Orthofix Medical Inc. (OFIX) Q2 2021 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the SeaSpine 2021 Second Quarter Financial Results Conference Call. [Operator Instructions]. As a reminder, this conference call is being recorded today, August 2, 2021. I would now like to turn the conference over to Lee Salvo, Investor Relations.

Thank you, and thank you for participating in today's call. Joining me from SeaSpine is CEO, Keith Valentine; and CFO, John Bostjancic. Earlier today, SeaSpine released full financial results for the quarter ended June 30, 2021. During this conference call, we will make forward-looking statements within the meaning of federal securities laws in regard to our business strategy, expectations and plans, our objectives for future operations and our future financial results and condition. All statements other than statements of historical fact are forward-looking statements. Such statements may include words such as believe, could, would, will, plan, intend and similar expressions. You are cautioned not to place undue reliance on forward-looking statements, which are only predictions and reflect our beliefs based on current information and speak only as of today, August 2, 2021. 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 at www.seaspine.com and at www.sec.gov. Our discussion today will include certain financial measures, such as adjusted EBITDA, loss and adjusted gross margin but are not calculated in accordance with generally accepted accounting principles or GAAP. Management believes that the presentation of these non-GAAP financial measures provides important supplemental information to management and investors regarding financial and business trends relating to the company's results of operations. These non-GAAP financial measures should not be considered replacements for and should be read together with the most directly comparable GAAP financial measures. Reconciliations to the most directly comparable GAAP measures are provided in the financial tables accompanying the press release we issued today. I will now turn the call over to Keith Valentine. Keith?

Thank you, Lee. Good afternoon, and thank you all for joining us. Q2 was a quarter of significant achievement for SeaSpine. We transformed the company with the acquisition of 7D Surgical and its enabling technology platform and meaningfully strengthened our balance sheet with a $94.5 million equity raise. From a financial and operational results perspective, we saw a continuation of the revenue growth momentum that started in the back half of Q1, and we further expanded our gross margins. Display pockets of COVID-related surgery disruptions that impacted some of our larger markets, we delivered a solid quarter of growth. Through our commitment to innovation and customer experience, we took additional market share in both the spinal implants and orthobiologics market, and we benefited from higher spine surgery volumes as surgeons work through much of their backlog. We've had a very strong quarter, with total revenue increasing 66% over the prior year period. In the U.S. where we generate approximately 90% of our total revenue, revenue increased 64% year-over-year. In the U.S., growth was once again led by higher sales of our new and recently launched products which comprised 74% of U.S. spinal implant revenue and more than 40% of U.S. orthobiologics revenue. Surgery volumes increased by more than 50% compared to the second quarter of 2020 and in the low teens sequentially compared to first quarter of 2021. We also generated slightly higher revenue per case and further increased the utilization of our spinal implant systems and orthobiologics products per procedure. For the second quarter of 2021, SeaSpine products and systems used per procedure average 1.9 compared to 1.8 a year ago. Turning to 7D Surgical. We closed the acquisition on May 20, and we placed our first unit under an earnout arrangement during the second quarter. We also are excited to receive FDA 510(k) clearance for the percutaneous spine module for minimally invasive surgery and are on track to launch the MIS module later this month. We have progressed rapidly to integrate the 7D team and brand into the SeaSpine organization and to accelerate certain high priority development programs. Also, we revised the capital sales force incentive compensation plans to be agnostic to a capital sale or an earnout arrangement. As a result, we are already seeing greater percentage of the financially more attractive earnout opportunities in the U.S. pipeline than we originally anticipated. With respect to our product launches, we recently initiated the alpha launches of the WaveForm Lateral and WaveForm anterior 3D Printed Interbody Implant Systems. We are now on track to alpha or fully launch more than 15 products and line extensions in 2021. We remain particularly excited about the next line extension of our foundational Mariner platform with an alpha launch of an adult deformity system expected late third quarter and the full commercial launches of our NorthStar OCT system for posterior cervical fixation, the Admiral Anterior Plating System, expected early fourth quarter, and the WaveForm C 3D-printed interbody implant system, expected late fourth quarter. This week, we began to deploy an additional 15 sets of what we believe is a truly innovative and differentiated NorthStar system, and we plan to deploy an additional 50 sets in 2 separate tranches mid-third quarter and late fourth quarter. Those full launches, in particular, are expected to be significant drivers of revenue growth in the fourth quarter of 2021. Continued investment in product innovation and in the deployment of our high-demand foundational spinal implant systems combined with our best-in-class EBM portfolio and market-leading flash navigation system featuring 7D technology gives our expanding distribution network the assurance that we can support their aggressive growth plans. Maintaining the confidence is so important to our efforts to further capture market share. And with the stronger balance sheet we now have after the recent financing, we have even more capability to invest for growth. We remain cautiously optimistic that despite the recent escalation in the number of COVID-related hospitalization, as more people get vaccinated, we will get a sustained return to pre-COVID spine surgery volumes during the second half of 2021. Confidence in the long-term opportunity, coupled with the expected contributions of upcoming product launches and the 7D Surgical technology platform, continues to drive our investment decisions, the most notable of which is the significant increase in spinal implant sets. In total, we plan to invest nearly $40 million this year in the alpha and full commercial launches of numerous spinal implant systems as well as deploying more of existing spinal implant sets that are in highest demand. These investments, which represent an almost 60% increase compared to 2020 solidify confidence with our distributors that we can comfortably support their ambitious growth plans for the second half of 2021 and beyond and give us the confidence to increase the bottom end of our revenue guidance by $1 million to a range of $201 million to $205 million. This reflects growth of 30% to 33% over full year 2020 revenue and 26% to 29% over full year 2019 revenue. And now I'll turn the call over to John with more details on our financials and our financial outlook. John?

