SPNE (2020 - Q1)

Ladies and gentlemen, thank you for standing by and welcome to the First Quarter 2020 SeaSpine Holdings Corp. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Note, this call is being recorded. [Operator Instructions]I'd now like to hand the conference over to your speaker today, Leigh Salvo, Investor Relations. Thank you. You may begin. Leigh Sa

Thank you for participating in today's call. Joining me from SeaSpine is CEO, Keith Valentine; and CFO, John Bostjancic.Earlier today, SeaSpine released first quarter financial results for the quarter ended March 31, 2020. 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 6, 2020. 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 release and periodic filings with the SEC, which are available on our corporate website, www.seaspine.com and at www.sec.gov.I'll now turn the call over to Keith Valentine. Keith?

Thank you, Leigh. Good afternoon and thank you all for joining us. I want to start off by acknowledging the heroism of all who have been working tirelessly to fight the COVID-19 pandemic. We continue to be inspired by the dedication of our first responders', nurses, physicians, technicians, medical staff and all care team workers who take an enormous personal risk returning to the frontlines day after day. Thank you for your service. You are enabling all of us to get through this challenging time.We are also very grateful to all our employees in the SeaSpine family for their efforts to balance caring for their families and loved ones or home schooling their children, while helping SeaSpine to sustain its operations and to stay true to its mission to improve the quality of patients' lives, many of whom are suffering debilitating back pain. It's humbling to witness this dedication and focus by the SeaSpine family in these extraordinary times.Early on, SeaSpine took a number of steps to protect our employees and to shore up our business based on the emerging trends, we saw in this unprecedented new landscape. Our IT team transitioned most of our employees to a work-from-home capability to permit those who can work remotely to do so. While manufacturing and distribution operations have been significantly reduced, some of our workforce are required to be on site one or more days a week to perform clinical job functions.For these essential employees, we implemented staggered work shifts to support social distancing and we initiated regular deep cleanings of our offices, particularly in high-touch areas. We continue to follow CDC guidelines for minimizing the spread of illness and created a contingency plan in the event of a spike in sick leaves or employee downtime as well as connected with all employees to offer education and counseling, regarding the resources and leave opportunities available to them.Consistent with what many other medical device companies experienced as states began implementing strict guidelines for elective or deferrable surgical procedures; we too experienced a meaningful decline in U.S. spine surgery volumes, generally starting around the beginning of March. At the end of February, we were expecting another quarter of double-digit U.S. revenue growth. However, the decline in U.S. revenue in March caused by the deferral of spine surgeries due to COVID-19 resulted in the slight overall decline in U.S. revenue for the first quarter.Additionally, we estimate that the total revenue for April declined further by more than 60% compared to April 2019. To reduce our cash burn during this downturn in our business, we have implemented a series of cost-savings measures including the following. We initiated progressive base pay reductions through at least June 20 for approximately 35% of our employee base, including a 25% reduction from the senior leadership team. In addition to these compensation adjustments, we revised the second quarter variable commission plan for sales management.We temporarily suspended most manufacturing operations at our Irvine orthobiologics facility at the end of March. We also implemented a hiring freeze for most new headcount for at least the next four months and are carefully evaluating the need and timing for if and when we backfill current open positions. In addition, we made the decision to defer the launch of select new products, which I will give more color on momentarily.Lastly, we are also realizing lower spend in areas such as travel events, clinical studies and consulting due to travel restrictions and event cancellations and other discretionary actions taken by us.Collectively, these reductions to planned operating expenses, working capital and capital expenditure investments have reduced our anticipated 2020 cash spend by more than $6 million. We also plan to utilize any applicable relief available to us under the CARES Act via the Employee Retention Tax Credit and Employer Payroll Tax Deferral programs.Additionally, due to the rapid decline in our business, we applied for and recently received an approximately $7.2 million loan under the Paycheck Protection Program. We're aware of the controversy regarding public companies accepting these loans based on the lack of clarity provided by the Treasury Department and the SBA regarding the needs-based certification for companies, where current economic uncertainty makes the loan request necessary to support ongoing operations.As a result of this, we subsequently repaid $1 million of the loan, which was the amount that we estimated exceeded our eligible payroll, rent and utility expenses over the eight-week period following the loan's origination. In deciding to seek the PPP loan, we were guided by the widely held consensus that the immediate protection of jobs is the bedrock principle of the Paycheck Protection Program, and should form a key part of any business' decision to apply for and retain a loan.Prior to receiving confirmation on the loan, we were faced with the reality that 80 to 90 employees could be furloughed or roughly 20% to 25% of our entire workforce whose workload was significantly or completely reduced, because of COVID-19-related business disruptions.I mentioned that, we implemented base pay reductions for 35% of our employees base previously. Put another way, we excluded 65% of our employees from these cuts. We focused our cost-cutting measures on those most able to absorb them with the greatest reductions among the senior leadership team, while keeping those least able to absorb them financially whole. Many of these employees are manufacturing line workers in our Irvine facility with limited financial means.The PPP loan proceeds provided us the financial flexibility to retain continuity with the manufacturing team in particular so that we can maintain maximum operational readiness over the coming weeks. The risk of losing portions of this valuable highly trained and long-tenured workforce, if we implemented furloughs or other similar actions in order to preserve cash and liquidity during this time of significant and ongoing economic uncertainty would no doubt be detrimental to our business and our ability to produce sufficient inventory to meet any increase in customer demand, should we start to see a recovery in spine surgeries.Yesterday, the Treasury Department and the SBA announced, an extension of the PPP loan repayment date to May 14 for companies to take advantage of the safe harbor regarding the loan certifications made with respect to need. The SBA also committed to provide additional guidance on how it will review the certification prior to May 14, 2020.We are eagerly awaiting that additional guidance and will ultimately decide on whether we repay or retain the remaining PPP loan proceeds, based on that guidance. We will continue to evaluate the need for initiating additional cost-savings measures based on our ongoing assessment of the situation and expected outlook for a recovery in spine surgeries.Before I comment further on what we are experiencing today, and how that is impacting our business decisions going forward, I'd like to turn the call over to John for a recap of Q1 financial results. John?

