Good afternoon, and welcome to SI-BONE's Second Quarter Earnings Conference Call. At this time, all participants are in listen-only mode. We will be facilitating a question-and-answer session towards the end of today’s call. As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to Matt Bacso from the Gilmartin Group for a few introductory comments.

Thank you for participating in today's call. Joining me are Laura Francis, Chief Executive Officer; and Anshul Maheshwari, Chief Financial Officer. Earlier today, SI-BONE released financial results for the quarter ended June 30, 2022. A copy of the press release is available on the company's website. Before we begin, I'd like to remind you that management will make statements during this call that include forward-looking statements within the meaning of federal securities laws which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Any statements contained in this call that relate to expectations or predictions of future events, results or performance are forward-looking statements. These forward-looking statements are based on the company's current expectations and inherently involve risks and uncertainties. These risks include the impact of the COVID-19 pandemic will have on the ability and desire of patients and physicians to undergo and perform procedures using the company's products, the duration of the COVID-19 pandemic and whether the COVID-19 pandemic will incur in the future. Other forward-looking statements include our examination of operating trends and our future financial expectations such as expectations for hiring, surgeon training and adoption, active surgeons, new products, clinical trial enrollment and reimbursement decisions and are based upon our current estimates and various assumptions. These statements involve material risks and uncertainties that could cause actual results or events to materially differ from those anticipated or implied by these forward-looking statements. Accordingly, you should not place undue reliance on these statements. For a list and description of the risks and uncertainties associated with our business, please refer to the Risk Factors section of our most recent Form 10-K and Form 10-Q filed with the Securities and Exchange Commission. SI-BONE disclaims any intention or obligation, except as required by law, to update or revise any financial projections or forward-looking statements whether because of new information, future events or otherwise. This conference call contains time-sensitive information and is accurate only as of the live broadcast today, August 8, 2022. And with that, I'll turn the call over to Laura.

Thanks, Matt. Good afternoon, and thank you for joining us. For today's call, I'll provide a business update, and Anshul will provide additional detail regarding our financial results. Before I cover our record second quarter results, let me highlight some recent wins for the company. At the end of May, we received FDA 510(k) clearance for iFuse Bedrock Granite, our breakthrough product that is intended to provide SI joint fusion in addition to sacropelvic fixation for adult spinal deformity procedures. This clearance follows the earlier designation by the FDA of iFuse Bedrock Granite as a breakthrough device. In August, CMS published the final decision, confirming the new technology add-on payment, or NTAP, of up to $9,828 for eligible cases using iFuse Bedrock Granite. The NTAP will be exclusive to iFuse Bedrock Granite and become effective October 1, 2022, for a period of up to 3 years. Based on the initial strong surgeon reception, we're really excited about the potential for iFuse Bedrock Granite to accelerate our penetration into a highly synergistic $250 million adult deformity market. In mid-June, we received FDA clearance for expanded indications of iFuse-TORQ for pelvic fracture fixation, including acute, nonacute and nontraumatic pelvic fractures. iFuse-TORQ was previously cleared for both SI joint fusion and fracture fixation. With this expanded clearance, we can now promote the use of iFuse-TORQ for treatment of patients with fragility and insufficiency fractures of the pelvis, which are fractures caused by low energy traumatic events. We estimate this patient population accounts for $300 million of our $350 million market opportunity. We believe the expanded indication will accelerate our growth in the trauma market as iFuse-TORQ's unique osseointegration features will be effective option to remobilize patients, many of whom have osteoporosis, who are suffering from fracture-related pain and disability, thereby improving quality of…

Thanks, Laura. Good afternoon, everyone. Our second quarter 2022 total revenue was $25.6 million, representing growth of approximately 15% compared to the prior year period. U.S. revenue was $23.8 million, increasing 18% compared to the prior year period. Growth in the U.S. was driven by strong demand for our solutions, which resulted in a 23% growth in procedure volumes versus the prior year period. We were encouraged by the steady sequential increase in monthly U.S. procedure volumes as we progress through the quarter, indicating that the operating environment continues to normalize. Consistent with our experience in the last few quarters, procedure volumes for minimally invasive SI joint fusion at ASCs continue to increase. ASC procedure volumes increased to the low 20% range, up from mid-teens in the prior year period. International revenue was $1.8 million, a decline of 8% compared to prior year period. While procedure volume increased by low double-digit percent year-over-year, led by strong performance in France that was more than offset by lower ASP and FX headwinds from weakening of the euro. Gross margin for the second quarter of 2022 was 86% compared to 89% in the prior year period. The second quarter gross margin was impacted by an anticipated mid-single digit decline in ASP due to procedure and site of service mix and increase in cost of operations to support the growth of the business, especially associated with the launch of new products and higher freight costs. Operating expenses increased 22% to $40 million in the second quarter of 2022 as compared to $32.8 million in the prior year period. On a sequential basis, operating expenses grew approximately 10% compared to the first quarter of 2022. The sequential increase was driven by higher commission, increase in travel and freight costs as well as the timing of…

[Operator Instructions] Our first question comes from David Saxon from Needham & Company.

