Good afternoon, and welcome to SI-BONE's Second Quarter Earnings Conference Call. [Operator Instructions]. 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, 2021. 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 COVID-19 pandemic will have on the ability and desire of patients and physicians to undergo procedures using the iFuse implant system, the duration of the COVID-19 pandemic and whether the COVID-19 pandemic will reoccur 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 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 of descriptions 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 2, 2021.

And with that, I'll turn the call over to Laura..

Thanks, Matt. Good afternoon, and thank you for joining us. Before I cover our second quarter results, I want to share some exciting news on the reimbursement front.

Based on the strength of our long-term Level 1 clinical data, Anthem has adopted coverage guidelines that are exclusive to our iFuse triangular titanium implants for minimally invasive SI joint fusion. Anthem is the second largest commercial health insurer in the United States.

With over 40 million members, Anthem joins more than 35 other plans to cover iFuse exclusively in the U.S., amounting to over 120 million exclusively covered lives in total. With Anthem exclusive coverage, we see reimbursement as a tailwind for our business.

We will capitalize on the opportunity through our 2021 commercial growth plan, which includes sales infrastructure expansion, surgeon engagement, products and solutions, and patient awareness initiatives. Now on to the quarter.

I'm pleased to report that SI-BONE had a record revenue quarter as our employees continue to relentlessly execute through this unique operating environment. In the second quarter, we generated revenues of $22.2 million, representing growth of 58% compared to the second quarter of 2020.

As a reminder, the prior year quarter was significantly impacted by COVID. Sequentially, our second quarter revenue grew by 9% due to increased underlying demand for our products and solutions.

Our strong results in the second quarter give us confidence that as the operating environment normalizes, our industry-leading diverse portfolio will accelerate our capture of the multibillion-dollar opportunity in the sacropelvic space.

Now let me provide an update on our key growth initiatives as we look to extend our leadership position and drive durable long-term growth, starting with sales infrastructure expansion. At the end of the quarter, our 133 person sales organization was comprised of 74 territory managers and 59 clinical support specialists.

We continue to be strategic about our mix of territory managers and clinical support specialists. Specifically, our clinical support specialists are crucial to driving revenue productivity for our territory managers while also serving as an important training ground for future territory managers.

Additionally, we continue to methodically expand our sales organization to support our surgeons. And as of July 1, added 2 new regions for a total of 16 regions in the U.S. Moving on to surgeon engagement.

The investment in our sales organization, our expanded product portfolio and training infrastructure drove a significant increase in the number of active surgeons in the quarter to approximately 640, an all-time high. During the quarter, we had 24 SImulators deployed worldwide, including 21 SImulators in the U.S.

SImulators, which accounted for more than half of our trainings in the quarter, not only allowed us to train new surgeons efficiently, but also reengage with inactive surgeons and drive adoption.

Going forward, with travel restrictions easing, we believe the combination of in-person local training and SImulator training will continue to drive surgeon engagement for new and previously inactive surgeons.

As a reminder, we are targeting the approximately 7,500 spine surgeons in the U.S., of which 1,700 have been trained and completed a procedure to date. Turning to products and solutions, starting with iFuse. We recently announced results from SALLY, our 2-year prospective multicenter trial of iFuse-3D for chronic SI joint pain.

Clinical results at 24 months showed marked and sustained improvement in SI joint pain, patient function and quality of life. The results demonstrated a significant reduction in the proportion of study subjects taking opioids for SI joint pain, 59% at baseline to 18% at 24 months.

In addition, the study included 3 objective physical function tests; active straight leg raise, 5x sit to stand, and transitional timed up and go, all of which showed statistically significant improvements from baseline.

An earlier publication of 12-month results from SALLY reported radiographic analysis of CT scans showing accelerated bony bridging across the SI joint. 100% of treated SI joints showed bone integration to iFuse implant surface on both the sacral and iliac site and 77% of treated joints showed bony bridging across the joint.

There are now 95 peer-reviewed publications demonstrating the safety, effectiveness, biomechanical or economic benefits of our iFuse technology, further substantiating iFuse as the gold standard for SI joint fusion. Moving on to iFuse-TORQ. We're pleased with the initial reception for iFuse-TORQ following its commercial launch in April.