Thanks, Keith, and good afternoon, everyone. Total revenue for the first quarter of 2020 was $36.1 million, essentially flat compared to the prior year period. U.S. revenue was $31.8 million, reflecting a less than 1% decline; and international revenue was $4.3 million, reflecting a 3% year-over-year increase.U.S. Spinal Implant revenue in the first quarter was $14.5 million, reflecting a 3% decline. This decrease was driven by mid-single-digit unit price declines and 5% lower procedure volumes, particularly in March when procedures were down an estimated 18% compared to March 2019. These factors were somewhat offset by us capturing more of the procedure with our expanded product offering and from procedural mix shifting to more thoracolumbar procedures, which typically generate more revenue per case compared to other procedures. New and recently launched products comprised 63% of U.S. Spinal Implant revenue in the first quarter of 2020.U.S. Orthobiologics revenue in the first quarter was $17.3 million, reflecting 2% growth. This was driven by recently launched products which comprised nearly 28% of U.S. Orthobiologics revenue in the first quarter of 2020. Prior to the impact of the pandemic on order volumes, we continue to see great traction in our DBM portfolio, as we continue to take share in the orthobiologics market with our focus on clinical data and its health care systems, increasingly appreciate the value proposition of our advanced DBM portfolio.From a distribution perspective, our core distributors collectively generated more than 60% of our total U.S. revenue in the first quarter of 2020, up from 58% in the fourth quarter of 2019. We continue to recruit for more of these committed and increasingly exclusive distributors in the U.S. and have identified additional near-term opportunities if a recovery in spine surgery volumes materializes in the second half of 2020.Gross margin for the first quarter of 2020 was 61.8% compared to 62.4% for the same period in 2019. The decrease was due primarily to lower utilization of our Irvine manufacturing facility and higher excess and obsolete inventory charges particularly in our legacy product portfolio for which revenues continued to decline at a faster rate due in part to increased cannibalization by our more recently launched products.For the second quarter of 2020, we expect gross margin to decline significantly to between 40% and 50%, because of idle plant costs associated with our temporary shutdown of Irvine orthobiologics manufacturing operations as a result of the pandemic. We anticipate that we had than four months of orthobiologics finished goods inventory on hand by the end of March and we'll evaluate the appropriate timing to resume Irvine manufacturing operations based on inventory needs when demand picks up.Operating expenses for the first quarter of 2020 totaled $35 million, a $3.4 million increase compared to $31.6 million for the same period of the prior year. The growth was driven primarily by $1.5 million in higher selling and marketing expenses the majority of which relates to increased depreciation and headcount-related expenses to support new product launches and a $1.3 million non-cash intangible asset impairment charge associated with acquired technology underlying an expandable interbody device that we expect to launch in 2020. The impairment charge was triggered based on an expected shift in future product revenue mix more to a parallel expanding device designed based on internally developed technology and in turn lower future revenue anticipated for the lordotic expanding implant based on the acquired technology.Net loss for the first quarter of 2020 was $12.6 million compared to a net loss of $9 million for the first quarter of 2019. Cash, cash equivalents and investments at March 31, 2020 totaled $105.2 million and we had no amounts outstanding under our credit facility. Our free cash flow burn, which includes operating cash flows and purchases of property and equipment was $4.9 million for the first quarter of 2020, a $2.5 million decrease compared to $7.4 million for the first quarter of 2019.In terms of business recovery, market research and recent guidance from government and other policy-making bodies suggest a gradual return of elective surgery capacity in the U.S. by the end of June with a yet-to-be-determined timing for the full return of pre-COVID-19 patient demand, both of which may be influenced by the potential for a second wave of COVID-19 creating further disruption. We have heard anecdotally that some surgeons and hospitals plan to increase the number of surgery days to include Saturdays and perhaps even Sundays in order to catch up as quickly as possible on the growing backlog of patients whose spine surgeries have been deferred as we believe that the vast majority of patients in continual pain will eventually seek and receive the necessary treatment. Those are the critical underlying assumptions that are driving our current decision-making with respect to managing the business and costs.However, we cannot accurately assess what additional risks lie ahead, such as how spine surgeries are prioritized within each hospital, what actual patient demand for spine surgeries will be in the future or whether additional waves of COVID-19 create further disruptions in spine surgeries. As a result, we cannot provide reliable guidance on revenue or free cash flow burn expectations for 2020.That said, we will continue to manage the business with a two- to three-year liquidity runway by striking an appropriate balance between preserving cash through appropriate cost-cutting measures, such as those that Keith outlined earlier and the potential to further reduce operating expenses and investing responsibly for growth and innovation and retaining maximum operational continuity and flexibility so that we are best positioned to continue to meet the needs of our surgeon customers and their patients when spine surgery volumes recover to pre-pandemic levels. We expect to have more clarity as the year progresses and look forward to providing investors with more informative and quantitative guidance later this year.I will now turn the call back over to Keith, who will provide a deeper level of detail on what has transpired, and what we expect in the future. Keith?

