Q1 2021 Surgalign Holdings Inc Earnings Call
Okay.
Good afternoon, ladies and gentlemen, and welcome to day sugar.
Your line Holdings first quarter 2021 results conference call.
At this time all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time.
As a reminder, this conference call is being recorded.
I would now like to turn the conference over to your host John singer. Please go ahead.
Thank you operator, good afternoon, and thank you for joining the <unk> Holdings, Inc. First quarter 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 statements that are forward. Looking these statements are based on our management's current expectations. They are subject to 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 this call. We make no guarantee 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 that 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 results.
Management uses non-GAAP measures to compare our performance relative to forecast and strategic plan to benchmark our performance externally against competitors and for certain compensation decisions reconciliations between U S. GAAP and non-GAAP results are presented and the tables accompanying our earnings release, which can be found in the <unk>.
Better relations section of our website now I will turn the call over to Terry.
On today's call I'll begin by providing an overview of our first quarter performance, then turn the call over to John to provide a financial overview after which I'll provide an update on the progress we have made thus far in 2020 one before opening the line for questions.
Total revenue for the first quarter was $23 $3 million down from $27 $1 million. During the first quarter of 2020, primarily driven by the negative impact of COVID-19 on elective procedures, both from the U S and internationally.
While our primary focus is the development of hollow and achieving key milestones. During 2021, we continue to successfully deliver innovation within our product portfolio. During the first quarter, we launched a number of new products, including board of Lincoln and Europe, and then and expansion of co fixed and the United States and.
And we recently acquired the assets of a fully capable medical device machine shop, and San Diego, which will enable us to support the acceleration of our innovation agenda by providing our research and development team with state of the art prototyping and manufacturing capabilities.
The benefit of this investment was on display last week as we hosted the search and design meeting and turned out prototype implants for Cadbury testing and record time.
This allowed us to quickly integrate that feedback into our next version of the design. This capability allows us to decrease the time to market and also allows for custom instruments to meet individuals' surgeon needs.
Turning to hollow, we remain on track with the ongoing development and the platform and are very excited and announce that we have filed our initial five 10-K submission to the FDA for the whole of surgical intelligent guidance system.
With a clearance expected and the second half of 'twenty 'twenty. One we remain focused on incremental milestones leading up to the first U S cases being performed with the platform by the end of the year with that now I'll turn the call over to Jon for a financial review.
Thanks, Terry local spine revenue for the quarter ended March 31, 2021 was $23 3 million compared to $27 1 million for the prior year period. The declining revenue was primarily due to the impact of the COVID-19 pandemic on global elective procedure volumes domestic revenue was $19 eight.
A $2 $4 million decline from the first quarter of 2020, and international revenue was $3 5 million or $1 $3 million decline for the first quarter of 2020.
Gross profit for the quarter was $17 1 million or <unk>, 73% of revenue compared to $17 9 million or 66% of revenue and in the prior year first quarter. The improvement in gross margin rate is due to the elimination of certain manufacturing related costs as we move from and integrated manufacturer.
On a fixed price purchase when we sold the OEM business.
Marketing general and administrative expenses increased decreased I'm, sorry, $11 4 million or 31% to $25 9 million for the three months ended March 31, 2021, compared to $37 2 million for the three months ended March 31 2020 did.
The decrease and marketing general and administrative costs was driven by a reduction in spending as a result of the decline in revenue and the simplification of the distribution and marketing and infrastructure and a reduction in spending due to the sale of the OEM business.
Research and development expenses decreased one 4 million or <unk>, 32, or 33% to $2 9 million from $4 3 million for the three months ended March 31, 2021, the decline in research and development expense as a result of a reduction in spending as the company has begun to build out.
Its internal R&D organization after the sale of the OEM business.
Adjusted EBITDA for the first quarter of 2021 was a loss of $9 8 million compared with a loss of $20 2 million and the prior year period, the improvement and adjusted EBITDA is predominantly driven by the reduction in operating expenses as outlined.
Okay.
Ladies and gentlemen, please be patient we are experiencing technical difficulties at this time and your conference will.
Resume shortly thank you.
Thank you.
It would start.
Turning to guidance and.
On your backend Sir.
Sorry about that I believe were back.
We were at guidance.
The COVID-19 global pandemic continue to impact demand for our projects during the beginning of 2021.
