Q4 2020 Surgalign Holdings Inc Earnings Call
Good afternoon, ladies and gentlemen, and welcome to the surge of line holdings for quarter and full year 'twenty 'twenty with all of this conference call.
At this time all participants are in a listen only mode.
We will conduct the question and answer session and instructions will follow at that time.
The one she would require assistance during the conference. Please press Star then zero on your Touchtone telephone as a reminder of just conference call is being recorded I would now like to turn the conference over to your House Jon singer. Please go ahead.
Thank you operator, good afternoon, and thank you for joining the surge line Holdings, Inc. Fourth quarter and full year conference call. Joining me today on the call is Terry Rich, our President and Chief Executive Officer before we start let me make the following disclosure the earnings and other matters, we will be discussing on this conference call will involve.
All statements that are forward looking these statements are based on our management's current expectations. They are subject to the various risks and uncertainties associated with our lines of business and with the economic environment in general.
Our actual results may vary from our statements concerning our expectations about future events that are made during the call. We make no guarantees as the accuracy of these statements. Accordingly, we urge you to consider all information about the company and not to place undue reliance on these forward looking statements.
During the call. We will also present certain financial information on a non-GAAP basis management believes the non-GAAP financial measures taken in conjunction with U S. GAAP financial measures provide useful information for both management and investors by excluding certain noncash and other expenses that are not indicative of our core operating.
The results.
Management uses non-GAAP measures to compare our performance relative to forecast on the strategic plan the benchmark our performance externally against competitors and for certain compensation decisions reconciliations between the U S. GAAP and non-GAAP results are presented in the tables accompanying our earnings release, which can be found in the inverse.
After relations section of our website.
Now I will turn the call over to Terry.
Thanks, John Good afternoon, everyone on today's call I'll provide an overview of our fourth quarter performance and update on events that occurred during 2020, and then turn the call over to John to provide financial overview, after which I'll provide our thoughts on 2021.
Total revenue for the fourth quarter of $26 2 million down from $31.6 million during the fourth quarter of 2019, primarily driven by the negative impact of COVID-19 on electric procedures, both in the U S and internationally.
Taking the step back.
2020 was a transformational year for the company.
Amidst all of the uncertainty associated with Covid, we presume we pursued an organizational overhaul in July which included the separation of two businesses to create a standalone pure play spine company now known the surge line.
Just a few months later in September we acquired whole of surgical immediately shifting our priority to becoming a leader in the digital surgery space with an initial focus on spine.
At the time, we launched surge of line, we laid out our growth strategy for the business, which was made up of three components build innovate and acquire.
We have made tremendous progress towards each of these during the remaining five months of the year.
Starting with billed.
We've assembled a world class team throughout the organization from our employees the management team and the board of directors.
We talked at length on previous calls about the talent, we have been able to add and we continue to do so in recent months.
When looking at the senior leadership team, John and <unk> <unk>, our head of international and myself are the only members of the team who were part of the organization at the beginning of 2020.
Along with senior leadership appointments, we have brought in substantial experience to round out the team in literally every department within the organization.
Our marketing team is in large part completely new.
Our R&D team is entirely new.
And we have added a number of people within our finance quality regulatory clinical medical education marketing and communications functions.
On the innovation side, we made progress towards the overall development of our portfolio during the third and fourth quarters, which included product line extensions and expansion of the biologics portfolio the application of new materials and manufacturing capabilities and most importantly, additional functionality of the digital.
That for them.
However, as we progress through the back half of 2020, we intentionally slowed down the pace of new product launches.
One take time to re imagine our current portfolio and our innovation road map to ensure it supports our shift to digital.
In conjunction with the development of our product roadmap, we need to properly onboard integrate and align all of the new talent within the organization.
We are now confident the beginning in the back half of 2021 and into 2022, a best in class portfolio will emerge which includes innovative products and systems that are highly integrated with the whole low platform.
Our last component of this acquire.
Following the close of the Hollow acquisition during the fourth quarter for members of the whole of the team have joined surge of line in key roles with two of its co founders Professor Christian Luciano and Dr. Chris Jimena, joining the head up the continued development of the whole of platform and lead our digital surgery R&D initiatives.