Thank you, John. Undoubtedly, the spine surgery sector has been severely impacted in the COVID-19 environment. While patients with spinal trauma and tumor cases who urgently need care will continue to receive that care, we have seen deferral of spinal deformity revision and typical degenerative spine surgeries so that the health care facilities can focus on the treatment of those affected by this virus. We have seen some shift in cervical and other less-intensive outpatient surgeries to ASCs and we will continue to support those and other cases as they arise. We are working closely with our Surgeon Advisory Board to understand how individual hospitals may react to the protocols that they may adopt as they open up for more spine surgeries so that we can be responsive to their needs and requirements.We are hosting regular weekly video meetings with our U.S. distributors to better understand the dynamics in their territories and they have been highly engaged in these discussions. We are getting updates from the field and are monitoring the news and market reports to determine the expected timing for the return of elective surgeries state-by-state, and are encouraged by our strong presence in many of the states that have begun to ease restrictions on elective surgeries or are considering easing such restrictions in the near-term.Despite the significant decline in revenue in April caused by the deferral of spine surgeries, we are encouraged by the fact that collectively those states comprised approximately 75% of our recent U.S. revenue. And we are proactively deploying spinal implant sets to specific regions based on that data.We are further encouraged by the recent increase, we've seen in daily sales since the last week of April and the relatively better start we've seen in early May with month-to-month -- excuse me, with month-to-date revenue down a little more than 30% versus May 2019.We will continue to monitor elective surgery volumes state-by-state and factor in how the return to specific procedures will impact deferred spending on new product launches and additional set builds. We have also been regularly hosting distributor and surgeon training, education and even product development programs in labs through video outreach meetings.Our marketing and field sales teams have been supporting spine surgeries virtually and we will continue to do so whenever and wherever needed until travel and hospital access restrictions are lifted. The SeaSpine team's commitment to help patients receive the treatment they need is unchanged even during this unprecedented time.Turning to product innovation and commercialization, we communicated in our business update last month that we carefully evaluated the timing and scope of our planned product development and launch initiatives for 2020. In order to preserve cash until we have better visibility to the timing and magnitude of the recovery in spinal surgery volumes, we have decided to temporarily defer more than $4 million of set build, CapEx and inventory investments originally planned for this year.That decision was guided primarily by our prioritization of the most critical new product introductions and additional set builds of existing systems needed to satisfy expected procedural mix later this year as well as assessments of potential supplier risks that could impact the timing of those launches.Notwithstanding those deferrals, we still have a robust product launch cadence for 2020. Starting with our interbody franchise, we recently completed the alpha launches for our articulating NanoMetalene with Reef Topography implant and our newly designed comprehensive, anterior decompression and disc preparation instrument system to better support existing implant systems.We also look forward to the alpha launches of a hinged TLIF IBD featuring NanoMetalene with Reef Topography and a suite of lordotic and parallel expanding interbody implants to be launched under the Explorer brand name. We recently received FDA 510(k) clearance for both of these implants and expect to launch both products by the end of the second quarter.We continue to be most excited by the planned alpha launches of a suite of 3D printed interbody devices that we are developing with restor3D. The first alpha launch is expected to be a 3D printed version of our foundational Shoreline Anterior Cervical System earlier in the third quarter. These 3D printed implants, which will ultimately span cervical TLIF anterior and lateral approaches allow us to be more efficient with capital expenditures because they are designed to utilize the existing instrumentation from their NanoMetalene counterpart systems. That value proposition is perhaps more important than ever as we carefully manage costs during this pandemic.Turning to our cervical franchise. We commenced an alpha launch of a new Cervical Facet Fusion System in the first quarter. This specialized instrumentation set is bundled with OsteoStrand MIS pellets and is designed to provide access to facet joints for posterior cervical fusion procedures. This system can be used in conjunction with our posterior cervical fixation systems including our Northstar posterior cervical OCT system, which we expect to alpha launch by the end of the second quarter. We are particularly energized by the planned launch of the Northstar system as it will address the last big product gap in our cervical franchise and will ultimately replace two aging systems that were launched almost 10 years ago.In the thoracolumbar franchise, we expect to launch a line extension of our Daytona Small Stature Deformity System by the end of the second quarter. We have also kicked off our development program to extend our foundational Mariner modular pedicle screw technology into complex and deformity surgeries and we were able to complete a number of surgeon development labs prior to travel restrictions coming into play. We continue to move this program forward through video meetings with surgeons and the project team and we look forward to providing an update on expected launch timing later in the year.Finally, we continue to move forward with transitioning our Mariner MIS and revision systems and the Shoreline ACS system with Reef Topography to full commercial launch in 2020 and expect to have all three of those systems in full commercial launch by the end of the second quarter.We are firmly committed to a continued innovation and will be fully prepared and poised to drive accelerated revenue growth through aggressive commercialization of our remaining product development pipeline of differentiated new technologies when the turnaround begins, including those new product introductions that we have deferred for now.We will continue to monitor expectations for a recovery in spinal surgery volumes and stand ready to make commitments to suppliers in order for the inventory instruments and sets needed to commercialize those systems quickly. Importantly, we are also actively monitoring the situation, including weekly outreach to spinal implant manufacturers to best understand the status of their operations and any supply chain risk, so we can best gauge the near and longer-term impact on our business.Finally, I want to highlight our continued enthusiasm in and the increasing number of inquiries we are receiving and collaborative video calls for the Machine-Vision Image Guided Surgery platform that we are co-marketing with 7D Surgical. Our agreement with 7D Surgical allows us to offer a best-in-class navigation solution to our hospital and surgeon customers, which, combined with our innovative and differentiated spinal implant systems and orthobiologics products, collectively provide for a complete integrated and seamless procedural solution in spine.We believe that our ability to place the 7D system in a capital-efficient manner will be particularly valuable to both companies, as hospitals are likely to continue severely restricting their capital purchasing budgets in light of the COVID-19 crisis.In summary, our near-term priorities remain the health of our employees and their ability to protect and provide for their families, our distributor partners and our surgeon customers and their patients, while reducing costs for non-critical expenses and programs in order to best position SeaSpine for what will likely emerge as a new normal.We are focused on maintaining the culture and operational readiness to emerge stronger than ever to address the pent-up surgery demand that we currently expect will ultimately materialize. I'm confident that the dedicated SeaSpine team, combined with our dedicated distributor network and superior products will enable us to maintain operations to support our customers and their patients in the near term and, importantly, will allow us the flexibility to capitalize on long-term growth opportunities, when surgery volumes fully resume.With that, we will now open it up to questions. Operator?