Thanks, Keith, and good afternoon, everyone. As Keith noted earlier, revenue for the second quarter of 2021 totaled $47.5 million, a 66% increase compared to the second quarter of 2020 and a 13% sequential increase compared to the first quarter of 2021. U.S. revenue totaled $42.6 million and included $600,000 of 7D Surgical capital sales revenue, a 64% increase compared to the second quarter of 2020 and a 14% sequential increase compared to the first quarter of 2021. U.S. spinal implant and Enabling Technologies revenue in the second quarter of 2021 totaled $21.4 million, a 62% increase compared to the second quarter of 2020 and a 16% sequential increase compared to the first quarter of 2021. That growth was led by new and recently launched products, predominantly those that were launched alpha or fully in 2020 and the first half of 2021. The rapid clinical adoption of our most recently launched products is a very encouraging sign for the growth that they can drive in the second half of 2021, particularly in Q4. We continue to experience low to mid-single-digit declines in average selling prices common in the spine industry. U.S. orthobiologics revenue in the second quarter of 2021 totaled $21.2 million, a 67% increase compared to the second quarter of 2020 and an 11% sequential increase compared to the first quarter of 2021. Those increases were once again driven by growth in the OsteoStrand Plus product. International revenue in the second quarter of 2021 totaled $4.9 million, an 81% increase compared to the second quarter of 2020 and a 9% sequential increase compared to the first quarter of 2021. In our press release, we also provide comparisons of our revenue results for the second quarter of 2019 as the impacts of COVID-19 on our business in the second quarter of 2020 make a comparison to the second quarter of 2019 a useful supplemental metric to measure growth. COVID-19 had a larger adverse impact on our U.S. orthobiologics business in the second quarter of 2020 compared to the spinal implant business, which resulted in atypical relative growth rates, with orthobiologics growing faster than spinal implants by that measure. The growth rates compared to the second quarter of 2019 are more in line with the typical relative growth rates, with spinal implants growing meaningfully faster than orthobiologics. GAAP gross margin for the second quarter of 2021 was 63.2% compared to 59.2% for the second quarter of 2020. The increase in gross margin was primarily due to idle plant costs recorded in the second quarter of 2020 associated with the nearly 2 months' shutdown of orthobiologics manufacturing operations at our Irvine facility. The year-over-year gross margin benefit from increased sales in the U.S. of our high-margin spinal implant products was mostly offset by 2 factors: higher kitting and logistics costs incurred in preparation for the full commercial launches of the spinal implant systems expected in the second half of 2021 that Keith mentioned earlier and from $300,000 of technology-related intangible asset amortization associated with the acquisition of 7D Surgical. Adjusted gross margin, which excludes technology-related intangible asset amortization and idle manufacturing plant costs was 64.5% for the second quarter of 2021 compared to 63.5% for the second quarter of 2020. The anticipated shift to more full commercial launches of spinal implant systems in 2021 is expected to generate higher excess and obsolete inventory charges relative to prior years from the substantial investment in outsized implant inventory required with those set builds. However, that impact notwithstanding, we believe that we can continue to expand adjusted gross margins by 100 to 150 basis points per year over the next 2 to 3 years. Operating expenses for the second quarter of 2021 totaled $41.1 million, a $10.5 million increase compared to $30.6 million for the second quarter of 2020 and included $1.6 million of 7D Surgical operating expenses. The increase in operating expenses was driven primarily by $8.4 million in higher selling and marketing expenses, the majority of which relates to selling commissions; $1.1 million in higher general and administrative expenses, which included more than $500,000 in legal and other professional fees incurred in connection with the 7D Surgical acquisition and integration and $900,000 in higher research and development expenses. We reported a $6.2 million nonoperating gain and other income net in the second quarter of 2021 in connection with the forgiveness by the SBA of the total amount outstanding of our Paycheck Protection Program loan. Net loss for the second quarter of 2021 was $5.2 million compared to a net loss of $13.7 million for the second quarter of 2020. Adjusted earnings before interest, taxes, depreciation and amortization for the second quarter of 2021 improved by $4.3 million to a loss of $3.5 million, compared to a loss of $7.8 million for the second quarter of 2020. Adjusted gross margin and adjusted EBITDA loss are non-GAAP financial measures that we believe provide 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 gross margin to adjusted gross margin and 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 June 30, 2021, totaled $120.7 million, and we had no amounts outstanding under our credit facility. We received $94.5 million of net proceeds in April 2021 from an underwritten public offering of 5.2 million shares of our common stock. We paid $28.3 million in cash consideration in May 2021 in connection with the acquisition of 7D Surgical and, in April 2021, repaid the entire $20 million of outstanding borrowings under our credit facility. Our free cash flow burn, which includes operating cash flows and purchases of property and equipment, was $14.7 million for the second quarter of 2021, a $3.2 million increase compared to $11.5 million for the second quarter of 2020 and was $21.4 million for the first half of 2021, a $5 million increase compared to $16.4 million for the first half of 2020. Those increases were primarily attributable to higher investments in spinal implant set build and instrument capital expenditures needed to support a greater number of full commercial launches in 2021. Turning to our financial outlook for 2021. We remain focused on expanding our gross margin and continuing to reduce cash-based G&A expenses as a percentage of revenue. However, we plan to continue to redeploy any operating leverage towards the sales, marketing and R&D initiatives and inventory and spinal implant set build capital expenditures that are critical to driving the sustained accelerated revenue growth implied by our 2021 revenue guidance. As Keith noted earlier, we now expect full year 2021 revenue to be in the range of $201 million to $205 million, reflecting growth of 30% to 33% compared to full year 2020 revenue and 26% to 29% over full year 2019 revenue. In addition to expressing our confidence via a $1 million increase in the bottom end of the revenue guidance range, we also want to provide more color on our expectations for quarterly revenue progression for the second half of 2021. Based on a number of factors, including surgeon feedback regarding taking vacation time this summer, the timing of the North American Spine Society meeting in late September and the rescheduling due to COVID-19 of other large industry trade shows into the third quarter and a greater percentage of 7D placements expected under an earnout arrangement than originally anticipated because of the new compensation model we introduced for the 7D sales team, we are now expecting more seasonality than we did earlier in the year. For Q3 2021, we now anticipate 16% to 18% year-over-year growth and, for Q4 2021, expect 33% to 39% year-over-year growth. That represents a roughly 5% to 8% sequential increase for the typically seasonally weak third quarter compared to the second quarter of 2021, which is typically one of the strongest quarters of the year. While the near-term impact of a higher-than-expected 7D earnout placement assumption has the effect of lowering 7D's anticipated contribution to third quarter 2021 revenue, it provides a much greater upside benefit to revenue and contribution margins for the fourth quarter of 2021 and for the next 2 to 3 years through the longer-term contractual relationship contemplated by the earnout commitments from those accounts. We expect to further reduce our adjusted EBITDA loss in 2021 compared to last year, including the anticipated dilutive impact of 7D Surgical on our P&L this year. We expect our free cash flow burn for 2021 to be between $46 million and $49 million. That increase versus 2020 is due in part to anticipated adjusted EBITDA dilution from 7D Surgical in 2021 but more significantly from the more than 60% planned increase to nearly $40 million in spinal implant inventory instrument and set build CapEx investments Keith mentioned earlier to support the many full commercial launches slated for 2021. With respect to the 7D Surgical acquisition, certain 7D shareholders elected to receive exchangeable shares at the closing, which allows them to defer certain taxable events until they tender those exchangeable shares for shares of SeaSpine common stock. As a result of the roughly 4.3 million shares of SeaSpine common stock in total that will ultimately be issued to 7D shareholders, a total of 1.3 million exchangeable shares that were actually issued will not be reflected in the denominator for loss per share calculations until the 7D shareholders tender those exchangeable shares because of their anti-dilutive effect. Those exchangeable shares, which will be treated consistent with common stock equivalents, like RSUs and stock options, in the loss per share denominator, must be tendered within 5 years of their issuance. At this time, we can't predict the timing that the 7D shareholders who elected to receive those 1.3 million exchangeable shares will tender them for shares of SeaSpine common stock, and that will likely be a decision each 7D shareholder makes based on their own personal tax planning. With more than $120 million in cash and cash equivalents on hand, plus the additional liquidity that we can access through our $30 million credit facility, which we extended for at least 1 year to July 2022 and for which we can elect to expand to $40 million, we have never been better capitalized to continue to invest confidently and aggressively for growth. At this point, I'd like to turn the call over to Keith for closing comments.

