Good afternoon and welcome to SI-BONE's Third Quarter Earnings Conference Call. At this time, all participants are in a 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 Saqib Iqbal, Senior Director of Investor Relations at SI-BONE 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 September 30, 2023. 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 are related 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 SI-BONE's ability to introduce and commercialize new products and indications, SI-BONE's ability to maintain favorable reimbursement for its products and procedures, the impact of potential economic weakness on the ability and desire of patients to undergo elective procedures, SI-BONE's ability to manage risks to its supply chain, the impact of future capital requirements driven by new product introductions, and risks to the continued re-normalization of the healthcare operating environment.

Other forward-looking statements include our examination of operating trends, and our future financial expectations, such as expectations for surgeon training and adoption, active surgeons, new products, and clinical trial enrollment, 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. During this call, management may discuss certain non-GAAP measures, including the Company's adjusted EBITDA results.

For a reconciliation of these non-GAAP measures to GAAP accounting, please see the Company's full earnings release issued earlier today. 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, November 6, 2023.

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

Thanks, Saqib. Good afternoon and thank you for joining us. I'm proud of our performance, as strengthening demand for our solutions allowed us to defy industry seasonality trends and deliver record worldwide revenue for the sixth consecutive quarter.

In the third quarter of 2023, we generated worldwide revenue of $34 million, an increase of 29% compared to the third quarter of 2022. The quarterly result was led by record U.S. revenue of $32.3 million which represents U.S. revenue growth of 31% compared to the prior year period.

This robust revenue growth also translated into continued improvement in adjusted EBITDA loss and cash outflow and moved us closer to our profitability and cash flow breakeven goals.

We also achieved a major surgeon milestone in the third quarter with the number of active surgeons in the quarter exceeding 1,000 for the first time in the Company's history, performing nearly 3,900 procedures. Our confidence in the business is reflected in the updated 2023 revenue growth guidance of 28% to 29%.

As we look toward 2024, with a market opportunity of nearly $0.5 million annual procedures, we're in a distinguished position to capitalize on what we believe to be prolonged demand for our expanding portfolio and deliver strong and consistent revenue growth.

Before I discuss the progress across our key initiatives, I want to thank our employees for their focus and persistence to create this unique platform and for positioning us to deliver breakout growth. Your impeccable execution ensures we achieve our mission of helping thousands of patients rise up and reach for the stars.

Now, let me provide an update on our key initiatives as we look to extend our leadership position and drive strong long-term growth. Starting with sales infrastructure,. Our direct sales team is our biggest asset as we expand our product portfolio and surgeon base.

Our revenue growth and operating leverage over the last several quarters are the outcome of the investments in our seasoned world-class commercial organization. At the end of the third quarter, our U.S. commercial organization was comprised of 83 quota-bearing territory manager.

We complement our territory managers with clinical support specialists as well as a growing network of third-party sales agents for case coverage. We also selectively place instrument sets at high-volume hospitals to meet demand. This hybrid strategy allowed us to deliver nearly 30% average growth in both U.S. procedure volume, as well as U.S.

active surgeon base over the last four quarters. This growth has translated into trailing 12-month average revenue per U.S. territory of over $1.5 million, representing a 38% productivity gain over the comparable trailing 12-month period. Moving on to surgeon engagement. We exited the third quarter with over 1,040 active U.S.

surgeons, representing approximately 30% growth over the third quarter of 2022. This was the 11th consecutive quarter of double-digit year-over-year growth in our U.S. active surgeons.

To put it in perspective, we had approximately a 1,000 surgeons perform a procedure in all of 2021 and now we have a larger number of surgeons perform procedures in a quarter.

We're proud of this milestone, which is the outcome of years of focus on driving surgeon awareness through education, building the best clinical evidence, and expanding our portfolio of solutions to address our surgeons unmet needs.

This elevated level of surgeon interest and engagement is a great forward-looking indicator and underscores the long-term growth trajectory of our business.

In the third quarter, nearly half of the active surgeons added in the quarter performed at least one minimally invasive SI joint fusion procedure and then several instances they also performed a pelvic fixation or fragility fracture procedure.

We expect our complementary portfolio to drive deeper engagement and increase procedures per surgeon over time. Turning to products and solutions, the U.S.

procedure volume trends confirm that with iFuse 3D, iFuse-TORQ and now iFuse Bedrock Granite, the value of our innovative, versatile, and complementary product portfolio has positioned us as the top choice for surgeons looking for sacropelvic solutions.

IFuse-TORQ remains a key growth driver for us due to its expanded clearance covering SI joint dysfunction, trauma and adult deformity. iFuse-TORQ provides complementary technology to iFuse 3D for existing surgeons.