Certainly. Thank you. And your first question comes from the line of Matthew O'Brien with Piper Sandler. Please go ahead. Your line is open.

Afternoon. Thanks for taking the questions. Just a couple of short-term ones and then a couple of more intermediate to long-term questions. John, you provided the feedback on the first week here of May, which was helpful. Would you be so kind as to provide what happened in April?

Yes. Matt, we'd talked about in the scripted comments that the month of April revenue was down just over 60%. So we saw, obviously, an increasing decline as the pandemic took hold over elective surgeries in April. But as we alluded to in the script, it's early in the month of May, but we started seeing a pickup as those states have eased elective surgeries starting in the latter half of April. And as we look to the first couple of days of May, we're definitely seeing a better trend compared to hitting the depths in early April.

Okay. Thanks. Sorry, for missing that. On the logistical side of things, as we get hopefully to a little bit more steady state in June, July and beyond, what are some of the gating factors? I mean, do you have enough sets to supply a lot of your customers at this point? What about patient interest levels and going into the hospital to get these cases done? Just any thoughts on those or anecdotal feedback would be helpful.

Yes. I mean, early on we started pulling back sets as we saw the impact start in elective surgeries, even in March. So we wanted to do everything we could to protect the sets and make sure that they're in a reachable place. So we've got an ability to manage the substantial majority of our sets and redeploy them.And we are redeploying them proactively, knowing what states are starting to resume elective surgeries and those that are likely to come back online and based on feedback we're getting from distributors. So, yes, we have a good handle on the ability to move the sets around to where they need to be.From talking to surgeons and hospitals, we're trying to get a better understanding what the protocols will be, if they need the sets in earlier, because they need more lead time for sterile processing and such. But based on our current expectations, I do not anticipate any issues with having sets available, because of our ability to manage them and move them around that we've already seen, as we're starting to see a little bit of a recovery. So we do not expect that to be a problem.