In the fourth quarter, Paul the wiki the third cofounder of Colo joined the surge of line board of directors.
Paul is widely known as one of the fourth of our forefathers of pre.
<unk> data mining and continues to be a thought leader in the promotion of artificial intelligence and healthcare and we are excited to have him as part of our organization.
With the integration of hollow behind US the company is completely aligned on our long term strategy and what needs to be done going forward to deliver.
We continue to believe that there are a variety of interesting products and technologies out in the market and we will continue to evaluate acquisition licensing and partnership opportunities that we feel would fit within our strategic framework and be supportive of our digital portfolio.
Our commitment to digital surgery aligns with the perspective of many industry thought leaders the medical device companies will see significant change in the near future as the currency of the industry moves from implants to digital services the.
The services include machine learning to leverage outcomes and additive manufacturing to create patient specific implants, all informed by AI resources, leveraging predictive analytics and a move towards personalized medicine.
We believe companies that embrace this new paradigm will thrive in the transformation.
2020 was a transformational year for surge line, where we've made significant progress in building the foundation to deliver on the promise of digital surgery.
While I'm proud of what we accomplished in the past six months.
We expect that it will take an additional 12 to 18 months to complete our transition from an implant company to a digital surgery company delivering surgical solutions.
With that I'd like to turn the call over to Jon for a financial update.
Thank you Terry global spine revenue for the quarter ended December 31, 2020 was $26 2 million compared to $31 6 million for the prior year period. The decline in revenue was primarily due to the impact of the COVID-19, pandemic and global electric procedural volume domestic revenue was 22.
$7 million of $4 $5 million decline from the fourth quarter of 2019 and international revenue was $3 5 million.
$9 million decline from the fourth quarter of 2019, we believe the demand for our core implants and biologics both domestically and internationally, we will return to historical levels globally in line with the return of global electric procedures. However, we anticipate complex product family will return to historical low.
Though at a slower pace than the rest of our portfolio.
Gross profit for the fourth quarter of 2020 was $12 8 million inclusive of $6 9 million incremental inventory charges predominantly related to the recall of the serve the line ACP system.
And purchase accounting related markups to inventory adjusted for the impact of the charges gross profit was $9 $19 7 million or <unk>, 75% of revenue compared to $23 6 million or 75% of revenue in the fourth quarter of 2019.
The marketing general and administrative expenses for the fourth quarter of 2020 was $27 3 million compared to $39 9 million in the prior year period, the decline in marketing general and administrative expenses is predominantly driven by the decline in sales related cost due to the decline in revenue.
<unk> and a reduction in the administrative infrastructure is the result of the OEM sales R&D expenses for the fourth quarter of 2020 was $2 2 million compared to $4 4 million in the prior year period, the reduction in R&D relates to the separation of the OEM business and the transition of R&D head count we expect R&D spend.
<unk> returned to prior year levels as we rebuild the competency with enhanced spine experience and invest in the whole of surgical platform.
The company incurred approximately $101 million of nonrecurring operating expenses during the fourth quarter of 2020, primarily related to the hollow acquisition in conjunction with the purchase of hollow, we determined that substantially all of the fair value of the acquisition within the acquired in process research and <unk>.
<unk> asset, which resulted in us treating the acquisition as an asset purchase with the total purchase price of $95 million comprised of $30 million of cash $12 3 million of common stock $2 1 million of transaction related costs and of $56 million related to our present value of assess.
<unk> of the contingent payments since the right platform is pre commercial and has not reached technical feasibility as defined by the accounting rules. The transaction was expensed in the fourth quarter, resulting in a onetime charge of $94 5 million.
Adjusted EBITDA for the fourth quarter of 2020 was a loss of $7 7 million compared with the loss of $14 3 million in the prior year period. The improvement in adjusted EBITDA was predominantly driven by the reduction in operating expenses as outlined above as of December 31, we had approximately 44.
And cash and on February one of 2021, we closed the secondary equity offering raising approximately $40 million of incremental cash.
Turning to guidance and the <unk>.
COVID-19 global pandemic has continued to impact demand for our products through the first quarter, which will be sequentially down by approximately 10% from the fourth quarter of 2020.