It has also been a key driver of new surgeon engagement, as well as successful conversion of surgeons using competitive products when performing minimally invasive SI joint fusion procedures.

In trauma, we are engaged with major trauma center thought leaders and are encouraged by the adoption we're seeing for iFuse-TORQ and sacral insufficiency fractures. At a recent Orthopedic Trauma Association's event in October, there was tremendous excitement around our solution to address insufficiency fractures.

This is consistent with the increase in our trauma procedure volumes in the third quarter of 2023. Based on an annual incidence of over 120,000 insufficiency fractures in the U.S., the trauma opportunity is of strategic importance to us as the sacropelvic solutions leader and is an important avenue for growth over the long term.

What's equally exciting is the growing interest of trauma surgeons in the diagnosis and treatment of SI joint dysfunction and degeneration. In the third quarter, over one-third of the procedures performed by trauma surgeons were SI joint fusion procedures. Moving to iFuse Bedrock Granite.

We're delighted with the outstanding performance of Granite as we increase our surgical capacity in the quarter to address surgeon demand. The additional capacity positions us well for the current quarter, historically, our seasonally strongest of the year.

The market reception in the pace of adoption underscores Granite's success and reaffirms our belief that it is becoming the standard of care for a long construct procedures to the pelvis. Following the recent successful launch of our Granite-Closed Head Implant, we're also poised to introduce another Granite line extension next year.

We expect the line extension to accelerate our penetration of shorter multi-level fusion procedures for the treatment of degenerative spine disorders, which already accounts for over 40% of Granite cases today.

With over 130,000 annual target procedures, we believe the Granite family of implants will be a crucial growth driver for us over the next several years.

Along with the growing demand for Granite, we're also seeing a consistent trend in surgeons using some combination of our products with Granite to achieve two points of fixation across the SI joint on either side and long construct procedures.

This is driving a significant pull through opportunity for the portfolio and a higher per procedure average selling price. Before I hand the call over to Anshul, I'd like to provide some background on drivers of sacroiliac joint pain incidents in the U.S. and the question of the impact of GLP-1.

The primary cause of SI joint dysfunction and degeneration is the altered function of the little ligaments and muscles supporting the SI joint. Changes in the position of the pelvis will also lead to changes in load transfer across the joints.

These factors are consistent with the patient demographics in our studies, where over two-third of patients for women of which nearly 80% previously had at least one child. Additionally, the average BMI of the over 300 patients in our INSITE and SIFI studies was between 29 and 30, which closely approximates the average BMI of adult Americans.

Based on data from our clinical studies, it appears that sacroiliac joint pain is more strongly correlated with female gender and traumatic events including pregnancy rather than BMI. Within the deformity market, patients can be classified as those with adult idiopathic scoliosis or adult onset scoliosis.

Adult idiopathic scoliosis patients have had scoliosis since childhood and it mainly results from abnormal systemic skeletal growth and asynchronous spinal neuro-boney growth generally due to genetic, hereditary or biomechanical factors.

Adult onset scoliosis which typically starts at the age of 50 but presents itself in an average age of 70 is driven by age related asymmetric spinal degeneration and can produce global sagittal misalignment with central and foraminal stenosis. Based on the data in our SILVIA study, the average patient BMI was between 29 and 30.

There is no clear clinical evidence around cause-effective high BMI and scoliosis, making it difficult to determine the direction of causality.

This high BMI cause spinal degeneration or does the painful spinal condition tend to correlate with a sedentary lifestyle an elevated BMI? Against this data backdrop, it is in our opinion, not likely that widespread adoption of GLP-1 therapy and a resulting decrease in average BMI in the American population would have a significant impact on the incidents of SI joint dysfunction, trauma or deformity that would meaningfully impact demand for our products in the near or immediate term.

2018 study in the Spine Journal by [indiscernible] of 244 adult spinal deformity patients indicated that BMI greater than 35 was associated with significantly worse peri-operative outcomes and higher cost compared to non-obese patients. As such, surgeons tend not to want to operate on morbidly obese patients.

And the consistent feedback from spine surgeons indicates that if GLP-1 therapy for weight management becomes more widely available, new surgery ready patients may come into our patient funnel as they lose weight.

Additionally, as people increase their levels of physical activity and live longer, they will become eligible candidates for musculoskeletal procedures.

There's still a lot that is not known about the impact of GLP-1 drugs, but our data shows that the primary causes of our target disease state are generally related to genetic factors, gender, traumatic events, history of pregnancy and age-related changes.