Great. Then just two more for me. You've got this great cadence of new products. It seems like it was going really well in Q1. Can you talk about the appetite? And I know this is a little bit more challenging to think about, but just the appetite for hospitals, clinicians to get trained on new technologies to switch over right as they're ramping back up and doing cases. Is this something where the benefits of all these new products likely aren't really going to be felt more so until 2021?

Yeah. Matt, I think that we've had a good opportunity to stay connected with, not only our alpha surgeons but also the expansion of some of the products, as we know that they're going to be moving into full launch. And we've been reaching out. We've been ensuring that if there's any training needs that we have the ability to do that. So I think we're still in a good place.A lot of the -- to your other question, and weaving it in with this too that there's such a pent-up demand for some of these cases that I think at first, we were wondering would patients still be receptive to going. And it appears -- and I mentioned in the notes that we've been working closely with our Surgeon Advisory Board to help us understand how those patients are responding.And I have to say that most are still very eager to get their surgeries done. And there's such a backlog that, it's not a problem if someone wants to postpone it. Because there's such a backlog, they can fill someone else in. And so I think that both of those things highlight that there's still an appetite for surgery, and there'll be an appetite for new products once they're available.

Okay. And then, -- that's really helpful, Keith. Last one for me. Just -- there's a lot of really small players within the overall spine market that are much less well capitalized than you guys. Are you starting to get inbound interest from competitive reps or distributors at an accelerated pace or starting to see some surgeons questioning whether or not their existing suppliers and vendors are going to be able to support them going forward or even some systems thinking that way? Is this a potential opportunity for you guys into 2021 to take some even step function elevated level of market share?

Yeah. Interesting question, because I think there are pockets across the U.S., where are seeing even some smaller companies that are certainly struggling and challenged, which makes their distribution channel nervous. And we're having the right discussions with those folks and trying to figure out whether they can be part of the future as things start to become back -- or start to return to somewhat of a normal state of surgery load.And yes, we're having those conversations. We do think it is advantageous, because we're in the position we're in and the security we're in to emerge from this. And it continues to be part of our distribution expansion strategy to continue having these discussions. So, I do think we'll be well placed upon returning to normal of being able to attract some additional talent, yes.

Got it. Very helpful. Thank you so much.

Thanks, Matt.

Your next question comes from the line of Kyle Rose with Canaccord Genuity. Please go ahead. Your line is open.

Great. Thank you very much for taking the question. Just a couple of follow-ups on some of the previous commentary. I guess the first one is just following-up on the potential to add new reps. I mean you talked about, you've got some distributors potentially identified and are just kind of waiting for additional clarity on the market before maybe pulling the trigger and sign some agreements. I guess maybe help us understand, what specifically would you be looking for. Is it insight into set availability and procedure volumes, or is there some other, I guess catalysts that would drive the additions of some of these sales reps?

Yes. No, I think it's pretty traditional items. I mean one is, obviously, we want to get them to our facility. We want to make sure they understand the people all of the team, not just the senior leadership team or sales management team they've been talking to, but making sure they appreciate where we're going from a marketing and development perspective. So a lot of that is on hold until we get less restrictions on travel and face-to-face meetings.Additionally, we do want to understand how their market is going to recover as well. I mean obviously we want to put all the sets and deploy the sets in markets that are going to have the fastest recovery and are going to be able to demonstrate that they're going to be able to return to elective surgery quickest.

That's very helpful. And then, you commented just about the exposure to the states that you're starting to see pockets of procedures come back representing 75% of historic U.S. business. That's very encouraging. Maybe -- I know it's early. It's still the first week of the month, but maybe help us understand where you are seeing either cases come back or case logs fill up for future cases.What type of cases are you seeing being scheduled? Are they actually being scheduled in the ASC setting? Are these simple like ACDF cervical procedures? Are you starting to be able to schedule maybe some of the pediatric deformity cases? Just help us understand what the case mix might look like as we start to come back.

Yes. So, the case mix has been pretty standard to what we would have expected as we closed last year and started the beginning of this year as far as what cases are being put back on the books. Surprisingly, we're not seeing a great deal of ASC request yet. All the requests and what we were referring to were the traditional hospitals. I mean, we do have some ASC requests but it's the traditional hospitals that are returning to some sort of close to full capacity.Now they may not be turning their rooms as quickly as they did before because they had different policies or kind of new restrictions in place but we are seeing that caseload in the larger institutions.