We anticipate full year growth in the range of 5% to 10% compared to 2020 full year global spine revenue from continuing operations of approximately $102 million our guidance assumes the global procedure volume returned to normal levels. During the second quarter of 2021 with a relative.
Typically slower return to historical revenue levels of for complex in limited contribution from the server line, ACP, which was which.
Was withdrawn withdrawn from the market due to a recall buyer of manufacturing partner in January based on this revenue we anticipate adjusted EBITDA will be in the range of.
Loss of $35 million to $40 million.
I would now like to turn the call back to Terry.
Thanks, John before shifting to our 2021 the outlook I wanted to discuss our long term vision for surge line and how we are approaching our transformation from a spinal implants company two of dirt digital surgery technology company.
The whole of platform is a revolutionary foundational technology and we believe it will impact how surgery is performed and ultimately how care is provided to patients.
The initial application of the whole of platform.
As enabling digital spine surgery the <unk>.
That form of addresses limitations that exist in today's computer assisted surgery and robotic platforms by introducing smart applications enhanced visualization real time guidance warnings and alerts thus enhancing the surgical performance.
We will leverage the autonomous Anatomies segmentation and identification software to develop smart instruments to improve surgical workflows make spine surgery safer, which we believe will lead to better patient outcomes.
We intend to expand the.
<unk> of the platform outside of the or as we believe it has the potential to provide benefits throughout the surgical landscape from died in the diagnostic and predictive analytics capabilities to autonomous Preop planning and intelligent Postop analysis functionality.
While the spine market is of significant opportunity we view it as a stepping stone application for the platform.
Once the model has been proven we intend to expand into other surgical specialties beyond spine.
We're in the early innings of our journey through this transformation, but we are excited about the potential of this innovative technology.
As part of this transformation, we intend to move away from the traditional model of selling screws implants, and the access as a package for procedural pull through instead moving towards delivering better outcomes by Reimagining what is possible through integrated intelligent technology.
The shift will not happen immediately but everything we are doing from this point onward will be done with the intention of moving towards personalized medicine through the application of the digital platform and supporting technologies.
Before opening the call up to Q&A I'd like to discuss our key priorities for 2021.
At a high level 2021 will be a year of transition and investment building the foundation for growth in 2022 and beyond.
Our priorities for the year are first continue to build out the organization in support of our digital strategy.
Second continue the development of our hollow platform with the goal of performing first cases in the U S by the end of the year.
And third re imagine our product portfolio to accelerate the pace of new product introductions.
Starting with the continued build out of our organization in support of our digital strategy. We have put tremendous senior leadership team in place over the last nine months, which includes the integration of the team from Hollow and we have now shifted the optimizing the structure and scale of the company. We also brought on a significant number of very talented people cross the.
The organization and we'll continue to add talent aligned with our strategy.
Turning to the ongoing development of hollow there are a number of key milestones we expect to achieve this year.
First is the FDA five 10-K clearance for the platform.
We expect to happen in the back half of the year. We are very confident in the technical foundation of the platform and continue to work to put together the absolute highest quality.
Filing to ensure a timely clearance.
Despite the short delay associated with a requirement to complete additional third party testing, we expect to file of the submission initial submission in the near term.
We expect the initial indication for use to be specific to lumbar spine procedures.
Following clearance, we expect to file a steady stream of submissions for an indication expansions as well as for additional software capabilities related to diagnostic and predictive analytics.
After FDA clearance.
The second milestone for 2021 is the launch of the initial IRB studies. The purpose of these studies are to prove the efficacy in humans optimize the software and hardware interactions and prepare the platform for initial use before proceeding to the marketing phase marketing development phase of.
Our launch.
Following the successful clearance, we anticipate having the first cases using the whole of platform performed in the U S. Later this year.
Shifting to our third priority re imagining our product portfolio.
Given the material change to our focus we are working to re imagine our long term product development roadmap to support hollow and the promise of digital surgical solutions.
In addition to focusing on identifying new development initiatives. We will also undergo of critical assessment of our existing portfolio to identify any individual products of product segments that we don't believe will be supportive of our digital strategy going forward.
In summary, we are very excited about the future surge of line 2020 was a transformational year for the organization.