Thank you, John. We are all very excited to add the 7D Surgical team to the SeaSpine family and to be able to leverage their outstanding enabling technologies to spread our growing influence beyond just the operating room. That will be additive to our commitment to execute at a high level on our foundational priorities that have transformed SeaSpine into the organization that we are today, namely to timely and effectively develop and launch clinically relevant products, to attract and retain the highest-quality distribution, to generate above-market revenue growth through more efficient utilization of our spinal implant sets and to further expand our gross margins. Our mission is to collaborate with surgeons to develop cost-effective solutions to treat spinal disorders and improve patients' quality of life. And our goal is to be a market share taker and grow 4 to 5x faster than the overall spine market. We believe that we have the right products and systems, a highly effective and growing distributor network and the best team in the spine market to accomplish this. Today, SeaSpine is an organization of more than 500 passionate and dedicated employees who are motivated by our past successes and are driven to deliver clinically superior net cost-effective procedural solutions that differentiate us with both surgeons and distributors in this competitive market. With the recent return to the office after nearly 15 months of working remote, we are reenergized and enjoying the face-to-face collaboration that is so important to our culture. That energy and excitement is palpable. And it has been noticed by the increasing number of surgeon and distributor visitors we've hosted in the past couple of weeks. It's so great to be back. With that, we will now open it up to questions. Operator?