And then just last question and I'll hop back in. It's just Keith, you've been around the industry for a while. You've seen ebbs and flows in procedure volumes as well as commercial changes as far as how sales forces interact with physician and hospital customers. From your perspective, are there positives that you might see emerge from how the sales rep in hospital and company relationship develop on a go-forward basis?Are there opportunities for you to secure – a pure-play focus for you to secure new account wins, or is it going to be a bit tougher over the interim period as far as getting doctors to reengage, getting hospitals to reengage with new vendors and just being able to have some of those conversations?

Yes. I don't think so. I can tell you from the momentum as we closed out April and saw this nice momentum in the first week of May that there's a number of opportunities that are coming and new business opportunities as well. And in fact, just over the past couple of days there's been a lot of circulation amongst leadership and our sales team about some really exciting new opportunities and clinicians that we haven't had the opportunity to work with before that will be coming aboard and that are also very interested once travel restrictions ease of getting to our facility to dive a little bit deeper into some of the new products that we're offering.So I think this has been an opportunity that the strong – stronger sales more exclusive sales force has been deeper engaging in their territory and we're already starting to see some of those wins as we kick off May.

All right. Thank you for taking the questions.

Yes.

Your next question comes from the line of Ryan Zimmerman with BTIG. Please go ahead. Your line is open.

Hey, guys. Thanks for taking my question.

Hey, Ryan. How are you?

I am doing great. Thanks for all the commentary, especially in the PPP dynamics. It's interesting to hear, certainly as you guys go through that and as it changes. Number one, just around what you're hearing from your surgeon customers. I'm curious what the attachment rates are kind of looking out ahead.What I mean by that is patients who would have otherwise had surgery in March and April are being deferred. And so what's your expectation for recouping those procedures specifically? And what may or may not be lost as a result of just the dynamics going on with COVID right now?

Yes. It's funny because I think as April started coming into focus and we're leaving March and you start seeing the rapid declines, there was a lot of concern in and around – I think a number of companies have talked about the fact of A, what percent come back; B, even if they are to come back do they feel safe to go into a hospital environment.And so that ended up being a very common thread that we would in all of our weekly calls with surgeons would revisit and just say "From your perspective the city you're in how do you view this?" And surprisingly, consistently we heard that as soon as our hospital turns on the ability to do elective surgeries, I'm extremely comfortable that we're going to be as busy as we can possibly be in the weeks that we're allowed to do surgery. And that's what now we're seeing as we see the schedules for May and we see the schedules starting to round out for June.Even in places that I thought would be a lot later, in the Pacific Northwest for example, even they are setting dates and sticking to those dates to allow surgeons to go back to surgery. So I feel like a very large percentage will ultimately get back into the system and the loss will be very small.In fact, most of the surgeons have explained that their surgeon – or that their patients have been in pain. They've been miserable and they've been waiting for this opportunity to get back and be able to have surgery. And I think they look to their surgeon for comfort as to whether it's a good time to do the surgery and I think they look to their – the hospital and the reputation in the community of whether they should go back. And right now the feedback we're getting is that most are still willing to get on schedule and move the process forward.

Okay. Appreciate that. And then I got two for John. I don't want to leave him out. First, number one, John on operating expenses. You identified I think in total about $6 million in savings for the remainder of the year. And so one, I don't want to jinx this, but if there is a second wave, do you feel like you have sufficient opportunities in your back pocket to trim some expenses further if need be? And actually I'll stop there. Thank you.

Yes. There are definitely additional levers as we've mapped out different scenarios and what levers we'd pull. And those levers become increasingly painful and we would only pull them if the situation turned particularly negative. As Keith and I both talked about in the scripted comments, our strong desire is to maintain operational flexibility so that we can take advantage of the opportunity to participate in the recovery of surgery, not just because of the market share taking but just because we understand our mission is so important that people are in pain. We want to be in the best position to help surgeons help their patients who have been enduring longer pain than they otherwise would have if not for the pandemic.So we've identified what we think are the responsible reductions in product spend, CapEx and OpEx but have identified additional levers that as we continue to monitor the situation, we can push or pull depending upon what the situation calls for. But again always keep in mind what our mission is and why we're here. It's to help people in pain and we will always be biased towards making sure, we're taking care of those that are in pain that we can help.

Thanks for taking the question.

Sure.

Your next question comes from the line of Kaila Krum with SunTrust. Please go ahead. Your line is open.

Great. Hi, guys. Thanks so much for taking our questions. So you mentioned that you're strategically deploying capital based on where elective procedures are returning and that makes a lot of sense to me. Can you just speak to the magnitude of that capital that you're -- or that you've deployed or you're in process of deploying? And I realize it's early. And then what types of procedures are you seeing come back first? Are this kind of largely cervical cases in the ASC, or just any color there would be helpful.