While still in the early days, we are seeing adoption in trauma as well as several competitive conversions. As a reminder, TORQ is a highly differentiated 3D print threaded implant, which was developed to solve unmet clinical needs for pelvic trauma, an attractive $350 million adjacent market.

iFuse-TORQ also has applications in the primary SI joint fusion market. Last year, we estimate that our competitors generated approximately $40 million of business in primary SI joint fusion. And iFuse-TORQ allows us to offer a product that leapfrogs the competitor's screw-based implants and extends our leadership and market share.

In adult deformity, Bedrock is driving revenue growth as interest in the Bedrock technique among deformity surgeons and key opinion leaders continues to increase.

We currently anticipate that our second-generation adult deformity product, a first of its kind design based on feedback from KOLs, will enter market preference testing in early 2022, a bit later than previously scheduled.

While we're not experiencing supply chain issues with our implants, we are experiencing longer-than-normal delivery times with some of our instrumentation suppliers due to raw material, labor and capacity challenges due to the COVID-19 impact.

The instrumentation delays impacted our validation and verification testing, causing the delay in our second-generation adult deformity product launch. However, we are developing plans to mitigate this risk in the future. Next on to our patient awareness initiatives.

We have completed our second TV marketing test program in multiple cities and compared the broadcast results to our digital marketing initiatives, including search, social media, display and video. We're seeing a higher return on investment in the digital marketing initiatives.

Based upon these results, we're focusing incremental investment toward digital marketing in the second half of 2021. These investments are expected to fuel revenue growth through patient and professional experiences, amplifying our reach to health care professionals and empowering patients through their SI journey.

Our digital initiatives will allow us to be highly targeted, data-driven, technology-enabled, measurable and allow for continuously improved marketing. We expect to see the revenue impact from these programs beginning in 2022. Finally, let me provide some more updates on health economics.

Effective July 3, Centene Corporation established positive coverage for minimally invasive SI joint fusion. Centene is a major intermediary for both government-sponsored and privately insured health care programs and covers more than 25 million members. With the decisions from Anthem and Centene, substantially all of the U.S.

insured population now has access to minimally invasive SI joint fusion. Internationally, in June, the French Health Ministry granted national reimbursement for iFuse-3D. This reimbursement decision by the French national health care system provides coverage for SI joint fusion procedures exclusively using SI-BONE's iFuse-3D implants.

With that, I will now turn the call over to Anshul to provide more details on our financial results..

Thanks, Laura. Our second quarter total revenue was the highest in company history at $22.2 million, representing growth of 58% compared to the prior year period and 9% compared to the first quarter of 2021 due to the growing underlying demand for our products and solutions. U.S.

revenues were $20.2 million, increasing 53% compared to the prior year period and 8% compared to the first quarter of 2021. International revenue of $2 million was a record, increasing 137% compared to the prior year period and 17% compared to the first quarter of 2021.

While we had a solid quarter, the month-to-month revenue growth trend has not been linear as we continue to emerge from the pandemic. We did not see material cancellations due to COVID in the quarter, but we did experience higher-than-normal deferral of cases.

We believe this is due to the patients and surgeons taking advantage of the economic reopening to plan vacations earlier in the summer.

Based on feedback from health care professionals, while backlog continues to grow, we believe delayed diagnosis and use of telehealth to manage patients during previous COVID surges impacted the timing and pace of backlog replenishment of patients who met the medical necessity criteria and who are ready for surgery.

We think these 2 transient factors had an impact on patient volumes in the second quarter and could impact the third quarter. With regards to sales force hiring, we ended June with 74 direct sales reps and 59 clinical support specialists. We expect to end the year with approximately 150 full-time field sales professionals.

We now anticipate ending the year with 85 direct sales reps and 65 clinical support specialists, a change from our original target of 90 and 60, respectively.

Gross margin for the second quarter of 2021 was 89% compared to the prior year period at 85%, as higher cost of operations to support the growth of the business were offset by lower inventory write-downs.