[Operator Instructions]. We have your first question from Matthew O'Brien with Piper Sandler.

Great. I'll stick with two, although I've got many more than that. But Keith or John, just the increase in implants and sets versus 2020 is pretty eye-popping. Can you talk a little bit about is it more skewed towards sets? Is it more skewed towards implants? Which of the two is that -- is it kind of weighted towards one or the other? And then why is now the time to really increase this investment? What do you see as far as your growth opportunities, both domestically and internationally in this category?

Yes. The biggest driver, Matt, is the number of full commercial launches we're doing this year compared to last year. And the mix, it's pretty even, right? There's a big investment in implant inventory but also the instruments in the sets, right? That's the capital expenditure side of it. But the biggest catalyst is just the number of impactful full product launches this year. I mean we have a number of alpha launches, the WaveForm C -- sorry, the WaveForm 3D interbody technology. But NorthStar is one that's been highly anticipated. As we said, we've got 15 more sets coming out, 50 more to be deployed by the end of the year. The Explorer expandable interbody, the Reef TO to its full commercial launch, and then even within the alpha launches, the Mariner adult deformity indication, which we expect the near future, is a very complex and expensive set even for alpha launch because of the deformity aspect of it. So it's a sign of our confidence in the growth and that growth is going to be driven by some of these more impactful product launches, and that's what's really driving it.

I think the other thing, too, to think about, Matt, is the overlap of bringing aboard some larger distribution groups that require more of an inventory commitment. And also on top of that, for each of those earnouts that we're anticipating, those earnouts are done much through the newer systems and done through the excitement in and around the newer systems. And so we want to make sure that whether it's a 7D earnout or whether it's a new distributor coming aboard, that we can instantly or quickly deploy sets that make them comfortable and make the hospital comfortable that they're going to have the right equipment to either earn out or the right equipment to sell into their new accounts.

Okay. That's helpful. And just to push a little bit further here, guys. Just because I think investors are pretty attuned to the impact of new sets, is it more skewed on the set side or really the implant inventory side that you're able to support all these new distribution groups?