While it would be premature to predict the long term implications of GLP-1, if any, on our musculoskeletal degeneration, in the intermediate term, there is the potential for lower population average BMI to increase the number of surgery eligible patients. With that, I'll hand the call over to Anshul..

Thanks, Laura. Good afternoon, everyone. I will focus my comments today on third quarter revenue trends, operating leverage and liquidity, and end with our updated 2023 guidance. Additionally, all the comparisons highlighted in my section will be versus the same period in the prior year, unless stated otherwise. Starting with our third quarter revenue.

As Laura noted, we delivered another record quarter with worldwide revenue of over $34 million, representing growth of approximately 29%. Third quarter U.S. revenue was $32.3 million, increasing approximately 31%. Our U.S. revenue was driven by growth in procedure volumes, which rose by approximately 34%.

The fourth consecutive quarter of over 30% growth in the U.S. case volume highlights the underlying patient demand for our procedures. The ASP in the quarter reflects the evolving procedure mix as the expanded use of Granite in degenerative procedures to the pelvis resulted in an increase in to-implant Granite cases in the quarter.

International revenue was $1.7 million implying nearly flat revenue. We saw strong performance in France and are encouraged by the improvement in the U.K. We are focusing our commercial efforts on revitalizing growth in Germany and the rest of Europe through expanded surgeon engagement.

Additionally, given the reception for TORQ in the U.S., we are diligently working on getting notified body clearance to launch TORQ in EMEA. Moving to gross margin and operating leverage. Our gross margin in the quarter was 79%, in line with our expectations.

Consistent with recent quarters, the gross margin reflects the impact of procedure and product mix, higher total cost of TORQ and Granite, increase in depreciation from the deployment of instrument trades to support the growing demand for them, depreciation associated with our second facility in Santa Clara and higher freight cost.

Operating expenses were $38.1 million in the quarter, representing 6% growth. The increase in operating expenses was driven by higher commissions associated with the revenue growth, as well as increase in R&D and other commercial activities.

We are proud of our demonstrated track record of investing in infrastructure to drive robust revenue growth and then translating that to healthy operating leverage over the last several quarters.

Going forward, we remain focused on investing in R&D and clinical research, which are crucial to delivering strong and sustainable revenue growth while progressing towards breakeven. Our net loss was $10 million for the quarter or $0.25 per diluted share. Compared to a net loss of $14.2 million or $0.41 per diluted share in the prior year.

Representing a 29% reduction in net loss. As a reminder, the earnings per diluted share for the third quarter of 2023 were impacted by the increased number of shares outstanding from the May follow on stock offering. Adjusted EBITDA loss in the quarter improved 44% to $3.9 million versus $6.9 million in the prior year period.

Adjusted EBITDA loss also improved sequentially by approximately 18%. Turning to liquidity. We exited the third quarter with a solid balance sheet including approximately $167 million in cash and marketable securities. Our cash usage in the quarter was $2.7 million.

On a year-to-date basis, cash used in operating activities was $16.4 million, an improvement of 53% compared to $34.9 million in the first three quarters of the prior year.

We are pleased with our trajectory of cash utilization in the last several quarters while making investment in long-term growth initiatives including building incremental surgical capacity to support the anticipated demand for our new products. Finally, moving to our updated guidance for the year.

Based on the strong performance throughout 2023, as well as the momentum exiting the third quarter, we are increasing our full year 2023 worldwide revenue guidance. Our revised 2023 annual worldwide revenue guidance is a $136 million to $137 million up from a previous guidance of $132 million to $134 million.

This revised guidance translates to year-over-year growth of approximately 28% to 29% versus the previous range of 24% to 26%. We expect the 2023 annual gross margin to be approximately 80% implying fourth quarter gross margin to be in the 78% area due to the factors discussed earlier.

With that, I will turn the call over to the operator for questions..

[Operator Instructions] Our first question comes from the line of Young Li of Jefferies..

Hi, guys. Thanks for taking our questions. And congrats on a good quarter and six quarters of record revenue. I guess to start, I appreciate the color on a potential GLP impact. It's a hot topic. I guess the comments from spine surgeons that lower BMI patients can fall back into the funnel.

I guess I'm just wondering, have they or can you quantify that impact? I mean some of the ortho companies have talked about a 10% increase in near-term volumes as a reference point..

Young, thanks for the question. On GLP-1, I think just talking about the overall addressable market is probably the right place to start. So our - we're targeting an under-penetrated annual market opportunity of nearly $0.5 million procedures.

And so we have a pretty significant runway and we're confident in our ability to deliver strong and sustainable growth. I did talk a fair amount in my prepared remarks about the causes of the disease state and the general demographic makeup of our typical patients.