Our second quarter 2020 gross margins were impacted by certain period costs that were expensed as incurred due to suboptimal capacity utilization driven by lower case volume and increase in inventory write-downs. Operating expenses increased 49% to $32.8 million in the second quarter 2021 as compared to $22.1 million in the prior year period.

The increase was driven by higher sales and marketing costs related to increased sales hiring, research and development expenses for new product development and increased stock-based compensation expense. Our second quarter 2020 operating expenses were impacted by preemptive steps taken in response to COVID-19 to reduce discretionary spend.

Our net loss was $14 million or $0.42 per diluted share for the second quarter of 2021 as compared to a net loss of $12.5 million or $0.44 per diluted share in the prior year period. As of the end of the quarter, our cash and marketable securities were approximately $176.6 million and long-term borrowings were $39.6 million. Moving to guidance.

While encouraged by the strong underlying momentum in our business, we remain cautious given the uncertainty surrounding COVID-19, including potential risk of resurgence driven by new variants of the virus and uneven vaccination rates, disruption from surgeon and patient vacation schedules, pace of backlog replenishment and the potential negative impact on hospitals and ASCs.

Our guidance is highly sensitive to assumptions on a global recovery, which anticipates continued progress on vaccinations resulting in normalized case scheduling and elective procedure levels progressing throughout the year.

While we had a solid first half of the year, we continue to take a measured approach given the early stage of COVID-19 recovery. Based on this, we continue to expect total revenue of $92 million to $94 million, representing a growth of 25% to 28% compared to full year 2020.

Given the gross margin trends in the first and the second quarter of 2021, we are updating our gross margin guidance to between 87% to 89% for full year 2021. I will now turn the call over for questions.

Operator?.

[Operator Instructions]. Our first question comes from Bob Hopkins with Bank of America..

Just a question on kind of the what we learned on your last call versus what we're learning on this call. And big picture, it sounds like, obviously, you're making progress, but it felt like things went a little backwards relative to how you exited the first quarter throughout the rest of the second quarter.

Whereas what we heard from other spine-related companies is a little bit better in Q2. So I'm just curious, do you think that your procedure is a little more elective than traditional spine? And just want to get a little more color on kind of what you saw in the quarter relative to how things exited in Q1..

Yes, Bob, thanks for the question. In terms of how we think about how things are developing, we actually feel great about the second quarter. I think the difference between us and potentially some of the other companies that you're talking to is -- and this is my opinion on the matter, 80% of cases in -- for iFuse are outpatient or ASC cases.

And so what we saw, as you know, is a pretty rapid bounce back of our business already starting in March. And so I think what other companies may have seen is more of an orderly transition with both new cases plus rescheduled cases coming in more in the second quarter.

So as Anshul mentioned on the call, what we saw is a little more choppiness during the quarter, but overall, I feel really good about where we ended up. We grew 58% year-over-year. Obviously, last year was impacted pretty significantly by COVID. But we're also pleased that we grew 9% sequentially between Q1 and Q2.

And so we think that bodes well for the rest of the year..

Yes. No, all fair points. So just trying to understand the difference in what we're hearing. And maybe you could talk a little bit about kind of what you're seeing currently and you mentioned a bunch of different things that could impact the near term.

Are you seeing those things have an impact on your business regionally in the United States, if things turned a little bit negative from what you've been seeing recently as a result of the spread? Or are you just suggesting those are things that could have an impact in the future?.

Yes. So I think it's more the situation where we really haven't seen a significant number of canceled cases similar to what we saw during the surge during the winter or at the very beginning of the pandemic. So these are more cautionary statements at this point in time. Obviously, every single day is a new day.

We're seeing a lot of information just today about Florida. And so once again, these are cautionary notes. In a lot of cases, the situation is that cases can't necessarily be performed inpatient if elective procedures are being stopped. They may be moved out of hospitals into ASCs.

It really does feel like things are a little bit different this time that the hospital systems are more in a position to address the issues that are out there and to manage through them. But we're certainly taking all of that into consideration as we're providing information on the call and on our guidance..

Great. And then just one last really quick one. Does your guidance assume a big difference between Q3 and Q4 or is it sort of normal seasonality? Or just maybe talk a little bit about the cadence..