Yeah. The initial surgeries are in line with what our expectations were that it'd be more outpatient surgeries, simple cervicals, ACDF. That's the majority of what we saw in April. But we are starting to see a rebound in the more say complex surgeries outside of ACDF and the cervical. So that's been the trend the last two weeks. Again it's very early to call, but we're optimistic by seeing how there's been an inflection towards the higher ASP cases, a little bit more complex cases than what we saw particularly early on in April as we hit the depths of the deferral of surgery -- spine surgeries.And your first question was on the capital – sorry, I forgot what the first part was.

Yeah, yeah. So just if you could speak to just the magnitude. You'd mentioned on the call that you guys are deploying capital based on where you're seeing elective procedures returning. And so just the magnitude to the extent that you've done that so far would be helpful?

Yeah. As Keith talked about on the call, the total cost-saving levers we've pulled so far are in excess of $6 million across the board for OpEx, CapEx and inventory. A little more than half of that is non-operating expenses that we pulled back on new product launches. But we're very much biased towards continuing to deploy more of the foundational Mariner platform, particularly MIS and the revision system and more of the open Mariner systems because that's been the lion's share of the revenue growth we've seen of late and where we expect it to come from as surgeries come back online.So we're very much biased to those foundational systems and continuing to deploy those. And although we've put the brakes on the -- some of the new product launches that's part of those cost savings, again we're going to monitor the situation and literally looking at things week-by-week to understand when we're ready to make those commitments based on how we things -- we see things shaping up in terms of the rest of the new product launch cadence that we had initially planned for the full year. So we stand ready to continue to invest for growth, but feel like it's prudent at this point to not make those commitments yet, until we have a little bit more time under our belt for the -- seeing what this recovery looks like and how sustained it might be.

That makes sense. And then -- so you guys -- so you mentioned a handful of areas that you're cutting costs. And you mentioned that you froze hiring and it sounds like manufacturing in your biologics as well. So I guess first on hiring. Are you still finding your sales force headcount to be relatively stable at this time? And then on manufacturing, how quickly can you ramp that back up if procedures begin to return in the second half? Thank you.

Sure, yeah. The sales force and the sales leadership team, I think has been in the best shape it's been frankly since the spin right? I think we've got the right sales leadership team in place for both portfolios across the geography. We've looked and revised the territories over the past year and spent a lot of time getting the sales leadership team to where it's at today. And we want to keep that intact because that's the team we want to move forward with as we start to see surgeries recover. So we're very biased at not disturbing anything in terms of the sales leadership team.And with respect to Irvine, the manufacturing operations, right, we can start that up on a few days' notice to be ready to go back to full production in a relatively short period of time. I mean, we have enough inventory on hand that that's what drove the decision to essentially cease operations of a substantial part of the operation since late March. But that workforce is ready to go when we make the call to resume that and I'd expect we'll be able to get it back up and running at full speed in a matter of a couple of days. But we know we have enough inventory at this point that it's not an urgent thing to have to crank it up that fast, but we could if we needed to.

Great. That makes sense. Thank you guys.

Thank you.

Your next question comes from the line of Jeffrey Cohen with Ladenburg Thalmann. Please go ahead. Your line is open.

Hi, Keith and Bostjancic. How are you?

Good.

So just a few for me. So firstly, can you touch upon 7D and where things stood in February and March as far as having conversations and interested parties as far as system goes and how might that look? I think you mentioned early Q3 to be putting some systems in place. Can you give us any more color on that front?

So again the 7D opportunity for us, it's been good Jeff from a number of perspectives in this downtime of spending a lot of time, not only from a training perspective, but also kind of giving us more opportunity after getting feedback from our distribution channel from our early launch with them on how best to deploy this in the most efficient manner, especially as you look at some of the challenges with COVID and the anticipated challenges of capital purchasing that could be going on after we return to normal business right?And so we look at it as a good fast start opportunity for us because I think we have some creative ways that we can help get these systems placed and do it in such a way that it's a great synergy, not only for all of the different SeaSpine implant systems that can be used with it, but also a great synergy with 7D themselves to get it installed quicker.And so we do feel like this will enable hospitals to make a quicker access decision with navigation in a way that they wouldn't have been able to do before because they would have to buy it out right.

Yes. Okay. Got it. And then secondly can you give us any feedback that you've been receiving over the last couple of months as far as the feedback on the Reef Topography alpha launch that's out there?

Yes. It's gone really well. And I think too we're excited because we've also gotten some very positive news about how we view not only that technology, but that technology and how it's coupled with our DBM and our higher-performing DBM that we have a good opportunity coming up at NASS to be able to present not only the research we've been doing in and around this area, but also the animal work as well. And I think you're going to see some compelling information that bridges both of the technologies together to really demonstrate not only a more cost-effective interbody procedural solution, but also one that is going to be -- I think longer term show greater outcomes.

Yes. Okay. Got it. And then lastly could you talk about as far as the cases that you've been doing over the past number of quarters what percent do you think in the ballpark has been deemed essential versus nonessential as far as to be performed inside a 90-day window versus not?And then as far as some rebound that you're seeing in May are you seeing some of the centers coming up to basically just some level of caseload being perhaps half or 2/3 as far as the end hospital cases and how they're staggering some of their sales force and the physicians over weekdays and perhaps weekends?