As we highlighted in that discussion the primary causes for the disease state and I'm talking about SI joint dysfunction specifically as genetic factors, gender, traumatic events, history of pregnancy, as well as age-related changes and we even didn't provide some information [technical difficulty] SIFI and INSITE studies and actually we did include some info on our SAFFRON study which is trauma as well.

And those patients had average BMI between 29 and 30, which is, which is average BMI for an American. So, based on the data that we shared from these various studies, what we're trying to do as opposed to some other companies, we're not speculating on what the issues actually are here.

Instead what we're saying is that we don't believe that a decrease in average BMI is going to have a significant impact on the incidence of SI joint dysfunction and as well as trauma or deformity, that would be meaningful to the company.

And then, if you're asking, kind of, the question on the flip side of will it actually generate more demand, I did mention that surgeons tend to not want to operate on morbidly obese patients and that's consistent with the feedback that we've received from our spine surgeons indicating that GLP-1 therapy for weight loss management could become more widely available and have more surgery ready patients that are coming into the funnel.

But instead of giving you a number of what that percentage could be, what we're saying is that we don't think that there is a significant downside risk and that there is an upside opportunity that's here as people increase their levels of physical activity, they live longer and that will become eligible candidates for procedures like ours..

All right, great. That's very helpful. I guess the follow-up. I guess, Laura, for your comments in the press release on exiting the year with strong momentum, demand inflection at the early phases. I mean, on the call, you talked about momentum exiting the third quarter.

I guess, I'm kind of wondering what are you seeing in 4Q so far, if you can comment on it. Your guidance for the year implies high '20s growth for the year. Does - your comments sort of imply 20-plus percent growth for next year as well.

What can you comment about puts and takes for 2024?.

So, thanks again for the question, Young. What I'll do is I'll talk a little bit more about our Q3 performance and I'll have Anshul talk a little bit more about the future. So I am thrilled with our Q3 performance.

It just shows our execution delivering another record quarter and outperformance and it's really energizing for our team to deliver these strong results despite typical seasonality that you see in the summer time. So just to restate, we delivered 34% growth in U.S. volume, it was the fourth consecutive quarter of 30% plus U.S. volume growth.

We saw strong growth across all of our different procedures and we certainly are benefiting from the rollout of the additional Granite and TORQ surgical capacity, which does set us up very well for our seasonally strongest fourth quarter as well as 2024.

Really excited about hitting that major milestone of over a 1,000 active surgeons in the quarter, it was only - in 2021, that we had a 1,000 surgeons do a procedure for the entire year. And then finally, if you look at our adjusted EBITDA loss improvement, in the fact that we only used less than $3 million in cash in the quarter.

It really just shows you that we're in a really strong position here proceeding forward. And it really is about the execution that we've been able to show here in 2023. And I mentioned it in your last question, but with around $0.5 million procedures still untapped, it puts us into a great position going forward.

So let me have Anshul talk a little bit more about the fourth quarter and 2024..

Yes. Hi, Young, good to connect. With regards to our Q4 guide, as we've demonstrated throughout this year, we've consistently outperformed versus our own guidance just because of our execution and the strong demand that we're seeing.

And some of that is reflected in our, in our updated guide, which was higher than what we beat the market expectations by. So we feel really good about that.

We're very focused on ending the year stronger, given the demand trends, given the record number of active surgeons and the significantly higher surgical capacity coming into the fourth quarter than we were going into the third quarter. So we're really set up well there.

Now in terms of 2024, we'll provide guidance when we announce our fourth quarter earnings.

We're just focused on executing for the fourth quarter and to get strong, but like Laura talked about, when you think about the drivers of the robust growth in 2023, all numbers are long term and are very specific to SI-BONE, so our TAM expansion initiatives through the product portfolio, that's in early stage of their life cycle.

We've increased our surgical capacity and plan to add more, that's going to allow us to capitalize on the demand for Granite and TORQ. The surgeon interest remains at a record level and very elevated. So we feel really good about that.

And then the last and the most important, the caliber of our sales force and the hybrid model is playing out the way we expected it to be to drive deeper surgeon engagement.

So we're positioned really well, and when you combine these levers with the procedures that are in our TAM, as well as the Granite line extension rollout that we have planned for 2024 and other products in the future, we feel pretty well set from going into 2024 perspective, but even beyond that. Feel very good about the setup there..

All right. Thank you very much for the color..

Thank you. Please standby for our next question. Our next question comes from the line of Drew Ranieri of Morgan Stanley..