Yes. So as I mentioned, when I think about our revenue growth for the third quarter and the fourth quarter, we delivered a solid first half this year and continue to navigate COVID-19 headwinds.

And it gives us confidence in the growing underlying demand to drive growth in the second half of the year and beyond as we continue to progress more towards normalization. But we are still in the early stages of recovery and COVID-19 still exists and it remains an unknown.

And for all those reasons, we do continue to be measured given the variability in the growth rate trend that we experienced in the fourth quarter -- in the first half of the year. And while we're not giving quarterly guidance, I will share how we're thinking about the U.S.

in the second half and continued sequential growth, which very similar to our typical seasonal patterns will be weighted toward the fourth quarter. As we're entering the third quarter, we continue to see the patient and surgeon vacations as well as the backlog replenishment dynamics continuing into the quarter.

And when we combine that with normal Q3 seasonality in the U.S., which historically has been flat versus the second quarter, and you also even have 3 major surgeon conferences in the third quarter, AAOS and AANS are in August, Joint Section was in July and then NASS is in September and a couple of those used to be in the second quarter.

So we do think that, that will likely impact cases. And so overall, we think it's going to result in a modest third quarter sequential growth rate. So we do anticipate that we'll continue to grow sequentially, but that will be modest. Also, as I said, the fourth quarter historically has been our strongest quarter.

And as a point of reference, going back to the fourth quarter 2019 pre-pandemic, we had year-over-year growth of 26% and quarter-over-quarter growth of 22%. Now we're still dealing with the recovery, but we do expect the fourth quarter pace assuming no disruptions to the recovery trends.

Just finally, with the investments we've been making across our strategic priorities and with the recent exclusive approval from Anthem, we're excited about the opportunities in the second half of the year as well as into 2022..

Our next question comes from Kyle Rose with Canaccord..

I just want to see if we could go back to some of the Q2 commentary. I mean, you talked about some of the transient factors as far as maybe more deferrals and then as people are taking vacations and things of that sort. And then also just a rebuilding of the funnel.

Could you just maybe help us quantify maybe what that impact was in the Q2 and kind of how you're thinking about that impacting in the Q3? Because it does sound like you're still pointing to growth quarter-over-quarter. But just trying to understand what that would have looked like in the Q2..

Yes. So if I'm walking through the trends for the second quarter, we ended the quarter with $22.2 million, and that was a record revenue quarter. It was 58% year-over-year growth, and it was also 9% quarter-over-quarter growth. So I'm pretty pleased with that performance and our team's execution in the first half.

Let me share a little more on the dynamics we saw in the quarter, and I'll start with the U.S. We talked previously about finishing March very strong. So then April is also one of our strongest months, but it was actually below March.

And we continue to see some nonlinear or lumpy recovery during the quarter, and we believe that was driven by a few things.

We saw higher than normal deferral of cases as surgeons and patients took advantage of the economic reopening, the planned vacations earlier in the summer or that's our estimate based upon the higher-than-normal rescheduling of cases. And so we think these vacation trends impacted the scheduling of new procedures in the quarter.

So that's something that we're on lookout for, and we can actually see some of that in our numbers in terms of rescheduling the cases and then also just in conversations with surgeons.

And based on that physician feedback, while there's pent-up demand, the patients that delayed diagnosis and use telehealth to manage patients during the previous COVID surgeons, it impacted some of the timing of the backlog replenishment for patients who need to be medical necessity criteria or ready for surgery.

We think these trends, which we've seen throughout the industry, contributed to some of the month-to-month variability we experienced and with volumes being pressured in the early part of the quarter. But we did really see a very nice trend upward toward the end of the quarter once again.

So like I said, just a little bit of lumpiness in these monthly numbers for the couple of reasons that I mentioned. If I talk about outside of the U.S., we saw a really strong performance actually from our European operations, and that was led by Germany and France and also saw some early signs of recovery in the U.K., which lagged the recovery.

So we're pleased with how Europe is performing in the first half, and we expect the EU to continue to perform well. They have a strong leadership team over there in each of the major countries. And then we also have our newly announced French exclusive coverage for iFuse-3D. I hope that's helpful, Kyle..