Maybe to start off just on procedure volumes going in the third quarter. I mean it times like June was a really strong month and returning to a more normal operating environment. How should we think about the normal seasonality we typically see in the third quarter? Are you expecting kind of a slowdown? Or do you think we could see some sequential growth, just given some of the building momentum with TORQ, Granite and iFuse?

David, I can take the question around the cadence for the rest of the year, and thanks so much for the question. You're right, this does feel a lot to us like 2020 -- 2019 was especially based on the acceleration of growth that we saw in the first half sort of going from 10% to now 15%. This is worldwide, and the U.S. actually doing even better than that based on the strong procedure volume rebound that we've seen. And you're right, when we think about historical patterns, Q3 tends to be sequentially flat to even lower from Q2. But given the momentum we see in the business, we do expect Q3 to be sequentially up, albeit low single digits up, and there are a couple of factors that play into that. One is just the strong volume in the U.S. that we expect to continue, but some of the staffing challenges that we experienced in Q2, we think some of those will continue to unravel as you progress through the year, especially in Q4, starting to normalize. And then you've got some of the FX challenges that we saw in Q2. We expect some of those to continue in Q3 and Q4 as well. And then as you think about Q4, that is always the strongest quarter for us from a seasonal perspective as patients have met deductibles, and there is an increase in elective procedures in general. So think about the cadence of sequential growth that we saw in 2019 to sort of be very similar in the Q4 of 2022 when you think about Q3 to Q4 as well.

Okay. That's super helpful. And then my follow-up is just on OpEx. I appreciate the color you provided in the script. Should we be kind of starting at mid-80s for the back half in terms of OpEx? And then I guess just on the increase from the first half to second half, are you pulling forward any investments? Or is that just to support the higher revenue?

Yes. So when you think about the first half OpEx, our OpEx was around $75 million, $76 million. And I'm just talking OpEx, not looking at COGS or anything. And our expectation is a low single-digit percentage increase in the second half versus the first half. If you recall, earlier in the year, we had talked about the productivity in the P&L, especially as we progress through the year, and some of that is going to play out in Q3 and Q4. And then also, there were some spend items that we knew coming into the year that would be more in the first half. We highlighted a few of those, specifically around global sales training, certain surgeon and employee training events, which don't get replicated in the second half of the year.

Next question comes from Craig Bijou from Bank of America.

Let me start with guidance in the second half and -- or the implied guidance for the second half. I think, by my math, it's about 20% up over the first half, which is meaningful step up. And I do think year-over-year growth almost double what it would be or what it was in the first half. I understand the encourage -- what you're seeing and you're encouraged by what you're seeing in the field, but maybe just a little bit more color on what gives you the confidence in that ramp. And then additionally, with the TORQ momentum that you're seeing and the new indications, the launch of Granite, can you just help us think about how or what's driving the higher sales in the second half whether it's core versus TORQ versus Granite. Obviously, it's going to be all of it, but any color on kind of the magnitude there?

Yes. Thanks for the question, Craig, and yes, we are very bullish about how the business is developing here, seeing the acceleration occurring in the second quarter and a lot of the tailwinds that we discussed on the call earlier today, not yet completely in place. And so you're right, it's a little bit of everything. First of all, it's primarily our core business that we're seeing that growth. So as we said, the volume growth was around 23% year-over-year in the second quarter in the United States, and that represented 18% growth in revenue -- in dollar revenue. And so it is primarily the core business that we're talking about that we're seeing this rebound in the business, and part of it is from the more normalized environment that we're operating in. But then some of these other factors that we talked about, I think, are factors there too. I think TORQ has had an impact too in terms of allowing us to convert some competitive accounts with that technology. So primarily, it is the core business. And Anshul had mentioned this earlier in his comments where if you think about how the business developed before COVID hit, we actually saw the same exact sort of acceleration in the core business. And at the time, that was only our iFuse-3D business. So that's the core. But then on top of it, we have these 2 additional opportunities that literally just came to fruition in the last month of 2022. And first of all, it is our Granite product in adult deformity, and we're very excited about the opportunity that's here. It really is a product that's meeting an unmet clinical need, provides fixation, infusion in spinal pelvic cases for the first time. There's a clear need for it in…

Got it. Very helpful. And maybe a follow-up for Anshul, on OpEx. So I appreciate the color that you provided and the thoughts on the second half. And if I could push a little bit on maybe 2023, I know you're not going to provide guidance for that. But how should we think about your ability to see operating leverage kind of going forward? And is it possible -- recognizing that you're going to see some of it in the second half, is it possible to see some acceleration in that operating leverage in '23? And how do some of the inflationary environment or some of those challenges factor into your ability to see that operating leverage in '23 and potentially beyond?