Again, it's both because the sets get deployed with, what we call, trapped inventory, all the implants that travel with the instrument sets to be able to conduct the surgery. So we're investing in both, but then we also need to have inventory on the shelf to be able to replenish the implants as they're consumed. So it's not a 50-50 mix, but it's pretty even in terms of the investment in both the capital expenditure side and the inventory side because you need both to be able to do a surgery and those all travel with a set. But then you got to have the replenishment inventory on the shelf so that when distributors consume the implants from a set and want to move on to the next surgery, we can easily and readily replenish those inventories to maintain their confidence.

Got it. That's super helpful. For the follow-up question, just talking about the earnout opportunity here. Is it pretty much straight line over a 2- or 3-year period? Is it back-end loaded, kind of based on how things go? And then with you getting the MIS indication, do we expect really more of the impact late Q4 into next year in terms of your placements? Or can you quickly update the system or provide an upgrade for people that want to get their hands on 7D open right now and then move quickly in MIS?

Yes. The first question is generally -- the conversations we're having are more of a straight-line impact of the revenue. It doesn't mean we wouldn't be flexible to something with a ramping escalation. But typically, we're finding engagement with a straight-line commitment over a 3-year period for the earnout revenue. And then sorry, the second question was?

Yes. On the upgrade, yes, there's -- there'll be different options if you buy a system new as to whether you choose to have that module and then, of course, there is opportunity for that module to get introduced into existing installs if they choose to purchase.

We have your next question from Kyle Rose with Canaccord.

I wanted to talk about just the state of the sales force now. I mean, the comment about bringing on a lot of new surgeons and new distribution groups to the company to do trainings and education and things of that sort. And then also dovetailing off of your answer to Matt's question, just about new sets to support some larger distributors, maybe just help us understand where are you in the life cycle of upgrading the distribution talent. Obviously, you've got ambitious goals for taking share. How much of that comes from just having better products to sell versus you now will have better distribution talent carrying more weight in the market?

Yes. I think really, both continues to go on. I think as we start getting more and more of our -- legacy systems become obsolete, we're moving, obviously, to a greater amount of our revenue coming from new product introductions and new product sales. That creates a better opportunity for us to continue to fill in that white space. And it solidifies some of our current distribution teams. We're working in some of our larger areas on some nice additions that are being added to the team, either through combination or through hiring. And so we feel like the reason for that is absolutely because of what the pipeline is presenting. And 3D technology is certainly an important one that now we have a leading interbody portfolio in NanoMetalene and we have the opportunity to also be able to offer 3D across many, many of our interbody platforms. And so again, that creates a different conversation and opportunity with new distribution. But most of the new distribution is going into white space and going into areas that we don't currently have exclusive or more focused distribution.

Great. And then on 7D, I mean, encouraging to see the MIS clearance come through that's going to roll out. Maybe when do you expect to have the R&D teams such that you'll have new implant or instrument designs that are actually kind of utilizing some of the 7D technology more directly? When will we see those first R&D projects move into alpha launch?

We already have some new instrumentation that is more dedicated and focused on SeaSpine specific. But keep in mind, one of beautiful things of 7D is that it was set up originally to be agnostic. And so really, what we're talking about is it can be -- it's been able to be used on SeaSpine instruments for quite a long time but can be used on competitive. What you will see as we move forward is it becomes easier and easier to be integrated with SeaSpine with software enhancements and other items that make it seamless to use our instrumentation. And our instrumentation has very easy assembly onto certain parts of the guidance platform for 7D. And so you'll continue to see that as we go. There'll be some items, I'm sure you'll notice, at NASS that's coming up. But we view that as it's already going. And the good news is it's going to continue to flow as we move into further software generations going forward.

Great. And then just one last one and then I'll hop back in the queue. You commented about some of the quarterly progression and certain vacations and things on that side. But maybe just update us on anything you're seeing with respect to the recent increases in COVID volumes across the United States. Is there anything from a Delta variant perspective that you need to call out as far as what you've seen in the last couple of weeks?

Yes, there is. There was just recently the joint sections meeting in San Diego. So I had a good opportunity to talk to surgeons there and not only talk to others in our industry. Yes, there are spotty places. Certainly, Florida has become a hot area. And I know that there's a big neurosurgical meeting coming there in Orlando. Specifically, in Orlando is in a place of, I think, requiring masks now for that meeting and even having some elective surgery slow down in the Orlando area, as we understand it from last week. So yes, I think there are some accommodations being made in some markets. We don't feel like yet, it's something of the same concern that we've had previously, but it is something we're keeping an eye on. And certainly, there are some markets where the Delta variant does seem to be at higher numbers and at numbers that certainly health authorities are starting to be concerned about whether they need to make accommodations at hospitals.