It is. And then just 1 on Anthem, and then I'll hop back in the queue. Obviously, congrats on the coverage. Great to see exclusivity.

How should we think about the time line until when that coverage could potentially impact underlying momentum? Is it 6 months? Is it a '22 event? I'm just trying to really understand to get the gears moving there, when we should see those -- that start to impact growth?.

Yes. Yes. We're pretty excited about the Anthem announcement, obviously. And what Anthem did is they transitioned to the AIM clinical appropriateness guidelines for SI joint fusion and that includes the requirement that iFuse triangular implants be used exclusively. And so with that, we have nearly universal coverage for the U.S.

insured population for SI joint fusion and that includes coverage by over 35 health plans that are exclusively requiring the use of iFuse triangular implants for the procedure. So we're pretty happy about all of that. Anthem has 40 million members across its health plans.

And prior to the transition, Anthem was approving iFuse patients more on a case-by-case basis because they had a pelvic girdle trauma coverage policy only. And so what we saw was only around 50% of cases were actually getting approved. So it was hit or miss as to whether the coverage would occur.

And so they were one of the toughest payers in terms of denying patients access to the procedure. In terms of their move to the AIM criteria, we do think this is going to be a great thing for patients going forward as well as surgeon offices feeling confident that all of their patients will have coverage.

And it really does open a huge opportunity for us. Our best estimate is that this is approximately 15% of the U.S. covered population that previously didn't have consistent and fair access to SI joint or iFuse procedure.

In terms of the time line, what you asked about, we typically estimate that it takes 6 to 12 months for this to work through the system before we see a meaningful impact on volumes. So we may have some impact in 2021. For example, some patients are currently in the pipeline for appeal, so those patients who have been denied and are appealing.

But for the most part, what we really want to see is for in 2022, or starting now, we want for surgeons, and we expect for surgeons to start regularly diagnosing patients with SI joint dysfunction or degeneration that have Anthem coverage in that, that will in particular, be a catalyst in 2022..

Our next question comes from David Rescott with Truist Securities..

I first want to start on the number of sales reps you plan to add for the year. I know you've lowered the guidance there as far as how you're expecting to add reps the year.

Do you see this as more of something that has run as more difficulty in the hiring environment than you originally thought? Or is this more around the elected procedure or coverage? Just trying to understand what the change is here. And then I guess as a second part to that question.

Is this really impacting any type of -- any of the sales rep productivity metrics that you've had in the past?.

Yes, David, thanks for the question. And actually, this doesn't have anything to do with the hiring environment. It doesn't -- it's actually how we work with our business. So we are still going to have the same number of FTEs when we exit 2021. And so we're continuing to make progress, and we're methodically expanding the sales organization.

It continues to be one of our key growth initiatives. And as I said, the number of people that we will finish the year will be exactly the same at that approximately 150. What we've done is we've shifted 5 of those hires from territory managers to our clinical support specialist.

And that's really driven by what's happening from a territory perspective and from a growth perspective.

So we typically add a clinical support specialist at the point in time where a territory is -- only has 1 territory manager in it and that territory manager is starting to have issues from a bottleneck perspective with adding new surgeons or with covering cases.

And so that's when we'll add a clinical support specialist to grow that territory from an estimated $1.5 million to more of the $2 million range. We split a territory at the point where they're typically approaching or exceeding $2 million. And so it's really this interplay between the territory sizes, the amount of growth that we're experiencing.

And also in some cases, we do have territories where there are 2 clinical support specialists if we're seeing strong growth in those particular territories and it makes sense to do that. So this is really just a small fine-tuning of how we're handling things from a sales force perspective.

We're hiring terrific people and it's just being very thoughtful about how our territories are developing and making sure we're doing what we need to do in order to grow the business..

Okay. That makes sense. I guess, second on TORQ. I know you launched in the U.S. in April.

Could you provide, I guess, any color around how the early days of the launch has gone so far, at least maybe through July? And know that on the last earnings call, you had talked about how you included just a little bit of revenue contribution from TORQ and the guidance for 2021.