Hi, Laura and Anshul. Thanks for taking the questions. Maybe just to start on utilization for a moment. It looks like utilization kind of held fairly consistent quarter-over-quarter despite kind of the average surgeons going up so significantly.

So one, can you just maybe talk to us about what you're seeing in terms of utilization, kind of on the same surgeon level and what kind of adoption drivers are there seeing there and then layering on some of the newer products?.

Sure, happy to do that. So I'm going to go back to the point about active surgeons in the quarter, we were above 1,000 for the first time in our history. And so that 30% growth, that's a strong forward-looking indicator and it's our 11th consecutive quarter of double-digit growth. And I think five-plus quarters of 30% plus growth in that number.

So I think what you're talking about is surgeons per procedure. And so I think from that perspective, talking a little bit about our core business, primary SI joint fusion.

If you think about the surgeons that we're adding, we're seeing around half of those surgeons that are primary SI joint procedures, whereas the other half approximately is doing some of our pelvic fixation procedures or pelvic ring fracture procedures.

And so what we're seeing from that perspective is the ability for surgeons, not just to do one procedure, but do all three procedure with us. So it's been a point of focus for us to have our surgeons do multiple types of procedures. We tend to keep surgeons that are doing multiple types of procedures with us.

And then additionally, what we're doing is, in our residents and fellows training, we have a focus on educating the next generation to ensure widespread use and adoption of our procedures as well..

Got it. Thanks, Laura. And maybe this is a question for both of you. When - I think you mentioned you had about 83 reps ending in the third quarter.

So, that number has been kind of steadily moving down yet sales productivity is moving higher, but can you talk a little bit more about what your expectation is for sales rep productivity and maybe the direct portion of the sales force and how fluttered opportunity can translate eventually into adjusted EBITDA breakeven, and maybe a time, if you're willing to provide that, Anshul? Thanks..

So I'll at least start out with your question here. We're actually very pleased with the productivity gains that we've seen over the last several quarters and it's a big driver of our operating leverage that you've been seeing in our progress towards adjusted EBITDA breakeven.

If you think about our revenue per territory, we have been saying for the history of the company that our goal is to be between $1.5 million to $2 million in revenue per territory per year and what we just did in this last quarter is we entered into that window of $1.5 million and that's growing from, we were sub $1 million in fiscal year 2021, we were approximately $1.2 million last year.

And now for that trailing 12 months at $1.5 million. And so there are a number of different things that are driving the productivity here. So, the first is just the caliber of our increasingly seasoned sales force.

And that would be the first thing that I would focus on that we really have a significant group of mature, highly trained quota-bearing reps. The second thing is that we actually have a hybrid commercial model at this point.

So we are working with our territory managers, as you said, there's 83 in the last quarter we had 85 of those, but they are supported by clinical support specialists to help them to cover cases. And then, we have added a significant number of agents who actually cover cases as well, very specifically with our Granite product.

And so what we're seeing from a sales force perspective is what we were anticipating and that is getting that leverage from the sales force, especially with some of these new products and the utilization of our hybrid commercial model..

And then, Drew, on the adjusted EBITDA side, all the points Laura highlighted is what's driving our operating leverage in the business and we're not going to be providing specific timelines, so when you get to breakeven, but when you think about the trajectory of our adjusted EBITDA, I think for the fourth quarter, we were at - third quarter, we were at about 44%, year-to-date, we've seen more than 50% improvement in year-over-year adjusted EBITDA.

So feel really good about that. Our trajectory to breakeven is pretty linear to top line growth. That's where we see the leverage. So we're very confident in our ability to deliver that year-over-year improvement in annual adjusted EBITDA as we go forward.

And like Laura said, we are progressing very quickly towards adjusted EBITDA breakeven pretty quickly after that from a cash flow breakeven as well..

Thank you. Our next question comes from the line of Craig Bijou of Bank of America..

Good afternoon. Thanks for taking the questions and congrats on another strong quarter. I wanted to start and I appreciate the comments on the active surgeon dynamics.

And I wanted to start with, if you're seeing any pull-through from some of the new surgeons that are doing the - using Granite or the pelvic ring fixation procedures, if they were, if there are new to SI-BONE and then if you got them a pull-through to do some of the core SI joint fusion procedures..

Yes, happy to, happy to take that question, Craig, and good to connect. There were a couple of data points that Laura highlighted in her prepared remarks as well. One was around just the adds that we had year-over-year in active surgeons, about nearly half of those adds was surgeons that did minimally invasive SI joint fusion.

And a lot of instances there where surgeons would it that procedure along with deformity and in trauma.

So we're seeing a nice halo from the new product launches that's going both towards the core business, but also driving surgeons who perform minimally invasive SI Joint procedure to adopt degenerative spine procedures using Granite, in terms of going to the sacrum.