We have your next question from Ryan Zimmerman with BTIG.

Just a few for me, following up from Matt's and Kyle's question. Just Keith, dovetailing that question with Kyle, you did make a comment about backlog dynamics. And I appreciate all the quarterly cadence commentary that we have. Where are we at, in your view, from a backlog perspective? It sounds like some of the surgeons you're working with are working that down, but I'd love to just get your sense for kind of how long that tailwind may potentially last.

Yes. It's a good question because it's a question that I -- we ask every surgeon that comes through and was asking at the meeting even this past week. It certainly appears that most of the backlog has worked through. I think there was a lull there between what was out there on backlog and then what was being slowed from the patient's office -- or from the surgeons' offices, meaning patients were being reluctant to go in. I think now they're, as they're describing it, they have a much better balance. The backlog is largely being worked through. They don't feel like the backlog is going to be present for the entire third quarter, unless something slows things down, but they also are acknowledging that they're getting much better patient flow into their offices than they had before. And so I think that spells to what we've been trying to give some clarity to on the call is that fourth quarter is still looking and shaping up to be very robust from a surgery load perspective.

Okay. Appreciate those comments. And then turning to 7D for a little bit. Two questions for me around that. Just one, I think at the time of acquisition, there was roughly 54 systems in the field. And so I'd love to understand kind of how those are working through your placing systems. You're putting these earnout agreements in place for the new systems. But of the 54 that were there, how many were you able to convert already to spine product or have the opportunity at least to get some spine hardware in front of those? And then just for John, and I'll just ask my question upfront. The second one part of that is on the cost synergy side, kind of where are we at in that process. And what are your expectations from a cost standpoint if there are any synergies that you can work through?

Yes. So on the first part, right now, all of those placed units were all placed outright sales. So we are participating in a few of those accounts, and we're continuing to try to drive further. We've been really fortunate that, over the course of the past couple of months, a couple of accounts in specific have started using some SeaSpine product. And some that we're already using or continuing to use it here closer to us locally. So that continues to go on. But it's not just a -- it's not an easy opportunity. It gives you a chance to have the discussion about the SeaSpine products. But keep in mind, there's no hook in it, if you will, of them having to earn it out because they've already purchased it. So the opportunity will continue to present itself as the MIS module can be talked about and how we can approach that moving forward. And there's also going to be additional new software that continues to be launched that will help us have that better conversation. But we've had a few successes, and I think that our sales force has taken advantage of the fact that they have something new to talk about with those surgeons. And they're more aware of us, thanks to the 7D being in their OR and knowing that SeaSpine is behind that now.

And then on the synergy side, Ryan, this is still very much a "1 plus 1 equals 3" revenue synergy opportunity. There are modest cost savings in things like trade shows and driving more collaborative relationships with 7D suppliers with higher volume commitments over time with our stronger balance sheet that we can drive down cost of goods sold some, too. But really, this is all about revenue play. It's taking more market share faster and growing because 7Dis pretty much bolt-on, right? They have specialties that we don't have in terms of like product development, optics and software development. So it's all complementary to our base of strength and it's all about the revenue and market share taking opportunity.

We have your next question from Sam Brodovsky with Truist.

So first, I just want to make sure I have my head wrapped around the impact of 7D in guidance first. So you mentioned that a greater mix from earnout -- coming than originally anticipated. So should we take that to think that maybe a little bit less than that $7 million comes into revenue from 7D? And then backing that into the $1 million rate in the low end, should we think of that more strictly as strength of the core business? Or how much is 7D increasing sales there with -- through those earnouts?

Yes. Again, the caution we took when we talked about 7D on our last call was to not give an assumption around the mix of that revenue, that $7 million incremental revenue between capital and earnout revenue, which is kind of the base business. So we're still not providing that mix because we're incentivizing the sales team to convert as many of those opportunities to earnouts as possible. And as we said on our scripted comments that the expectations of earnout models, we've been able to do more than originally anticipated, which does impact the short-term capital sales revenue opportunity, particularly in the third quarter. But when you say is 7D weaker or the base business stronger to bring up the bottom $0.5 million, well, it's both, the base business is stronger. But part of the reason it's stronger is because the revenue pull-through we're going to get from the 7D earnouts generating more spinal implants and orthobiologics sales in those accounts in a more meaningful manner starting in Q4. So we still have the same expectations that we've got that $7 million of upside, but we intentionally didn't give any color on the mix on the last call of what that $7 million is comprised of capital versus implants because of that very reason. As we didn't have great visibility into what the earnout would be, we had an assumption. And the good news is what the pipeline is, is the assumption for earnout opportunities is even greater than we originally anticipated, which is good because that's exactly why we restructured the incentive plans for the sales team is to motivate them to focus on earnouts because they're better long term financially, long term in terms of maintaining access to accounts through contract periods. So it's the same assumption, and we're just not going to provide color on that because it's a slight impact to the third quarter in terms of capital sales but it's upside longer term.