So I guess as far as you've gone so far, are you feeling any more or less bullish about that opportunity and so much as you'd be willing to describe how that's kind of played in your guidance so far?.

Yes. I'm happy to share that. So obviously, we're only 1 quarter in since the full launch. We started -- we launched in April that we are very pleased with the initial reception for TORQ across trauma and competitive conversions. Some early surgeon feedback we're hearing is innovative design and differentiation. It's been accelerating the year.

And we're still in the early days of the products, but we like the momentum. And as a reminder, TORQ was primarily developed for trauma, which is a $350 million new adjacent market for us and then we also have an opportunity with competitive SI joint fusion conversions.

Since the trauma market is new for us, we expected targeted competitive SI joint fusions conversions to drive the initial adoption momentum. And so we are seeing some of that. And while we've continued to execute on the competitive conversions, the adoption of TORQ for trauma has been strong as well.

So TORQ has been a great addition to the portfolio, and with iFuse-3D, which is the gold standard for SI joint fusion, and then we also have iFuse Bedrock for adult deformity, it's helped us to further extend our leadership as a sacropelvic surgical solutions company.

So very happy with TORQ and think we're going to continue to see the momentum growing, and we're tracking very nicely..

Your next question comes from Brandon Folkes with Cantor Fitzgerald..

Congratulations on a good quarter. I just want to drill down into the patient-related delays. Looking at it from the surgery level, completely understandable. I just wondered maybe from the diagnosis level, how should we think about that impact then? Maybe how long this patient journey in total surgery.

Just trying to get a sense of whether these patients who should have been diagnosed were on vacation, does that impact maybe 4Q 2022. And then secondly, it's a tough question and granted there's so many moving pieces.

But how do you view where we are now versus a normalization? And in terms of your guidance, are you thinking about 4Q 2021 as a normalized quarter? Or do you still expect us to be having pockets of disruption?.

So good -- two very good questions. From a patient pipeline perspective, so the medical necessity criteria is 6 months of conservative care simplistically. And so when we think about the pipeline, we really think in terms of that 6 months of conservative care.

And so during the surge and also during the surge that occurred in the winter and then the original pandemic issues, we certainly saw a lot of the use of telehealth in those particular areas. And this is a diagnosis where the patient comes in, there's a patient history that's taken, which that certainly can be done via telehealth.

But then there's also provocative tests, which is typically the surgeon placing his or her hands on the patient or a physician assistant or a nurse practitioner. And so some of these things become a little more difficult. And then additionally, it's typical for a diagnostic injection to be administered and show 50% to 75% reduction in pain.

So some of these things do certainly require in-person conservative care. And so overall, I don't want to overstate where we're at. If we look at how we performed in the first half of the year, I'm pretty pleased with it. If I look at the sequential growth that we've experienced, I'm pretty pleased with it.

I do think that based upon the discussions that we've had with surgeons that most of this impact from the patient pipeline will likely be worked through in the third quarter. And so getting to your question on fourth quarter, I do think that we're going to see a pretty normalized fourth quarter for the business.

And a lot of different tailwinds that we've seen here. So the fourth quarter is historically our strongest quarter. And I had mentioned previously that we grew 26% year-over-year in Q4 2019 and that quarter-over-quarter growth was 22%. So that's a normal -- that was a normal year for us prior to the pandemic.

And so our expectation is that we will see those similar patterns occurring and that the patient pipeline issues that we've been talking about that are causing some lumpiness in the month-to-month sales that we really shouldn't see those in the fourth quarter..

Our next question comes from Drew Ranieri with Morgan Stanley..

Just to touch on the guidance question from a different angle. Just as you're looking at active surgeons for the year, I think you said 640 for the second quarter. You noted that there could be some delays in procedures from vacations.

But just how are you thinking about bringing on more active surgeons in the back half of the year? Is there a target, especially as you're getting these SImulators out in the field more actively and reengaging prior surgeons?.

Yes. So good question on the active surgeons. We are actually pretty pleased with how training is going at this point. We are approximately at our target in terms of our training. We don't give out training numbers per se. We use the active surgeon number instead.