We stood up of pure play spine company.
Brought together a world class spine leadership team.
And positioned ourselves as a leader in digital surgery through the acquisition of whole of surgical all while while successfully managing our operations during an ongoing global pandemic.
Looking ahead 2021 will be a year, where we invest to build the foundation of our digital surgery offering to support our long term growth initiatives in the years to come.
With that I'd like to open the line for questions.
At this time I would like to remind everyone in order to ask the question Press Star then the number of one on your telephone keypad again that is star then the number one on your telephone keypad, we'll pause for just a moment to compile the Q&A roster.
We have our first question coming from the line of Matthew O'brien with Piper Sandler Your line is open.
Afternoon, Thanks for taking my questions.
Terry or John can you just talk a little bit more about that the way that you saw.
On hollow.
Maybe just quantify a bit how long the delay wasn't specifically what it what it was the island the software with the hardware was it something else.
Any more color there would be helpful.
Yeah, Thanks, Matt So yes.
Yes, the <unk>.
Software is.
Perfect, which is the.
The Great News is we had to go through.
Some third party.
Testing.
That was required for the submission.
We ran into a couple of minor issues.
<unk>.
To some hardware and electrical systems.
Net.
The the fix was quickly identified and are in process of finishing up that testing now so.
<unk>.
Really a nominal delay.
Okay, we're talking a couple of weeks basically.
Yes, yes, that's exactly right.
Got it Okay, and then on the new product side I guess, the first thing.
It sounds like you feel pretty comfortable with the approval timelines I don't know how much you're kind of factoring in some of the slowdown at FDA that we're seeing just just COVID-19 related but.
I'd love to hear the confidence again in that time line that youre talking about and the secondly on the new product side I guess, what happens if the all of it does get delayed can you still rollout those new technologies and then how differentiated can you really make those products can you get pricing premiums on them et.
Et cetera.
Yes, sure so so.
Again.
We don't have any insight to the FDA on how COVID-19 is back them up but we've had good conversations with them and it put together.
An outstanding submission and so we feel very confident.
About that and certainly are contemplating.
What you mentioned.
Into the time frames.
The other products.
You referred to look our sales force has been starving for products for a number of years now. So we believe the just getting them into the field will continue.
To drive revenue growth that will increase.
Our products per.
The distributor per surgeon and drive all of those metrics up.
As for premium pricing, there isn't a lot of it any more with <unk>.
<unk> and <unk>.
Really driving pricing.
At the product level.
But we will certainly look to.
Maximize the opportunity of the best we can.
Okay, and then last one for John just on the EBITDA loss for the year, how do we think about that ramp over the course of the year as youre getting closer to the the hollow approval and rollout.
We're going to see of big loss in Q4, and then that carries into the into next year, how do we how do we think about the cadence there. Thank you.
Yes, no we don't anticipate we're going to build the competency through the course of the year. So as you kind of we were at seven seven in the fourth quarter.
And I think.
It's pretty the cost will build a bit between now and the end of the year.
But.
We're talking.
Less than.
No.
The 10 resources incrementally to support the IRB.
And then really based on the output of that will get the assessment of what we need for the full commercial alpha launch.
So I think that it will look.
I don't anticipate that it's going to grow significantly in the fourth quarter.
To be more in line with the overall revenue cadence.
Understood. Thank you.
We have our next question coming from the line of Ryan Zimmerman with BPI, Inc. Your line is open.
Hey, Terry of Hey, John Thanks for taking the questions just the follow up on Matt's question on array and hollow real quick.
So if we think about first case is kind of at the end of the year.
How are you thinking about that launch in 2022.
In terms of on the size and scale.
Is that should we think of that as kind of a gradual launch with kind of beta testing going on maybe in the first half of 2022, just some color in terms of once we get that product out to market you know what that could look like initially.
Yes sure.
We plan on getting a number of these systems out as quickly as we get clearance and we'll be prepared to do so so that we can begin to again.
The experience.
Based on the success of the initial experience.
We should be.
Ready.
To begin to launch.
Multiple units throughout the course of 2022, especially through the back half.
The key is that we want to do it responsibly as we scale up and build.