And then the other thing that's very interesting for us, again, it's still early days, but as we try to build trauma franchise and work with key opinion leaders within trauma, what we are seeing is in over a third of the cases, the volume that we're getting from the trauma surgeons, a third of that volume is actually surgeons doing minimally invasive SI joint fusion procedures.

So we're seeing a pretty good overlap across a surgeon base and that gives us optimism that as the denominator grows, our focus on driving deeper penetration with those surgeons with a diversified portfolio sets us up well for 2024 and beyond..

Got it. And - that's helpful. Thanks, Anshul. And then maybe another one for you. So just talking about the P&L, so gross margin came in a little bit lower than we were expecting and then supposed to step down, or you said it is going to step down again in Q4.

So, appreciate those comments, but just wanted to understand the gross margin trend and when we're kind of thinking about '24, I know you're not going to give guidance, but how to think about the trend through '24 or just going forward and the same on OpEx? OpEx, mid-single-digit growth, I think was kind of the expectation for this year.

Can you do that again going forward?.

Yes. Thanks, Craig. So on the gross margin side, as we mentioned, it was in line with our expectations and the trends that are impacting our gross margin have not really changed. It is evolving procedure and product mix, especially given the higher total cost of TORQ and Granite.

We have been building capacity throughout last year, this year to support the demand that we're seeing. So you're seeing depreciation of that goes to the P&L as well. We've put a lot of that capacity to work in the third quarter. So you're seeing that depreciation sort of start going through the P&L in the third, fourth quarter.

And then in terms of the trajectory, we're not going to provide guide on gross margin right now, but when you think about what our expectation is to exit the fourth quarter, I think that could serve as a decent proxy from a modeling standpoint for now till we provide additional information in our fourth quarter earnings.

And look, our gross margin is very important to us and we've got initiatives underway to bring the cost of our products down as we get to scale and also bring the cost of our instrument trades down as we go into next year, but we are also increasingly focused on adjusted EBITDA and progressing towards breakeven.

And what you've seen over the last several quarters is that top line growth that we've gotten from the investment in new products, increasing surgical capacity has allowed us to get that operating leverage across our sales and marketing, G&A functions and that's reflected in the improvement. So we feel good about that.

In terms of OpEx as well, we do expect 2023 OpEx for the year to be mid-single digit up year-over-year. And we're very pleased about the trajectory of the leverage that we've seen.

We'll provide more color on the OpEx in 2024 once we provide the revenue guide because as I said earlier, our OpEx is going to be linear, our OpEx leverage is going to be linear to revenue growth..

Thanks for taking the questions..

Thank you. Our next question comes from the line of David Saxon of Needham & Company..

Great. Hi, Laura and Anshul. Thanks for taking my questions and congrats on the quarter. Maybe to start, I wanted to follow up on a previous question about utilization. So it looks like 3.8 cases per doc per - in the quarter.

So just wanted to ask, where does that go longer term? Is the ceiling higher across any of the three products or are they generally the same? And then when you think about your surgeon champions or kind of higher volume docs, how long did it take them to ramp to their current levels?.

Yes, David. Thanks for the question. Happy to answer that. Our utilization has been staying relatively consistent, a little under four procedures per quarter. And a part of the reason for that though is how rapidly our surgeon numbers are increasing. So the denominator is increasing very significantly.

As I said, I think it's been 30% plus over the last five quarters at this point. And so what's happening, and you kind of highlighted it is that those, what we call champion surgeons, those surgeons who have adopted our procedures consistently into their practices, their numbers are significantly higher than that.

Whereas newer surgeons are going to be just starting out procedure, so they're going to be bringing down that average. So overall, we're staying consistent even with 30% growth in the denominator of surgeons.

So, for us that bodes very well for the business in the future with three different procedure types going forward and really just at the start in every one of these markets.

So in terms of - in terms of SI joint fusion procedures, we've said this many times that a typical surgeon who has fully adopted the SI joint into their practice is doing around nine cases per quarter, is a little less than four than what you're seeing in our numbers right now. So there is a significant opportunity to build that out.

It does typically take two to three years in order for a surgeon to fully adopt to get to the level of procedures per quarter that you would expect.

And then what you need to do is to add on to that, those surgeons who are dealing adult deformity procedures or potentially degenerative procedures with our Granite product pelvic fixation and then we're just at the starting point right now on fragility fractures as well. So those are on top of those procedures, too..

Okay, that's super helpful. Thanks, Laura. And then just for my second question just on Granite and TORQ, by my math, the two combined are tracking and kind of the low-teens percent of revenue.

