Carlsmed Third Quarter 2026 Earnings Conference Call - CARLSMED INC

Ladies and gentlemen, thank you for standing by, and welcome to the Carlsmed Third Quarter 2026 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. I would now like to turn the conference over to your first speaker today, Stephanie Zadkiewicz, Investor Relations. Please go ahead, Stephanie. Thank you, Operator. Welcome to Carlsman's third quarter 2026 earnings call. Joining me today are Mike Cordonier, Chairman and Chief Executive Officer, and Rich Heppenstall, Chief Financial Officer. Before we begin, I would like to caution you that comments made during this call will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements made on this call that do not relate to matters of historical fact should be considered forward-looking statements, including statements regarding the market in which Carls Med operates, the potential of Carls Men's current and future product offerings to improve patient outcomes, trends, expectations, and demand for Carls Men's products, expectations with respect to reimbursement, statements about the company's clinical data, surgeon and customer adoption, procedure volume and utilization, the timing of Carls Med's future product launches and its planned multi-center cervical registry, the ability of Carles Med to scale, and Carles med expected financial performance, growth prospects, and position in the market. Any forward-looking statement made during this call, including projections for future performance, is based on management's expectations as of today. Carls med undertakes no obligation to update these statements except as required by applicable law. These statements are neither promises nor guarantees and are subject to known and unknown risks and uncertainties that could cause actual results, performance, or achievements to differ materially from those expressed or implied by the forward-looking statement. For more detailed information, please review the cautionary notes in the earnings materials accompanying today's presentation, as well as CARLS-MED's filings with the SEC, particularly the risk factors described in CARLS MED's annual report on Form 10-K for the year ended December 31, 2025. I encourage you to review all Carls Med's filings with the SEC concerning these and other matters. These filings, along with Carls Mad's press release for the third quarter 2026 results, are available on Carls Mad's website at www.carlsmad.com under the Investors section and include additional information about Carls Mag's financial results. Additionally, during today's calls, management will discuss certain non-GAAP financial measures, including adjusted EBITDA and adjusted net loss per share. A reconciliation of these non-GAAP financial measures to the most directly comparable GAAP financial measures is included in today's earnings press release. A recording of today's call will be available on Carls Med's website by 5 o'clock p.m. Pacific time today. Now, I would like to turn the call over to Mike to go over Carls Med's business highlights. Thank you, Stephanie, and welcome everyone. At Carls med our mission is to improve outcomes and decrease the cost of health care for spine surgery and beyond we aim to accomplish this through our proprietary data and ai enabled surgeon in the loop personalized surgery platform the published clinical evidence behind a privo which demonstrates meaningful reductions in reoperations continues to drive strong surgeon adoption procedure volume and revenue growth while our inventory white digital first model lets us scale that growth efficiently we believe carl's med represents the future standard in medical technology one that is better for patients surgeons hospitals and payers The third quarter represented strong execution against our long-term strategy as we reach an inflection point in our business. We delivered 65% revenue growth and we're raising our four-year revenue guidance to between $78 million and $80 million. We continue to demonstrate operational excellence, consistently delivering Aprivo personalized surgery kits in about a week, week, expanding gross margin, and improving quarterly adjusted EBITDA year-over-year. We broadened our portfolio with the commercial launch of our Aprivo Lumbar Bilateral Posterior System in October and are preparing for the full launch of CORA Cervical Plating System, both of which we expect to be meaningful catalysts in 2027. On reimbursement, the new lumbar MS-DRGs that took effect on October 1st are a significant win that we anticipate will make it easier for hospitals to provide access and adopt a Prevo. And we announced organizational updates that strengthen our leadership team and prepare Carlsmed for its next phase of scale. As a pure play personalized surgery company, our technology platform leverages proprietary data assets and foundational AI models to create surgeon-specific 3D surgical plans and translate that to 3D printed anatomical correction implants. Published studies involving our closed-loop technology and Aprivo personalized fusion procedures have demonstrated predictable outcomes and a meaningful reduction in reoperations. Our underlying technology platform powers the business to run capital light and drive sustainable, profitable, long-term growth. Commercially, we delivered strong revenue of 21.6 million during the third quarter, representing 65% growth over the prior year, driven by rapidly onboarding new surgeons, deepening utilization within our existing customer base, and building upon our 4Q25 launch of Aprivo Cervical. In the third quarter, our trained surgeon user