe some of the pullback that some of the hospitals may be saying, we're still within a price point that becomes more affordable, but that said, we're certainly keeping an eye on it we have a great deal of items in our in our funnel and we also.

Looking towards continuing focus on earn outs and earn outs are a great opportunity as I mentioned earlier, because many accounts that were talking to we don't have a presence in and so this would give us a new presence on the implant and ortho biologic side as well.

Got it thanks, again and congrats on the performance yes. Thanks. Thanks.

And our next question comes from Ryan Zimmerman of <unk>.

Your line is open.

Hey, this is Phil on Brian can you hear me alright, yes.

Yes, you bet has it gone.

Okay, Great Yeah, I've got just two questions here, one with the higher allocation to R&D in the past you said.

12% plus in FY 'twenty two 'twenty three do you have a sense for where you expect to allocate that spend among your product families.

Yeah, we've got a good outlook for it and historically it was 9% to 10% of our revenue, which is the spinal implants and with the biologics and it was heavier.

Significantly heavier on the spinal implant side within that 10%.

And the 12% we're expecting this year of total revenue.

You could probably kind of back your way into it is going to be higher than 12% for the set of deep portfolio as a percentage of their revenue.

Because.

We're still going to be in sort of that 10% range on the legacy spinal implants with the biologics business, but more on the 70 side as a percentage of their revenue just because there's so many exciting new technologies and product line enhancements that we're going to bring to the market that we wanted to have the 70 team has worked as quickly as they can with.

Additional liquidity, we can provide to be able to accelerate those programs.

No that's great. Thanks for that color and the second one is in a similar vein with the vitality index of the company improvement over the last several years whats the right way to think about how high that can go in and you know what's the goal for a proportion of sales from new products.

I mean ultimately.

Spinal implant side, our new products, we expect to get well above 90% because we've really.

Transformed the portfolio most significantly in the last two years or so.

When we spun off from 2015, so long ago seven years three quarters of our revenue came from products that were seven or eight years or older.

And now if you look at products that are seven years or less.

I believe we are close to 90% at this point.

And we're just going to continue to cannibalize, the legacy products and grow and take market share with new products and also convert the surgeon is still using the legacy products to those wood.

Better.

Features and benefits and help ourselves to become more efficient and less complex supply chain. So that we're managing fewer systems, but also making sure that surgeons have the best and was current products in hand to take care of their patients with.

No it makes sense and congrats again on the good quarter.

Thank you.

Yes.

And our next question will come from Jason Wittes of loop capital. Your line is open.

Hi, Thanks, taking my questions.

So first of all in terms of cash flow did you kind of cash burn that is did you kind of indicate kind of where you think cash burn will be for this year and related to that you mentioned, you're going to be doing some debt refinancing.

Where does that put you in terms of our cash position, especially in relation to I think you said.

Kind of pointing to 2020 quarter, reaching EBITDA breakeven.

Yes, we're still expecting to <unk>.

Spend more than $60 million in free cash flow burn this year consistent with what we talked about in the analyst day as we invest $40 million of that is going to go to the spinal implant inventory or to biologics inventory.

As the spring looks like the capital expenditures in the instrumentation. So we're still on track for that and the <unk>.

Growth, we put up in Q4 shows why that's a good investment because we got to make sure. We comfortably have enough sets to service current surgeons and distributors and we've got some really ambitious plans to onboard some new larger more transformative exclusive distributors. So it's really important to be able to hit the ground running and have enough sense for.

<unk>.

<unk> grow their business and convert their business from day, one and not try to ramp it up over time, but just trying to convert that as fast as we can and we feel like the portfolio is in a position now where we want to aggressively make those bets and flip that business because we know distributors have been waiting on the sidelines until these products through to full commercial launch and then Ken can.

Further business much quicker than we could have two years ago. So.

Kind of what's driving the aggressive bet again, another year of $40 million plus an inventory sets because we know we've got the portfolio to take market share faster and we want to make sure. We're in a position to do so while continuing to service the legacy distributors, who are also growing their business.

Okay. That's helpful. Thank you and also in terms of if we summarize kind of your outlook for the year on revenue growth.

Just how much of that is new product.

Our asps.

Related growth how much of that is salesforce distribution.

Expansion and how much of that is <unk> related if you could just maybe summarize that as best you can I appreciate it.

Yeah, So asps as we talked about it.

Consistently like many other spine companies low single digit declines so all of our growth is coming from volume growth.

It's really difficult to quantify where it comes from but Theres really three primarily primary legs of growth for us.

Adding new distribution and we've got some good opportunities we've already begun onboarding this year and last late last year more opportunities in the pipeline for these more exclusive and transformative distributors. So it is going to be taking market share by bringing onboard new distributors.

You're going to be penetrating deeper into the territory of our existing distributors and I think we've been really successful in some regions, particularly in the west in flipping competitive reps to come join existing distributor shifts there.

Exclusive Lee selling <unk> products, and being able to grow the business that way based on.

The product innovation, we've launched and how well our distributors have received that technology and being able to grow their market share David would convince some competitive reps to come join their business and represent <unk> as well. So that's the second leg and the third leg is just more revenue per procedure and that can come from either.

Two areas just competing in more complex and deformity surgeries, and Thats, where mariner adult deformity and kind of reinvigorating that franchise is going to help us generate more growth or more revenue per procedure by participating in more complex and.