Is that the right ballpark and where does that go longer term, especially with the shorter construct Granite coming out next year? I think that's a much larger TAM. And then can you give any update on that launch timing? Thanks so much..

Thank you. So we don't comment, we don't break out our different procedure types for sacropelvic solutions company. And so our primary SI joint fusion, our pelvic fixation, and our fragility fracture businesses are really all a part of those of that broader business that's here.

But in terms of your question, and I'll get back, it really the size of the market opportunity overall. We're targeting $0.5 million procedures per year approximately. So around 280,000 of those are primary SI joint fusion procedures.

If you think about pelvic fixation, it's another approximately 130,000 procedures a year and then the remainder are the trauma procedures.

So if you want to think about the opportunity, those are the buckets that we're going after, those are the sizes that we're going after and we're really just at the beginning of the journey with each one of these different areas. But it does bode well for the future.

Now I'm going to answer your question two on, we're going to watch our next Granite extension. Thus far, we've just said it's going to be 2024, but as you said correctly, our goal is to better penetrate the opportunity with short construct degenerative spine procedures.

Currently, our Granite product, we're already seeing our current Granite product being used in approximately 40% of those cases in short construct procedures. And so what we're going to do is leverage our experience from these degen procedure where Granite has been used and work on expanding the Granite family.

So introducing that new product in 2024 is, the target is to accelerate adoption across those 100,000 degen spine procedures that are part of the 130,000 number that I just gave to you. The initial low hanging fruit, our - what are called F1, revision cases, we estimate those are around 20% of total degenerative procedures to the pelvis.

I'm not necessarily going to talk any further on the breakout. But as I said, we're really excited about the revenue potential for the expansion of the Granite implant system..

Great. Thanks so much, Laura..

Thank you. Our next question comes from the line of Dave Turkaly of JMP Securities..

Hi, good evening.

Can you hear me?.

Yes..

All right. Quick one on some news that you had in the quarter. The press release you put on the Medtronic compatibility, I think it was with the CD Horizon, Solera rods.

I was just curious, how many of the competitors out there are you compatible with and how do you think about that in terms of allowing you to continue to penetrate that market?.

Great question, Dave.

So you may recall and may - or may not recall, we had actually sent out a press release, it was around 12 months ago already where we talked about having general compatibility with almost all rod systems that were out there with our Granite product that was a clearance with the FDA provided to us after quite a bit of testing to show that we were compatible.

So in terms of the particular announcement with Medtronic, that announcement was more to provide additional safety and security to Medtronic surgeons that they could feel very confident using Granite with the Medtronic Solera system in their adult deformity cases..

Got it.

And the update that you put out on the triangular broach, the patent, I imagine that's - that refers to the core the 3D implants, but I just wanted to get your thoughts on sort of what that means from your intellectual property and the runway that you have?.

Yes. Another good question. So our - we have been able to actually extend our patents on the shape and the trajectory through the end of 2025. But what's unique about this extension is that it actually will take those patents and extend them further into 2034.

So the broach, just to remind you on the procedure, the broach is a triangular shape and it creates the channel in order for the surgeon to actually place the triangular implant and this is something that's required for the surgeon to do in order to place a triangular implant.

And so by receiving this new patents for the broach instrument, it's extending our patents into 2034..

That's a long time. Thank you..

Thank you..

Thank you. Our next question comes from the line of William Plovanic of Canaccord..

This is Caitlin on for Bill. And congrats on a great quarter. I was hoping to dig a little bit into the ASP.

Can you really talk about your expectations for the rest of the year? How much of a dynamic do you think using a second point of fixation for Granite will be on the ASP going forward? And aside from this kind of product mix dynamic, can you continue your success in maintaining price at ASCs?.

Yes, I'm happy to take that, Caitlin. So from an ASP standpoint, our procedure ASP varies depending on the type of procedure and the surgeons preference. So when you think about SI joint fusion cases, surgeons generally tend to use three implants.

And deformity cases to the pelvis or pelvic fixation cases, we generally see the use of two points of fixation. So three to four implants are used in that case. And then within the degen space with Granite or in the trauma space, you generally see two implants used.

So what you're seeing is just the continued evolution of the portfolio as we continue to penetrate these markets on different use cases.

And with the increase in our surgical capacity in the third quarter, in addition to the strong demand for Granite within deformity, we also were able to capture a lot more of the short construct degenerative spine procedures to the sacrum and that's what impacted the ASP.

And if you recall in our second quarter, we had mentioned sort of that low single-digit decline in ASP, so it played out just the way we expected.