base grew more than 60% year-over-year, driven by continued strong additions of new surgeons who performed their first ApriVo procedure in the quarter, and procedure volume grew 76% year over year, with a growing contribution from Aprivo Cervical Procedures. As a result of this strong growth in the first nine months of 2026, and in combination with our expectations for the fourth quarter, we're raising our full year 2026 revenue guidance, which Rich will detail shortly. Organizationally, we recently announced management team updates to prepare Carlsmed for the meaningful growth we see ahead. In September, we promoted Jeff Bertolini to Chief Operating Officer. Jeff previously led Operational Excellence in Advanced Manufacturing Technologies at Carls Med, where he drove the deployment of advanced technologies throughout our digital production process. And he will lead our operations as we rapidly scale. We also welcome Rich Heppenstahl as Chief Financial Officer. Rich brings deep public company MedTech finance experience, most recently as CFO of Zimbi, and will be instrumental in driving disciplined, efficient growth. And on October 1, Dr. Tony Jark joined us in the newly created role of Chief Product and AI Officer. Tony spent more than 15 years at Intuitive Surgical, where he built the global AI organization from the ground up, and he will lead the development of our next generation technology platform, surgeon ui ux and personalized spine surgery procedures together this team brings large-scale experience to drive the next phase of carl's men's growth operationally we continue to demonstrate the efficiencies of our capital light digital first business model our proprietary digital platform enables us to provide patient specific and surgeon specific preoperative 3d plans personalized implants and single use instruments directly to the hospital without the significant capital investments required by traditional medtech companies like surgical trays and stock implants we can focus on patient centric innovation in partnership with surgeons and hospitals to execute on our mission to improve patient outcomes. With our deep focus on technology and operational excellence, we can consistently deliver Aprivo surgical kits to the hospital in about a week after surgeon approval of the plan. We've achieved approximately 140 basis points of quarterly gross margin expansion year over year. Shifting to our commercial performance during the third quarter, our lumbar fusion franchise represented 88% of our revenue. We continue to grow the lumbars franchise rapidly and we believe that we're still in the early innings with an estimated 445,000 lumbarfusion procedures performed every year in the US. Clinical outcomes data remains core to to our value proposition for surgeons and hospitals. Published data on over 500 Aprivo patients has demonstrated improved surgical outcomes in both degenerative disc disease and adult spinal deformity. Most recently at the ESMIS annual forum in September, investigators presented two-year data on 378 lumbar fusion patients with low vertebral bone density. Patients treated with a PREVO had a two-year re-operation rate of approximately 6%, representing an 80% reduction in short fusions and an 85% reduction in long fusions, compared to published literature in similar patient populations based on unadjusted cross-study comparisons. We believe this data is meaningful, as this patient population represents nearly 80% of surgery patients over age 50. On reimbursement, the CMS FY27 Inpatient Prospective Payment System, or IPPPS, final rule went into place on October 1, 2026. The final rule consolidated the 11 MS-DRG codes previously applicable to approve inpatient lumbar procedures into three new codes, 523, 524, and 525. This new reimbursement structure simplifies coding and enhances reimbursement for hospitals providing the Aprivo inpatient lumbars procedure, which we believe will broaden patient access. We have invested in our strategic accounts team over the past few quarters to drive awareness and education of this important change with the goal of accelerating hospital approval of Aprivo. Finally, we continue to drive patient-centric innovation within our Lumbar portfolio, and we're thrilled to announce the commercial launch of our Apribo Posterior Bilateral Procedure in mid-October. Our newest procedure offering further expands our proprietary technology platform to enable a direct posterior approach for personalized spine fusion. Feedback from surgeons during our limited market evaluation suggests that this procedure has the ability to achieve targeted disc and regional alignment with double the end plate coverage as compared to stock devices. This expansion of the lumbar procedure addresses an estimated 30,000 procedures or approximately 7% of total lumbar fusions performed annually in the U.S. In our cervical business, surgeon reception and utilization has grown ahead of expectations post-launch. With an estimated 370,000 cervical fusion procedures performed annually in the US, we're already driving impressive momentum of a Prevost cervical within this market as further extension of our technology platform. The Aprivo Cervical Procedure is designed to provide precise implant fit with maximized end-plate coverage, which we believe has the potential to benefit patients who have a higher risk of re-operation, including those receiving more than two FUSE levels, patients with malalignment, patients with low vertebral bone density, such as osteoporosis and osteopenia, conditions that collectively impact nearly 80% of patients. Approximately 80% spine