Deformity surgeries or by using more products and systems for procedures. So if we have the antibody we want to make sure we have the fixation and biologics or vice versa. So the growth. The good news is coming from all those legs, it's very difficult to try to quantify how much of it is going to come from what and with respect to <unk>. We then.

Reluctant to provide any guidance in terms of how much <unk> is going to contribute to growth in terms of capital sales.

As I've said many times if every <unk> that we placed in the U S was under an earn out the capital sales would be zero, but it will be one of the happiest guy in the room, because we are locking in long term revenue commitments at new accounts, where growth in existing accounts because of those earn out so I don't want to put a number out there for <unk>, because we could miss it because we.

Placing more units on an earn out which like I said long term earnings wise market share taking market share preservation wise I'll take that seven days a week.

Okay. That's helpful can I, just a couple of thoughts related to that.

First on <unk>.

How should we think about earn outs for the for <unk>.

Place system in terms of like an annual revenue number.

Potential there and then secondly, I think you mentioned this quarter.

You were kind of revenues growth was look per case was low single digits.

So I assume that's kind of a good assumption going forward in the rest of the growth is 70 and sales force expansion to sort of close out the original question I had.

Yes.

Earn out commitments.

It's a range and it depends on the account.

But I don't want to get into too much detail for competitive purposes in terms of what we're looking forward, but its good growth fair enough right.

And the one data point, we gave was we got for earn outs already completed and those represent over $2 million of annual revenue opportunity. So that will give you a sense of at least what we've been able to achieve.

But yes, I don't want to get into too much detail. There and then the second part of that question was.

If I look at the quarter you mentioned I think you mentioned in this quarter.

Average revenue per case was up.

Think low single digits.

I assume that's a reasonable assumption going forward. So the rest of the growth is coming from the other parts of the bucket that you kind of highlighted sales force expansion in 2017.

Yeah Fair question, the bulk of the growth is going to come from bringing on new distributors.

Probably the number one source number two would be penetrating deeper into existing territories with existing distributors and.

Yes.

Products <unk> systems per procedure and participating in more complex and deformity surgeries would probably be.

Tied for third.

And 70 is going to help us.

With growth across all of those different mics.

Very helpful and congrats on the promotion I'll jump back in queue.

Thank you. Thank you.

Sure.

And our next question comes from Ross Pas born of Cantor Fitzgerald. Your line is open.

Hi, Brian Hi, Thanks for taking my question and congrats on the corner.

Starting off on your guidance sounds like Youre pretty comfortable with the new range, but just curious does that consider any new variant.

<unk> range or are you all.

And improving operating environment for the balance of the year.

Yes, largely assumes no new variants.

I talked about in the scripted comments.

It seems like a good landscape right lots of experts who are much smarter than us are talking about having moved past the pandemic phase we have seen an increase in case counts.

Banting around in the news lately, but the good news is we're not seeing any constraints in hospital staffing where hospital bed capacity notwithstanding the fact that cases increased and so it does not contemplate a large scale type of.

Very coming up that would disrupt surgeries again, but again, we say that with growing confidence based on how things have trended. The last four months that we're in a better spot and hopefully.

All of that disruption to our business is in the rearview mirror with vaccines and therapeutics, we now have in place.

Got it I think pretty good.

Some color there.

Switching from the other products in your portfolio.

Feedback you'd share on North Star full launch for you last year and it may be ahead of them Mariner adult deformity.

<unk> E train's machine of <unk> launch.

Okay, great demand and limited margins great partners here.

So what was the back half of that question how do we.

How do we look at what those launches sorry.

Just how.

They are in limited launch now.

Demand has been so far any feedback.

Transitioning into a full launch.

Yes, so north star's full launch and it's going extremely well, we and as.

As we kind of <unk>.

You mentioned previously it was one that did it.

Beyond our expectations and alpha to the point that we were really stressing the system. How many surgeries are getting so we actually invested.

And more sets for launch.

And it is one of our hottest systems as far as demand and the excitement surgeons have with what features there are and the simplicity for implementation. It also works very nicely and seamlessly with 70 and so that's been a nice system for a difficult procedure not only making it easier.

But enabling surgeons to use the system with a better workflow.

Are the <unk>.

Entire implant portfolio.

All going to be a different stages of launch throughout the year, but it clearly is in high demand throughout the entire alphas. We were really pleased with not only how busy office have been but also the great feedback we're getting to make sure that we're making all the subtle refinements that we need for a complete launch and there was one other one.

You had mentioned.

Some color on what was that.

Yes, the last one got Mariner adult deformity system.

Yes, yes, so that will that will advance as well and we have some exciting features that will also incorporate and make it easier and more seamless with 70, that's one area when you get into deformity surgery. The difficulty of the anatomy of the difficulty of how you need to pursue that in NAV.

And how much easier it is.

Made with 70, and giving feedback not only on screw trajectory, but also the great part is as you are making certain corrections and adjustments that 70 is able to keep up with you. So to speak it's able to keep up with it by constantly.

You look at the topography, the spine and making a combination so that that combined launch.

Very excited about and it's got some nice momentum.

As we've been going through prelaunch surgeries.

Sounds great. Thank you and congrats again on the strong quarter.

You bet. Thanks.

Yes.

I would now like to turn the conference back to Mr. Keith Valentine for closing remarks.

Well. Thank you everyone for joining us. This afternoon are approaching evening in some areas and I hope I wish you a good evening to everybody talk soon.

This concludes today's conference. Thank you for participating you may now disconnect.