Yes, Craig, thanks. You're right, Craig. We're not going to be providing 2023 guidance at this point. But as we think about our business, Craig, and you look at the last 24 months, we've made a significant amount of investment to build out our commercial organization. To build a supporting operating infrastructure. We've continued to invest in R&D., and we've actually built a very solid foundation to be able to deliver the strong sustainable growth as we come out of the pandemic into a more normalized environment. And we're getting to a scale now, Craig. We think about it as an inflection point where we're not focused on gaining leverage on that P&L. So as we think about 2023, you're not going to see us not invest in items that we now deliver top line growth. So R&D, Laura talked about a couple of examples of Granite and TORQ and what impact it can have on the business. So R&D will remain a very crucial investment for us in 2023 as well. And then it's going to be a lot of selective addition to our sales force. We've grown our sales force over 30% last year. And as that sales force matures and you combine that with the broader portfolio that allows for deeper surgeon engagement and high utilization, both of them give us confidence in the productivity growing as we get into Q4 and then accelerating into 2023, especially as we look to get to that adjusted EBITDA breakeven over time. So feel really good about the setup that we have and now it's about monetizing the investments that we've made, Craig.

[Operator Instructions] Our next question comes from David Rescott from Truist Securities.

I guess, first, on the reimbursement front. Obviously, that's been an expanding reimbursement for investment there. It's been a tailwind in the business over the past several years and the proposals to increase reimbursement by 28% and 35% ASC outpatient setting next year is obviously a positive. So I guess, first, congrats on that. But just wondering how you're thinking about that at this point. And how we should be thinking about this either driving increased utilization, explain the active surgeon base. Just wondering how that improvement next year would impact the business.

Thanks, David. So as you said, CMS recently proposed 2023 facility payment increases of 28% and 35% in ASCs and in the hospital outpatient setting, respectively. So the final proposal won't be out until November. So we don't want to speculate on that, but historically, the final rulings have not been materially far from the proposal. So that obviously is a significant increase. We think it's going to be significant to surgeons. We think it's going to be significant to hospitals and to surgery centers. In our case, 80% of our procedures are already in surgery centers or hospital outpatient. And so our procedure is already economically attractive at all sites of service, but assuming that the final decision is close to the current proposal, we do think that it's going to be beneficial for facilities that have been dealing with pressures from inflation and from COVID that, that is going to be a factor that they'll be considering. And then we think it should be accretive to our revenues as well in terms of demand or also potentially reduced ASP pressures as well at these various sites of service, especially as we continue to see a shift of procedures to ASCs.

Okay. That's helpful. And I guess sticking on reimbursement. So this new AMA temporary code is expected to go into place next year. Just wondering if that is something that is specific to the iFuse product versus typical S2AI screws next year? And is there a significant difference in the reimbursement between those 2 segments? And how does that help you guys into 2023?

Yes. So our product -- our iFuse product is a product that is a transfixing product. So the implant is placed by a surgeon. It goes across the joint, and typically, 3 of these implants are placed laterally. And that is how CPT code 27279 is actually described. What the AMA has decided to do is, they've decided to create a Category 3 code, not a permanent Category 1 code for -- I'm going to just say commonly referred to as dorsal allograft procedure. So they're taking a posterior approach, not a lateral approach across the ilium toward the sacrum across the SI joint, but a posterior approach. And so based on a lack of evidence available for these procedures as well as many differences from MIS lateral SI joint procedures, which include the placement of a transfixing device like iFuse, they've made this decision to create a Category 3 code. So we do not sell these dorsal allograft products or procedures. Our iFuse product is a transfixing lateral approach product. And so we do expect there will be a significant impact on reimbursement for these other dorsal allograft procedures. And so we do not believe that commercial payers are going to cover the new T code in the near term here, and so we do see this as a significant development.

The next question comes from Drew Ranieri from Morgan Stanley.

Just maybe one on the Bedrock NTAP. Just reading through the documents, it looks like CMS might have been expecting like 1,400 cases in the first year. Is that kind of how we should be thinking about the rollout? And Laura and Anshul, I mean would you be disappointed if you were only doing that level of Bedrock cases over the next 12 months, just given the significance of the product?