surgeons perform both lumbar and cervical fusions, with about 20% of new surgeon users starting with cervical only. Our planned multi-center of Prevost Cervical Effectiveness, or ACE registry, will collect real-world evidence from patients treated with the Prevost cervical at six months, one year, and two-year time points, and we remain on track to commence enrollment this quarter. To expand our cervical franchise, we're also looking forward to commercially launching our FDA-cleared cervical plating system within the coming weeks. With the full launch of core of personalized ACDF plates, surgeons will have the flexibility to perform a personalized cervical procedure with standalone fixation, personalized multilevel fixation or segmental fixation with the goal of maintaining alignment as planned preoperatively and delivered with the Aprivo interbody device. Approximately 60% of cervical ACDM procedures in the U.S. utilize fixation plates so we see this as having the potential to deepen utilization inside our current user base and accelerate new surgeon adoption with the cervical platform in 2027 and beyond taken together our third quarter demonstrates consistent execution against our strategy and positions us for continued high quality growth we'll continue our focus on onboarding new surgeons deepening utilization and broadening hospital access supported by expanding medical education programs for residents fellows and key opinion leaders with a growing body of clinical evidence strong reimbursement and a platform built to add new procedures efficiently we believe ai enabled personalized surgery has the potential to become the new standard of care for spine fusion and beyond we're just getting started we look forward to updating you on future progress with that i'll turn it over to rich who will review our financial performance thanks mike good afternoon everyone i'll begin by reviewing our third quarter 2026 results and we'll close by providing updated commentary on our outlook for the full year 2026 Please note, our prepared remarks include references to certain non-GAAP financial measures. We urge investors to review the reconciliation of these non-GAP financial measures to their most directly comparable GAAP financial measures, which can be found in today's earnings press release. Beginning with sales, revenue for the third quarter of 2026 was $21.6 million, reflecting a 65% increase over the $13.1 million we delivered in the third quarter of 2025. Growth was driven by continued market adoption of the Aprivo lumbar platform through our expanding surgeon user base, as well as a strong contribution from our newly launched Apribo cervical platform. Revenue per procedure remained consistent in the quarter, reinforcing what we are seeing relative to strong market adoption rates we are excited about the momentum we are carrying into the end of the year and are encouraged that our personalized surgery solutions will continue to gain traction in the market gross margin of 77.3 percent in the third quarter expanded by approximately 140 basis points over 75.9 percent in the third quarter of 2025. Our growth margin expansion is largely driven by lower per unit contract manufacturer costs and continued operational efficiency improvements in our digital production system partially offset by a slight impact of product sales mix. Sales and marketing expense of 13 million dollars compares to 9.6 million dollars in the prior year period and includes continued foundational investment to drive long-term sustainable growth including sales headcount to broaden our reach and marketing investment to expand our surgeon user base r d expenses were 6.4 million dollars inclusive of a half a million dollars related to executive transition costs and compares to 4.4 million dollars in q3 of 2025 due to increased expenses to advance our patient-centric product development and ai initiatives general and administrative expenses of 10 million dollars included 2.3 million dollars related to Executive Transition Costs and the expected resolution of certain legal matters When excluding these expenses, general administrative expenses were $7.7 million compared to $4.9 million in the prior year period. The increase is driven primarily by personnel costs, professional services expenses, and legal fees. Adjusted EBITDA, which excludes expenses related to executive transition and the expected resolution of certain legal matters, was negative $7.3 million in the quarter compared to negative $8.2 million during the third quarter of 2025. Of particular significance, Q3 was the first quarter where our sales growth and strong gross margins generated positive operating leverage on our profitability. This inflection point reinforces the power of our differentiated, digital-first, capital-light business model and provides additional clarity toward becoming adjusted EBITDA profitable without compromising continued investment in crucial areas that drive long-term sustainable growth. Adjusted net loss per share in the third quarter was negative 34 cents per share. Now, turning to the balance sheet. As of September 30, 2026, cash, restricted cash, and investments totaled $80.3 million. Cash burned in the quarter was $9 million. Our term loan debt remains at $15.6 million under our $50 million debt facility that matures in October 2030, providing non-dilutive capital to support general corporate purposes. Now, turning to our outlook for the full year of 2026, we are raising our full year 2026 revenue range from between $74 million to $78 million to between $78 and $80 million, representing over 56% year-over-year