Yes. So different areas are talking about different level of weekend participation, I know that there's been conversations specifically in California about weekend participation by hospitals. But interestingly -- your first part of that question sorry Jeff was in and around what?

Caseload being essential versus nonessential.

So interestingly enough probably right around -- I want to say it was in March I think NASS had issued kind of some guidance on how hospitals and orthopedic and neurosurgeons for spine should be looking at different procedures. And they kind of had this urgent emergent and then of course elective kind of qualifications. And what I -- what we are understanding talking with surgeons and talking with hospitals is that they agree with that kind of qualifications and are pursuing it in line with that.And that's -- what we're seeing now is that opening of really the third category the elective category. But again as I mentioned in our notes earlier that our surgeon advisers that we're talking to are quite bullish that there's a pretty deep list of patient load and they feel very comfortable that they're going to be able to really get after it over the next two to three months.

Got it. And then last quick one for you guys. Can you give me the breakdown of the worldwide split between implants and orthobiologics please just on the totality outside including U.S.?

Yes. We're still -- 90% roughly of the revenue is U.S.-based. And then the revenue mix -- you're talking about on a global basis?

Yes. You had 14.5 and 17.3 in the U.S. What was the totality of the quarter?

So for global spinal implants it was about 46% for the quarter. So then ortho is about 44%. So not too far off the usual mix.

Perfect. That's it for me. Thanks for your time.

You bet, Jeff.

And your next question comes from the line of Shagun Singh with Wells Fargo. Please go ahead. Your line is open.

Thank you so much for taking the question. Keith, I wanted to get your thoughts on patients' confidence in returning to get the procedures done. I guess, there are two camps. One camp is that at least initially patients may be a little hesitant to get the procedures done for fear of being exposed to coronavirus. But then the second camp is that we could actually see a spike in Q3 for fear of a second wave. So I want to just know what your thoughts were there. And then I have a follow-up.

Yes. We've been tracking that pretty closely, because I think we were also maybe a bit concerned at how patients would view it, especially maybe what area of the country that they live in. It certainly appears right now and it's still early in the process of the states that have opened up elective surgery. And the surgeons that we've talked to about the feedback they've gotten from their patients, they are saying that their patients are excited to finally get the procedure on the books and that they fully anticipate unless something happens in and around the community with some kind of resurgence that the patients are actually going to go through with the procedure.I think though that it would make sense to me that the Northeast is going to have a slower start to that kind of process and maybe have different views by some of those patients. But we've been following it pretty closely and we're surprised with the very small bit of fallout that there has been. It's much better than we would have anticipated, especially in those states that have now opened up. So I think right now, it's -- there's an enthusiasm. I think we just have to monitor and see whether there's other concerns that start creeping up now that some of these states are getting back to a certain level of normal surgical work.

I got it. And then, is there any data you could share with us on the backlog you might be seeing?

It's really individual. We've been keeping track of it just by as I mentioned the Surgeon Advisory Board that we have. I'm also doing weekly calls with our distribution channel and working with them on -- talking to them openly. We're talking in a very open forum, video forum about new cases being scheduled and where they see the backlog and how they see the backlog freeing up. So it's really on a very individual basis. We don't really have it covering for every single territory. It's more about the ones that are closest to the family really getting detailed information for the feedback they're getting from patients and how the hospital is viewing that backlog and giving them the priority to get it on to surgical OR plan.

I got it. And then just a couple of questions on the catch-up phenomenon that you mentioned and the strong patient interest still. Do you think in Q4 we could get to some kind of a normalized level of procedures, just given where we stand today? And then just as we think about 2021, I know it's still early and there's a lot between now and 2021, but do you think we could get comfortably to sales levels to go above 2019 or even approach pre-COVID levels? Do you think -- any thoughts on 2021 would be helpful. Thank you for taking the questions.

Yes, sure. I mean, it's the million-dollar question Shagun, I think that it's too early to tell. Certainly from an enthusiasm perspective and the surgeon community we talk to, they feel very strongly that they're going to be working very hard to bring recovery quickly. But again, I can't predict how the third and fourth quarter are going to look later in the third quarter and into the fourth quarter as to whether there's some kind of resurgence of the virus or whether certain areas of the country have different shifts. So I'm just not comfortable yet being this early into May. Don't get me wrong. I love the positive signs we're seeing in May, but I don't feel it's predictive yet of trying to figure out 2021 just yet.

Fair enough. Thank you.

Yeah.

I am showing no further questions at this time. I'd now like to turn the call back over to Keith Valentine for any closing remarks.

Sure. Thank you everyone for participating this afternoon. I wish you a great evening and of course as always please stay safe. Cheers.

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