Great. That makes perfect sense. And then just on those earnouts, we'll be curious to hear what you're hearing from your sales force. Obviously, restructuring it is going to have an impact on their activity. But are they seeing more interest from accounts now that potential customers have that earnout option? Or do you think it's more earnouts coming strictly from that change in the incentive model?

I think there's an excitement that this is a very strong capital equipment sales team that has had to deal many, many times with only one option. And that option was they had to get an entire sale, and that cycle at a hospital can be quite long. And I think just the fact that they're able to offer either and get a hospital excited about possibly getting the equipment placed sooner than later, has been very motivating, especially in accounts that they knew full well going in that they probably didn't have capital equipment allocated for it for at least a year or 9 months. And now what we're working on is really shortening that cycle and getting an opportunity. And I think the price point and features of 7D give us a real ability to have a very reasonable earnout model that doesn't intimidate the hospital. I think some of the earnouts for some new technology really intimidates the hospital, and they have a difficulty feeling comfortable signing aboard. And that's -- ours, I think, is much more reasonable, and we're able to do that because of the feature to cost consideration that 7D has.

Particularly in ASCs, right? We see more surgeries moving there.

Yes. We really -- especially with the MIS application, I think it opens up some new doors to ASCs as we move forward. And obviously, that MIS application will continue to get launched over the course of the next couple of quarters, but we do see it as something that ASCs will be interested in.

We have your next question from Jeffrey Cohen with Ladenburg Thalmann.

So firstly for you, Keith. I hate to keep beating on 7D, but perhaps give us a little flavor as far as certain spinal levels, spinal regions or procedures that you're seeing some uptick from and how that matches up with your current offerings as far as pull-through, that would be helpful.

Yes. I mean, we're really excited about the 2 launches we discussed in the call. And that was -- NorthStar was our best alpha as far as numbers go. And -- but keep in mind, we're also committed to a good-sized alpha. We're committed to having more users than we usually have on alpha just to make sure we run it through its paces. And so we're excited. We've had validation of launch labs relatively recently, and it's full speed ahead. And that's going to be a nice procedure or a nice implant system for 7D technology in the cervical spine -- in the posterocervical spine. Additionally, the new deformity products that are coming are also well aligned to what you see a lot of folks using 7D for. Obviously, degenerative is the most procedures that are done, and it's a very simple system you use for just standard degenerative work. And so we take a look at all of that from an open perspective, there's a lot of things that we fall into, especially with our launches of new systems. But I think that ideally, the effort that will be made on the deformity side and on the cervical posterior side will be a really interesting interplay with 7D. And we'll talk a little bit more about that as well, Jeff, at NASS. So at the end of September, we're going to have the ability to not only have both present for discussions, but we're also going to have a guest surgeon that's driving this at an ASC just to get a perspective and get a perspective of -- from someone who's relatively new on the learning curve and how it's helped them at their ASC.

Yes. Got it. And then second for me, for you, Bost. Can you talk a little bit about efficiencies and leverage? It looks like your OpEx, which was like $600,000 lower than what we estimated drove in 6% higher on your top line of $475 million. So it looks like you're pulling out some efficiencies in leverage. Could you talk about that a little bit? Is it beginning or you just happen to see more of it during this quarter?

A little bit of both. As we've said, right, we're focused on expanding gross margins, getting more efficiency, which I think we've been historically pretty good at getting efficiencies out of G&A, right? G&A has grown, I think, on average -- adjusted G&A by like 5% compared to 11% long-term growth. But we're also starting to see more synergies out of sales and marketing, right, commission rates ticking a little bit lower as we expected they would. We've made a lot of investments in marketing over the past 2 years to bring in more product managers because of the number of new products we're launching into the market. And now that somewhere near on the market, an alpha launch and going to full launch we don't need to continue to add marketing heads because we -- I think we're in pretty good shape to have coverage there. So we're getting the anticipated leverage and efficiencies that we thought we would get. And second quarter was just another example of how we stay focused on that. And then we continue to be committed to reinvesting those synergies into more sets to drive higher revenue growth.