And when we originally gave information at the beginning of the year, we're targeting 20% growth in the number of surgeons by the end of the year compared to 2020. And so we're feeling good about all of that. We like what we're seeing in terms of the increases.

And the SImulator has just been great in terms of giving us the ability to train surgeons in their offices or quite frankly, wherever it is that they would like to be trained. But what we also saw in the second quarter, which has been really nice is we've started to start back up our regional training courses as well and local training courses.

So as we mentioned during the earlier part of the call, we expect to see a combination of regional training, local training and SImulator training in order to keep us on track with those active surgeon numbers..

Got it. And just on gross margins for a second. They were clearly stronger than I think we anticipated. But can you just talk to trends in the back half of the year? You pointed to the ASC setting potentially pressuring ASPs over time. But just is this kind of a better sustainable level? Just any more detail would be helpful..

Sure. Happy to take that. So we're really pleased with us maintaining industry-leading gross margin in the first half. And I do think that the strength of our gross margin signals the strength and differentiation of our products as well. So we did raise our guidance for our gross margin from 85% to 87%.

And a large part of that was driven by some of the favorability we saw in the first half. As we think about the second half, we do think that the gross margins will continue to be pressured. It's a combination of things that we've talked about in the past, the continued move to ASCs, which today accounts for close to 20% of our revenue.

We generally see price deterioration year-over-year of 1% to 2%. So that will continue. We've got some incremental ASP pressure from TORQ and Bedrock because they are 2 implants versus 3. So while the procedure dollar revenue tends to be lower because of the number of implants being used.

And then we've got some more depreciation that's going to go through the P&L for some of the CapEx investments that we've made. So overall, all those factors played in into our 87% to 89% gross margin guidance..

Our next question comes from David Saxon with Needham..

My first one is just on training. I think you said the split was about 50-50 between the SImulator and kind of traditional training. But -- and I know it's still early days on the SImulator, but have you notice any change in pattern from when you train a doctor to when you start seeing them do an iFuse procedure? Any color there would be helpful..

Sure. So surgeon training is definitely one of the critical initiatives this year and it's important from a surgeon utilization perspective, and the SImulator has been the core pillar of the strategy for this year. It's been great for us from a training efficiency perspective and the reception from the surgeon community has been very positive.

We don't provide specific data on training, but we do have 3 different ways of training surgeons, the SImulators. We have local training where we use anatomical model in an OR. And then we also have our regional training, which is a typical cadaver lab. And we do track the number of programs by type.

And as you said, over half of the trainings this year have involved the SImulator, and we expect that it's going to continue to be a high bird training with a combination of these different modalities. In terms of adoption, the question that you asked on adoption. It's a little too early to say at this point.

There's -- when you have a surgeon attending a regional course and making a commitment to go to that course, it's typical that they'll have a patient already lined up.

But it's a major commitment and then it's -- we've been asked this for over 10 years, and we've trained 1,700 surgeons who have treated at least 1 patient, and we still have almost 6,000 surgeons to go. So what the SImulator at least gives to us right now is the ability to get out there and train a lot of these surgeons very quickly.

And so our -- the adoption rates are a little bit lower at this point in time using the simulator versus a regional training. But we also, as I said, are able to train a lot more surgeons using those SImulators. And we're also developing a lot of different ways in order to engage with those surgeons.

And it's not just new surgeons, it's actually also inactive surgeons that we're targeting with the simulator, those surgeons who already went through a regional training course or went through a local training course, and this is just a refresher for those particular surgeons.

So we really see this as a number of different ways in order to reach surgeons and get them trained and -- but as you said, the most important thing for us is to get them converted to that first case..

Okay. That's really helpful. And then maybe just a higher-level question on TORQ. I mean, trauma is obviously the larger opportunity there, but it seems like it could be a slower ramp, given that it's a different call point.

So just wondering how we should be thinking about penetration into that $350 million market segment over the next few years?.

Yes. No, you're correct in how you're thinking about this. The low-hanging fruit, right, is really the SI joint fusion conversions, those competitive conversions. And so we're definitely seeing a good number of those.