On the field competency to ensure that these units are deployed in the way the delivers the best possible outcomes for physicians and patients.
Understood and then.
With the launch of products that are coming.
Just for John kind of how to think about the capital expenditures that youre.
Youre anticipating particularly with certain set of investments and things of that debt. What are you thinking you may need all of this year as you start as you launch some of those other products.
Yes.
Overall, when you look at our Capex budget for the year.
Between hollow in SaaS.
There is probably somewhere between $4 7 million of capital.
And then there is the other piece of capital that comes into play is as we've talked about previously we're working through an ERP implementation as part of the separation from RTI.
Probably another $3 million of capital.
And then.
There is probably another.
$2 million to $4 million related to a variety of activities.
Yes.
We are beginning to prepare for.
Movement into a new space in San Diego, We just signed the lease.
Last week that Youll see a 8-K on that.
It's going to take about a year to build it out but as we work through the build out.
Building surgical suites that highlight the digital technology and they'll begin to be some capital for that this year.
Got it alright, thanks for taking the questions guys.
Again in order to ask the question simply press Star then the number one on your telephone keypad.
Our next question coming from the line of Matt Hewitt with Craig Hallum. Your line is open.
Thank you for taking the questions first of all by the.
With the step back or the stepped down a little bit here in Q1 versus Q4, how much of that is COVID-19 versus the the winter storms that you saw on the southern part of the country.
If not for those storms.
Has the market somewhat stabilized from of Covid perspective.
Look there's probably a handful of surgeries that were impacted by the winter storms, but it's really hard to tease that out from the Covid impact.
The impact I would say the vast majority of the shortfall.
It was COVID-19 related.
And we are beginning and its global right and I think the important thing to keep in mind is the deal.
20% of our revenue is international and the impact of Covid. They were much more draconian in the way they shutdown of elective procedures.
So the impact was felt more significantly is that portion of the business.
I would say as we've gone through the end of Q1.
Everybody is watching the statistics and so you're starting to see.
The return of elective procedures.
I don't think we're going to.
What we're seeing is that many patients you are waiting to get vaccinated at this stage in order to return to procedures. So I'm not sure we'll see a full return to the levels. We saw on Q3, but we think we should see kind.
Of steady returned to normalized levels in the second half of the year.
Got it alright, and then as far as gross margins are concerned I think you said your adjusted gross margin in Q4 was 75% is that how we should be thinking maybe a little bit lower for Q1, but then kind of getting back up and maybe above that level as the year progresses or how should we be thinking about gross margins, yeah, that's probably a reasonable way to think about.
On it.
Fantastic all right that's it for me thank you.
We have our next question coming from the line of Frank Heikkinen with Lake Street Capital markets. Your line is open.
Hey, Thanks for taking my question just tune of day.
I know, it's been brought up on the past, but just curious if you could elaborate a little bit further on some of the potential models that whole low code.
You was once its commercially approved and then speaking to some of the different packages and software packages that you develop over time on LOE is going to be additional add on services or is there potentially going to be some sort of subscription model of pay per click.
Just trying to get a little bit on understanding of the potential models on the whole platform.
Yeah sure so look I think.
It will follow as we've said before.
In the short term until we prove out.
The technology and the ability to validate better patient outcomes of the existing models, which depend on a variety of factors.
Yes some.
Some hospitals.
Like the capital purchase programs others like the lease programs they are certainly.
The need for.
Some software licenses.
But the.
The key portion of the revenue for the next couple of years anyhow will be the pull through of the hardware implants.
Got it Okay, and then maybe one for John just to finish it off.
The comments on assumptions of international growth within the fiscal year 'twenty, one guidance, you're comfortable sharing with us.
Yeah, I think international.
It will grow slightly faster than the overall business.
They've got a new.
Number of new product introductions, we talked about hps, two <unk>, which is the dynamic poplar.
Which is approved in Europe, but neither the PMA pathway in the United States. So we're not introducing it here and then of number.
For the link family has gotten the CE mark so there'll be launching that.
So we anticipate the international market.
We will grow slightly faster than the domestic market.
But overall, we're not going to see of significant deviation from kind of 20% of the overall revenue.
Perfect Alright, thanks for taking my questions.