And John, when might you take the inventory up toward the end of the year? Are you looking at another 20% or so on current levels?

I don't know if it will be that high because, again, it's going to be a mix of orthobiologics and spinal implants. But of the $40 million we had, it's not going to be a total increase. Well, it's pretty close to 50-50 between the $40 million going towards spinal implant sets, which is the capital expenditure side, and the other half going towards inventory. So that's the rough breakdown of how that spend should hit the balance sheet.

We have your next question from Mathew Blackman with Stifel.

I think I've got two. Maybe just to start on 7D, I'm just curious what the early reception has been so far now that you have it fully in your hands. And then when we think about cross-selling, which is a bigger opportunity in the near term? Is it the current 7D customer pull through? Or is it placing 7D in current SeaSpine customers? Just help us think through those 2 buckets. And then I'll just -- I'll ask my second question right upfront. And I think, Keith, you sort of touched on it, but I just wanted to ask about NASS, what to expect. You are hosting an Analyst Day. Obviously, we're going to hear more about 7D. But anything else of note that we should be paying attention to heading into the meeting.

Yes, yes. So the first part is, I think you just kind of get your arms around is, is it a bigger opportunity to place these units in an existing account or is there -- how much of it is new. And I would say look at it, both are opportunities and both seem to be making their way to the top. There are some existing accounts that we already have a relationship with that just gives us a chance to expand if they choose to earn out. And then there's also a number of accounts that we're talking to that we really don't have a presence in. And so I think the sales force is approaching it that -- both ways, that this could be a great way to get further market penetration and market share in accounts that we already are friends with through other products or this is our first license to kind of hunt, so to speak, a brand-new account. And even one that we're talking to, it would give us a unique opportunity to get in on an account that we're already not approved on, but it would be an approval use our implants as well. So it could be an interesting way to open the door to be exclusive -- or not exclusive, but another provider for an already limited provider account. So those are all good things. When you take a look at NASS, we're going to be talking about not only 7D, the experiences in and around -- a rather new user at an ASC and how that learning curve went and where they see the advantages so far at their ASC. We're also going to have a discussion on some of the new products and the new products that you'll see at NASS that are either going into full launch or going into alpha launch in and around that late third quarter, fourth quarter time frame. The only other thing I think to look out for is, I think that, again, there's going to be a lot of different enabling technologies that we talked about and some are further along, obviously, than they were the last time we were face-to-face at a NASS meeting.

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

Congratulations on another good quarter. I just want to talk about the revenue per case. I saw you mentioned that it's sort of slightly up. Any color in terms of how this is trending versus your expectations longer term of where you can get this to as you bring in these new products? Just trying to put into context how much of a tailwind we should think of the new products contributing to revenue growth from a pricing perspective, granted that you're also ticking up on the usage procedure.

Yes. So revenue per case has gone up low single digits in -- pretty consistently in recent quarters. And that's because we're able to participate in more complex procedures with the entire Mariner portfolio. So we're seeing a consistent uptick there. I think the other thing it does in terms of price is it mitigates what is typically mid-single-digit price declines, I think, which is kind of the norm for spine. Having the new products helps us maintain price. So we typically see the low single-digit price declines because of the innovation we're constantly making to the portfolio. So I don't think we see the same price declines other companies that are less innovative are getting. But also the other thing we can't track is the orthobiologic usage in every surgery, right, because there is a percentage of our orthobiologics revenue, about 1/3 of that revenue is direct stocking orders, and it's pretty consistently been the case for a number of years. So if they do a stocking order, we don't see the orthobiologics on the charge sheet for a surgery when our spinal implants are used. So to the extent we're tracking revenue and products -- or systems and products used per case we're approaching to, but we know it's higher than that. We just don't know exactly how much higher because when the orthobiologics is used in an account that buys it direct through a PO, we just don't have that visibility. But the good news is the revenue per case is increasing because we're participating in more complex surgeries. With Mariner adult deformity indication on the near-term horizon, that opens up even more opportunities to take market share in some of these higher revenue per case procedures. Mariner Outrigger, right, that revision system allows us to do longer constructs. So we're seeing good growth in the revenue per case, low single digits kind of consistently every quarter for a number of quarters now.

I'm showing no further questions at this time. I would now like to turn the conference back to Mr. Keith Valentine for any closing remarks.

Yes. Thank you, everyone, for joining us today, and I hope everyone has a great evening. Cheers.

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