But I will tell you, we're also very pleased with what we're seeing from a trauma perspective too, even though that's a new market for us, and it's a different call point. In terms of -- it's a little early to talk about penetration, but we have this great product. It's an unmet need. And so we're excited about this incremental opportunity with trauma.

But as we said, we really did see this as something that was going to gain momentum more over a 12-month period, but TORQ is already having an impact on our business.

And as I said, competitive conversion is probably a little bit easier in the early stages but trauma is a big opportunity with the $350 million market that's adjacent to our current market..

Our next question comes from Matt Henriksson with Citi..

I'll start with the deformity market.

Is there any updates with the SILVIA trial, including -- especially since you made those comments about the second-generation device?.

Yes. In terms of SILVIA, as you may guess, we've been working hard on SILVIA and Bedrock, it's been an excellent platform for us. It's both a revenue contributor, and it's also terrific from a surgeon engagement perspective. And we are excited about the potential for our next-generation adult deformity product too.

So the next-generation adult deformity product, it's the first of its kind design. It's based on surgeon feedback and partnerships with leading KOLs in the space. And certainly, we did -- in our prepared remarks, we talked about bringing the product to market in early 2022 versus the original schedule.

We're not experiencing supply chain issues with our implants, but the delivery dates did slip a little bit because of instrumentation suppliers that had some issues with raw materials and labor and capacity challenges.

But -- and that came with our validation and verification testing, but we're working on some things internally to make sure that we don't have these issues with future product delays. But in the meantime, what we have is we really do have a nice business with our Bedrock product. It's a unique product.

We continue to add surgeons in this particular area. And so it's really been a terrific adjacent market opportunity for us and is helping to position us as a sacropelvic surgical solutions company..

Great. That's helpful. And then just as a follow-up to just the active trained physicians out there. You made the comment that some of the active physicians are new physicians, some of them are kind of those who are inactive and they're back from the sideline.

Can you provide any more color on that? And then particularly for those inactive surgeons who are back on, how quickly do they ramp up kind of compared to like new physicians? And are they -- are you seeing them adopt the TORQ versus the traditional 3D implant?.

Yes. There's a lot of reasons for surgeons to come back to have not been performing iFuse. And reimbursement, quite frankly, is the primary one. So and that could be either covered lives or it could be the surge in payment, which increased significantly last year.

So -- and now with Anthem coming on board and coming on board exclusively as well, it's just another reason for surgeons who previously had performed procedures to start performing those procedures again. And you're right that it is certainly easier to take an inactive surgeon and get that surgeon to perform cases versus a completely new surgeon.

A new surgeon has to be convinced of the prevalence of SI joint dysfunction and degeneration. They have to really understand the diagnosis and then they have to understand the procedure, whereas an inactive surgeon usually just needs a brush up on the procedure and we can use the SImulator in order to do that.

You are correct, though, that TORQ is also another opportunity for us to reengage those inactive surgeons.

We do believe that iFuse-3D is the gold standard for SI joint fusion with the 5 years of data that we have with all of the exclusives that we have, but there certainly are some surgeons that prefer not to impact and TORQ is such a unique solution for those surgeons that it gives us another opportunity to reengage them.

So you are correct that we're also using TORQ in those conversations..

Our next question comes from Dave Turkaly with JMP Securities..

Great. I'll just sneak one in here quickly at the end. You did mention that you weren't experiencing supply chain issues, but that the instrument and the labor supply, those things that you saw were specific just to the second-gen Bedrock, not to iFuse-TORQ or the first gen.

Is that correct?.

That is correct..

I'm not showing any further questions at this time. I would now like to turn the call back over to Laura Francis for closing remarks..

Great. Thank you again for your time today, everyone. I'm really proud of our team's execution in the quarter. We were able to deliver a record quarter and make significant progress across our strategic initiatives. And that's all while continuing to manage through this ongoing recovery.

The performance in the quarter combined with the coverage decision from Anthem and Centene, they reaffirm my confidence in our ability to accelerate our capture of the multibillion-dollar market opportunity in the sacropelvic space.

Anshul and I look forward to meeting with many of you in person at upcoming investor conferences and especially our surgeon panel at NASS in Boston in late September. With that, have a great evening..

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