As we think about it from a planning standpoint, we generally tend to assume a low to mid-single-digit ASP decline in cost of the procedures, because of just healthcare cost and then we focus on executing to come out ahead of that..

Got it. And then just to touch a little bit more on competition.

It seems like SI joint dysfunction is kind of a growing area - given all of your work on establishing reimbursement in the space, what are you really seeing from a competitive landscape and kind of any new products some companies have seen increased competition from even with your IP extension there?.

Yes, I mean it's become clear that we're the market leader in this space.

If we look at the market, our estimate when we went public is that our market share was in the high 50% range and we think we're significantly higher than that at this point in time and I think it's because of the fact that our name has become synonymous with sacropelvic procedures number one, but also it's the innovative products.

The discussion we just had around patents, I think it's an important one. Innovative patent-protected products that we have, the clinical evidence that we have provided for this particular space, the educational efforts that we make around these sorts of very specific procedures, and then the reimbursement support that we have here too.

So if you look in our slide deck, that's on our website, you can get more information on the competitive environment and how we've been able to lead the way here. So it's not just about putting out an SI joint product, it's about differentiated products, clinical evidence, education and reimbursement support which are - what we pride ourselves on.

And then in addition to that, we're building from there with our pelvic fixation business and with our fragility fracture business..

Great. Thanks for taking the questions..

Thank you..

Thank you. Our next question comes from the line of Samuel Brodovsky of Truist Securities..

Hi, thanks for squeezing us in here, and congrats again on a solid quarter. I just wanted to start off with what you saw in 3Q.

I know you're probably are going to break down growth rates by, by product, but did you see the sequential strength in the core SI joint fusion market as well? Was that up from 2Q or was the strength more from Granite and TORQ? And I guess, more broadly, are you seeing any underlying acceleration of momentum in that SI joint fusion market?.

Yes, Sam. Thanks for the question. So as I stated earlier, I really am very pleased with our Q3 performance. It's another record quarter at 30% - 34% growth in U.S. volume. It just continues to show how strongly we're performing. And I want to reiterate that we saw strong growth across all of our products.

And certainly Granite has been a strong driver of the business. TORQ has been a strong driver of the business as well, but our core business is absolutely critical to showing the sorts of results that we showed in the third quarter.

And so I think if you, if you look forward and you think about the underlying drivers that we have for the business, that sort of performance is not limited to the current quarter. It just really shows the level of execution that we've shown here with product differentiation, surgeon education and engagement.

The fact that we built a very significant commercial infrastructure with a direct sales force as well as a significant agent force as well. And I also just want to highlight that we continue to increase our surgical capacity to support demand, especially for some of those new products that you mentioned.

So our conviction in the, in the demand momentum is reflected in the guidance that we provided for this year. So finishing between $136 million to $137 million which is 28% to 29% growth. So that's up from the previous guidance of $132 million to $134 million, which was growth of 24% to 26%. So I think, I think that it was a great quarter.

And I think that we have reflected our expectations to finish the year strong in our increase in guidance..

Great. That's helpful, and then just as we think about the short construct opportunity, can you just give us any color on sort of the logistics of how that's going to happen? Is that going to require new sets and how quickly you should we think about existing Granite users being able to have access to a short construct option in '24? Thanks..

Yes, it's a great question. First of all, no new instrument tray. So to be very clear, it will not require a new instrument tray.

And what we're really trying to do here is to capture the opportunity in pelvic fixation for short construct, also I had mentioned this S1 trajectory when surgeons are performing pelvic fixation, they usually, typically use an S2 trajectory or an S1 trajectory and 60% are S2 and that's where our current Granite product is being used.

The S1 trajectory is where the line extension will be used [technical difficulty]. So it's a big increase in the ability to fully capture the opportunity in pelvic fixation and also specifically in the degen part of the market. So short construct two to four level constructs where surgeons may want to include pelvic fixation.

So very excited about the impending launch. And as I think your question highlights a very capital-efficient model that we have here too, because we do not need new instrument trades in order for surgeons to use the new Granite line extension..

Thank you. I would now like to turn the conference back to Laura Francis for closing remarks.

Laura?.

Thanks so much. Before I end the call, I just wanted to thank you all for your participation. The strength of the business is reflected in our impressive year-to-date performance and the increase in guidance for the third time this year.

And I've said it many times, but with nearly $0.5 million targeted annual procedures in the ultra-state, I firmly believe we're positioned to drive sustainable long-term and profitable revenue growth. Anshul and I look forward to seeing you.

We're going to be at the Jefferies London Conference as well as the Piper New York Conference, and we also have an NDR planned for Boston in New York later this month. Thank you and goodbye..

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