growth at the midpoint. this is reflective of the strong volume growth we have seen in the first nine months of 2026 and our revenue expectations for the fourth quarter our expected catalysts in the fourth quarter include an anticipated uplift in our overall approval lumbar volumes from the fiscal 2027 ipps final rule that took effect on october 1st as well as the fourth quarter commercial launches of our Prevo posterior bilateral procedure and Cora cervical plating system. We expect gross margin to remain in the high 70s. Additionally, we want to provide some additional transparency around stock-based compensation expense and the number of expected shares outstanding for the balance of the year. For the fourth quarter of 2026, we expect stock- compensation expense to be between $2.75 million and $3.0 million, and we expect our number of weighted average shares outstanding to be 27.3 million and 27.6 million shares. With that, I will now turn the call over to the operator for questions. Thank you. At this time, we will conduct the question and answer session. As a reminder, to ask a question, you will need to press star 1-1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. We ask that you please limit to one question before rejoining the queue. Please stand by while we compile the Q&A roster. Our first question comes from the line of David Saxon of Needham & Company. line is now open. Great. Thanks for taking my questions and congrats on the nice quarter here. So maybe I'll start just on the DRG coding and kind of what you're seeing or what you saw late in third quarter leading up to that effective date in terms of kind of the interest from hospitals and then what you are seeing in the fourth quarter now that it's live and how we should really think about that driving lumbar case volumes into 2027. Hi, David. Thanks for the question. You know, as previously discussed, we see the new DRGs for lumbars being an ongoing catalyst for our business. You Know, we did see an uptick in new hospital acquisitions going on contract, exiting Q3 and continuing through Q4. So, that gives us a lot of momentum going into 2027 and beyond. Okay, great. Thank you. Thank You. Our next question comes from the line of Ryan Zimmerman of U.S. Bancorp ETIG. Your line is now open uh good evening can you hear me okay absolutely good to hear you ryan hi ryan good to speak with you mike rich definitely thank you congrats uh on the nice results here um you know in the past you guys have talked about kind of a mix of lumbar and cervical i think with cervical being kind of around 10 maybe you know a little higher than that low double digits kind of low team from a contribution standpoint. Is that still where you're thinking you come in at for the year? And I'm wondering if you could expand a little bit on kind of the mix as we move into 2027. I know we're not going to get guidance necessarily, but cervical is going to become a bigger part of the business, I think, over the coming quarters. Thank you. Thanks for the question, Ryan. We're very happy with the adoption of cervical here in the early days. And particularly as we look forward to our CORA cervical plating launch here at the end of the quarter, you know, we will see continued uptick of the cervical franchise. And as we've, you know previously discussed, you low single-digit contribution for the years where we initially estimated, you know, we're now seeing this ramp above plan, and I'll hand it over to Rich. Yeah, yeah. Hey, Ryan. Yeah. So, to answer the first part of your question, cervical mix as a percentage of the total in the third quarter was 12%. And what we've seen over the last few quarters is we've seeing kind of, you Know, roughly a three-point, you Now, increase in contribution is cervical. And so, you know, the way we're thinking about it for Q4 anyway, that we'll continue to see strong adoption of the cervical platform, you know, as a percentage of the total. Got it. And if I could just sneak one more in, and Stephanie, I hope I'm not overstaying my welcome on the questions in a second. But, you know, when you think about where you're taking SHARE, I'm curious, you know, where you think specifically it's coming from from an inner body perspective, do you see it being share gained from, say, expandables? Do you see it being shared gained from maybe more conservative fusion methodologies? Just curious, Mike, you know, if you could apply it on kind of where these cases you think are coming from, from an inner body perspective. Thanks for taking the question. Absolutely. And I think that's a great question. As we think about our growth and certainly very strong procedure volume growth, you know, we continue to look at the early and mid-career surgeons that are really adopting this across their entire spine fusion portfolio, and as we continue to roll out, you know, more partnerships with the residents and fellows in academic teaching institution, you know, and we're seeing this adopted broadly across various procedures. One of the key initiatives that we've talked about that we continue to invest in is our medical education program and advanced courses, where when we initially started, we were heavily focused on adult spinal deformity, and we have rolled out some great advanced courses in adult spinal deformity. We're now seeing more and more uptick in MIS posterior, and We've just launched our advanced course series and advanced in MIS posterior, and we're seeing a lot of traction in that specific procedure as well. Thank you. Thank you, our next question comes from the line of Matthew O'Brien of Piper Sandler. Your