Drew, thanks for the question. And yes, you definitely read through the federal register to get that sort of information. Yes, it's a question as to what the demand will actually be for the product. But if you think about Bedrock, it's -- what it's trying to do is to address this unmet clinical need that's here, and that's around screw loosening and breakage of rods, and approximately 30% of adult deformity cases and then over 20% of them where revisions are actually required. And our product is a breakthrough from the perspective that it not only provides fixation at the base of the long construct, but fusion as well. And our best estimate here is that this is approximately a $250 million market opportunity that's here, and our best estimate is that there are around 33,000 adult deformity cases that go to the base of the long -- the base of the spine in these long construct cases. And so those are the targets for us, those 33,000 cases. And the question is, how rapidly can we capture that market opportunity. And as I said earlier, we do have a head start on this because of our original Bedrock technique where surgeons were using our iFuse-3D product at the base of the long construct and have already worked with over 300 of these surgeons with these procedures. So they're familiar with it. Granite is really a very significant change here that it integrates with the long construct, and it has all of these benefits associated with it, including the economic benefits of the NTAP.

Great. Laura, maybe just kind of thinking about R&D for a moment and just hearing Anshul's comments that you're going to continue to spend into next year on R&D. You just got a new indication for TORQ, Bedrock Granite and the NTAP. Just curious kind of what's next in the product portfolio as you're kind of shifting maybe more of the portfolio to trauma? Any additional products that we should be thinking about in the back half of the year into 2023?

Thanks, Drew. So we're not talking about future launches. As you know, we are pretty tight to the vest on those sorts of announcement. But what I will say is that we are a sacral pelvic surgical solutions company. And what we've done is really identified a space that was not well served by other companies in this space, and we have become the expert in the sacral pelvic space. So it all started out with our core products, our iFuse product and iFuse-3D targeting minimally invasive SI joint fusion. Then with our launch of TORQ around a year ago, also targeting the core market, but trauma as well. And then the new indication over the last few weeks really opens up that pelvic grain fracture market for us, and now with the Granite launch focusing on adult deformity. So what you can expect to see is for us to continue to, first of all, first and foremost, focus on the development of our core market. There's a multibillion-dollar market opportunity there. We have a very strong position. We're the clear market leader in this space. Our best estimate is that we have close to 70% market share in our core market, but we are diversifying our products and our business as well through TORQ and Granite by capturing more of this opportunity in sacral pelvic surgical solutions. So that's really the focus for our business. You can see that it's innovative product that's differentiated and putting us in a position of addressing unmet clinical needs where others have not.

[Operator Instructions] The next question comes from Dave Turkaly from JMP Securities.

Great. Laura, maybe as we're looking at product differentiation, obviously, the original iFuse-3D was a lot different than other things out there, but some competitors did launch products that arguably are not at the same caliber without the data. But when you look at TORQ and Bedrock, I just like to get your thoughts sort of on iFuse protection and then competitors' responses. Is anyone else looking at these opportunities and maybe coming with products they already have approved? Or are you aware of anyone else maybe tweaking what they have today to potentially come at some of these opportunities as well? Or do you feel like you're really the game in town?

Thank you. David, it's a good question that you're asking. And as I said as a response to the last question, we really are all about the differentiation of our products, protecting them with patents. In addition, having the most clinical data on these products and conditions that we can. So now over 100 peer-reviewed published papers at this point on our various products, techniques, biomechanics, economics and so on. And so we're differentiating ourselves through product, patent, clinical data, education, sales force, and we really are unique in the industry from this perspective. There are others that are certainly trying to follow us into these areas. But in each case, what we do is, we've built a lot of moats around our businesses. So in the case of iFuse-3D, the clinical data, the exclusive reimbursement, the patents that we have. In the case of Granite that we just talked about, the product itself, the breakthrough device designation, the NTAP that's out there. And if you look at the results of what we've done, we have seen our market share grow from the time that we became a public company where we were in the mid-50s to now approaching approximately 70%. So it really does tell you that we are developing strategies that are winning in the marketplace. And so our goal now is not so much to be capturing more market share, our goal is to grow the market overall in our core business and then to exploit the markets in adult deformity fixation infusion as well as with fragility fractures and trauma. These areas are unmet clinical needs that we are addressing with unique products and with a lot of data and education to support our positions.

There are no more questions in the queue. This concludes our question-and-answer session. I would like to turn the conference back over to Laura Francis for any closing remarks.

Thank you, and thanks to all of you for joining us on the call today. As I've talked about, we have several tailwinds that we believe are going to accelerate our revenue growth over the next 18 months, and that includes our increasingly productive sales force, our new product launches, a favorable reimbursement landscape and indication expansions into attractive new markets. We look forward to seeing you all at the upcoming Canaccord Conference in Boston, the Morgan Stanley Conference in New York as well as the Needham Virtual Conference. Thanks again, and goodbye.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.