Our next question comes from the line of Brandon Folkes with Cantor Fitzgerald. Your line is open.
Hi, Thanks for taking my questions and congratulations on the quota.
Sorry, if I missed this this is hopping between two quarters here, but.
I saw the spirit of the spine revenue guidance did you contemplate any potential revenue in 2021 of the.
Terry your comments on installs in 2022, but just wondering sort of how early we could get an impact from the highlight.
And then maybe secondly.
But sorry, I interrupted finished your question sorry.
And then maybe secondly can you just talk about the whilst its early days the sort of the expansion of the fiber and partnership into the multiple.
Impact you've seen the and your willingness to continue to do the sort of partnerships as you sort of low on China into the field. Thank you.
Yeah.
So Terry referenced in the previous question.
In the short term of the majority of the revenue that we anticipate seeing from polo.
Is going to be true product pull through there is a small disposable portion of that goes along with the procedure.
So in that revenue.
Would be recognized in conjunction with IRB.
Placement.
So we do anticipate.
What I would call some.
Pretty moderate revenue driven.
As we start placing the product for purposes of the study.
But again, it's going to be predominantly seen through implant.
And.
And we anticipate that that will.
Accelerated obviously as we transition from the.
Of the IRB and the alpha to the full commercial launch.
But that's going on that's going to take both of the 22 to work through.
From our standpoint.
Vibe on multiple it's early days in the relationship.
And.
We're seeing.
A subset of users that like the handling characteristics of that product.
And.
But it's difficult to assess at this point in time the progression of that it's a nice product.
But early I guess would be the best way to characterize it.
And then from a standpoint of.
Similar relationships, Yeah, I think we're very open to partnering licensing acquiring for purposes of accelerating.
The transformation of the product portfolio.
And so there is certain competencies that we have no intention to develop internally.
The biologics as an example, there is a lot of categories within the biologics space that we're not currently competing in.
As we work to either upgrade or expand our biologics offering we anticipate there'll be a number of additional distributions for licensing relationships and then as we look at.
The new product development pathway.
We're going to constantly do a make or buy decision on the product portfolio.
In order to determine whats the economic the best economic use of cash I mean, I think that we've got.
The rest of goals for the develop the investment in R&D of the organization to re imagine the portfolio and exploit.
The whole low technology, but there are some gap fillers that I think would be very valuable.
To our customers, they probably make more sense the partner on debt to develop internally.
Great Thanks for that strength.
We have our last question coming from the line of Jim Sidoti with Sidoti <unk> Co. Your line is open.
For our good afternoon.
Terry companies changed quite a bit since you've been there a much simpler model now.
You made some pretty significant changes to the to the dish.
Distribution on the sales teams now that youre going in the direction will be coming from more of a digital story.
Do you think that you have the right people in place.
Distribution or do you think there'll be more changes on that front going forward.
Yes.
Jim It's a great question.
And it's.
Evolution so.
We will begin to add those competencies.
To support the sales teams, but.
As we continue to build out and become more of a digital player it's going to come down to.
Those partners and whether they're willing.
To go through the various.
Trainings and protocols that we have if they want access to the technology.
So my thought is that we'll have broad internal work it.
Organization to support them and we will move to both direct and distributors that are committed to the following the same path.
Alright, and then my second question for John.
Can you just give us an update on where you think the share count will end up for 2021 on what you think the cash burn for the year on beef.
The share count will be $110 million.
Which is kind of representative.
Of the shares we issued for the <unk> acquisition as well as.
The impact of the offering that we did.
In.
Q.
The first quarter here.
And so thats, what I would use for modeling purposes at this stage.
And then.
We anticipate EBITDA guidance.
We don't anticipate of significant investment in the working capital as we move through the year I think there is some opportunity to improve.
In certain of those categories.
Think of you just look at the EBITDA guidance of plus the direction that we gave around Capex. It should give you a sense of the cash burn for the purpose of the year.
Okay alright, thank you.
There are no further question at this time I will now turn the call back over to Terry Rich for closing remarks.
Alright, Thanks again for joining us today, everyone. We look forward to updating you on our progress on our next quarterly call.
This concludes today's conference call you may now disconnect.
Okay.
On the.
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Yes.
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