line is now open. Great. Thanks for taking that question. I just want to make sure I get – the first one is just more of a clarifying question. Did you – just based on the 60 percent increase in the number of new docs, is that your best or your second best ever new doc add per quarter sequentially and especially in Q3? And then the real question is, just looking at the guide for the year, good to see it pop up by more than you beat in the quarter, but does imply the midpoint, just, you know, modest sequential step up and you have all of this other momentum. Is there something specifically either that was better than expected in Q3 or that could weigh on Q4 a little bit, or are you just trying to be conservative with that metric on Q5? Thank you. Yeah, first we'll talk about the surge in ads and, you know, as just talked about with the prior question, you know, we continue to see very strong adoption in early and mid-career surgeons and, you know, growing north of 60% year over year with our new surgeon ads, you know, really sets the bar for us going forward. And as far as guidance, you know, We feel really good about our business in Q4 and beyond. And, you know, as a newly public high growth med tech company, we continue to be prudent with our guidance. Got it. Thanks. Thank you. Our next question comes from the line of Richard Newiter of Truist. Your line is now open. Hi. Congrats on the quarter. Thanks for taking the questions. I guess maybe one housekeeping and then one about guidance and what's in the assumption set. Just the housekeeping on ASP, I think you had said that it was stable with 2Q. Is that right? And just if you can give us any color and kind of where cervical and lumbar are relative to one another, or even where cervical is from a pricing or ASP standpoint relative to where you thought it would be. That would be the first question, then I'll follow up. Yeah. Hey, Richard. It's Richard. Good to talk to you. Thanks for the questions. Yeah. So quickly around pricing, it's consistent to prior quarters as we talked about. And then relative to your question around cervical and lumbar, we mentioned in the call, I think that cervical was 12% of the total. So lumbars 88% and cervical continues to be adopted very nicely in the markets. We're really pleased with this progress so far. Okay, great. And then maybe just a second on the guide. You know, I think you had mentioned that you are assuming some uplift from the October 1st DRG reimbursement change. Is that right? And then how should we think about that? Just going back to Matt's question, you know, the sequential uplift in 4Q versus 3Q is a little bit lighter than, you know, what we've seen in the last two years. So, if you could reconcile that. And then just any thoughts on competition, which was delayed in custom implants, but, you Know, that sounds like it's on track for 27. How do you expect that to impact the market that you're clearly pioneering? Thank you. Yeah, first, just to reiterate on the prior comments on the guide. You know, we feel really good about our Q4 and a lot of early signals with new hospital, with new hospital ads, you know, growth in our new surgeon ads and continued growing in utilization. You Know, we believe that we have, you Know, a lot of catalysts that were driving long-term growth and continuing to grow our strategy. You know, as far as competition, you know, just to kind of double down on our uniqueness as a business, you knows, we continue to be, you know, really the only pure play personalized surgery company and, you continue to invest in our innovation around personalized surgical plans, personalized devices, and post-op data continues to drive the great clinical outcomes that we'll continue to publish on. Okay, thank you. As a reminder, to ask a question, you'll need to press star 411 on your telephone. Our next question comes from the line of Gracia Mahoney of Bank of America. Your line is now open. Hey. Good afternoon. Thanks for taking the questions, and congrats on a good quarter, and Congrats, Rich, on the new role. Mike, I think in the prepared remarks, you talked about reaching an inflection point in the business. So just kind of wanted to get your preliminary thoughts on how you were thinking about the contribution from reimbursement, cervical, CORA, bilateral, all of those launches that are good tailwinds to growth in 2027? And could we think about growth accelerating next year given the DRGs and your comments on inflection? Hey, Gratia, great to talk to you. Thanks for the question. And we do really see our business at an inflection point now as we've got a lot of these tailwind behind us that you just mentioned, our permanent enhanced reimbursement for the lumbar procedure, the additional expansion of the lombar platform, as well as the rapid momentum on the cervical platform. And so, as Rich also noted in his remarks, at the scale we're growing at, This is giving us some opportunities for additional productivity as we scale on our path to profitability. And so, you know, we're able to reinvest into those key areas of patient-centric innovation, again, focus on the early and mid-career surgeons that are adopting this at a very rapid pace and continuing to reinvest in those key innovations. I'm showing no further questions at this time. I would now like to turn it back to management for closing remarks. Thank you all for joining. We feel really good about our business as we exit Q3 and go to the close of the year and start of 2027. Appreciate the time and look forward to updating you at the next call. Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.