And with a particularly strong impact on our international markets. We are beginning to see a slow recovery and our domestic markets and as a result, we expect total revenue for the second quarter of 2021 to grow by 5% to 7% sequentially over the first quarter of 2021, we continue to anticipate full year revenue grow.
<unk> and the range of 5% to 10% compared to full year revenue of $102 million and 2020, our guidance assumes the global procedure volume continues to progress and begin normalizing towards the end of this quarter with a slow return to historical levels for co flex and limited contribution from <unk> ACP, which.
Which was withdrawn from the market due to our recall by our manufacturing partner in January and addition, we assume certain biologic products will be impacted by a delay and five 10-K clearance of the products as the FDA has other classified the regulatory requirements.
Based upon this revenue we continue to anticipate full year, adjusted EBITDA will be and the range of a loss of $35 million to $40 million.
I would like to now turn the call back to Terry.
Thanks, John and our primary focus this year is on the ongoing progression of our digital strategy, which includes the build out of the organization and the continued development of the whole surgical platform and to re imagine our product portfolio to accelerate the pace of new product introductions that will integrate seamlessly with the whole.
Digital platform to deliver better patient outcomes.
Starting with some of the recent developments with our product portfolio. We continue to work to align our long term product development roadmap to support hollow surgical and the promise of digital surgery, and addition to focusing on identifying new development initiatives. We are undergoing a critical assessment of our existing portfolio to identify.
Any individual products or product segments that we don't believe will be supportive of our digital strategy going forward.
And the near term, we've accelerated our innovation agenda and are building out our portfolio of products that can be integrated into the whole of surgical platform.
Turning to developments related to our digital surgery platform. We came into 2021 with a tremendous senior leadership group, which included the fully integrated team from hollow.
Shortly after the end of the first quarter, we added to the talent within the leadership team focused on our digital strategy with the addition of Mark Mackie, Our recently appointed executive Vice President of digital surgery.
And this position Mark will head up our digital surgery team, which is tasked with leading our efforts to redefine and lead our digital surgery efforts.
This team includes clinicians engineers technologists medical device veterans working together to Reimagine, what is possible with digital surgery.
Mark brings tremendous digital surgery, and robotics experience, having spent more than 20 years of brain lab prior to its acquisition by Smith <unk> nephew.
We are excited to have someone of Mark's caliber join the team and look forward to his contributions at this critical point and our development of our revolutionary digital platform.
There are a number of key milestones that we expect to achieve and 2021. The first of which is the FDA 510 clearance of the platform.
We are very happy to announce that we have made our initial submission to the FDA. The hollow surgical intelligent guidance system combines augmented reality and artificial intelligence to automatically segment, the spine and defined implant trajectories for surgical planning combined with real time inter operative three D surgical guidance.
The system allows the surgeon to see that targeted the surgery, which and the initial stages will be the patient spine with all the relevant anatomical details as if the patient had no skin muscles or connective tissue and the way.
And the system also provides intelligent AI based validation and guidance for the surgeon rigs.
And regarding regarding such aspects of the procedure is location size angle trajectory of the implant all of the systems functionality is available via the augmented reality display above the surgical field. So the surgeon does not have to look away from the patient for guidance as they are required to do with traditional and navigation.
<unk> that only provide <unk> images and does require the surgeon to look away from the surgical field.
Although surgical represents a one of our current combination of technologies as confirmed by the quote and our press release. This morning from Dr. Greg Anderson.
Having utilize digital technology and my practice for more than two decades. The surge line system is the first transformational innovation I've seen and the digital realm. Its unique combination of augmented reality and artificial intelligence will not only allow me to make better decisions for my patients, but will allow me to deliver more accurate and efficient.
Care and the surgical environment, it's truly a game changer.
Dr Anderson as professor and the department of orthopedic and neurological surgery at the Thomas Jefferson University, and clinical director of the spine section of the Orthopedic Research laboratory at the Roslin Institute.
We look forward to working collaboratively collaboratively with the agency and continue to expect to receive clearance during the second half of 2021.
This is the first of many whole of surgical related FDA submissions, we will file as we continue to work to bring incremental capabilities to the platform and expand its applications beyond spine and orthopedics neuro and general and many other surgical specialties and applications across the continuum of care.
We recently hosted on our lab with search and thought leaders and which we gain their input on certain of our new product development initiatives and introduce them to the whole surgical technology the.
And the surgeons were incredibly enthusiastic regarding the whole of surgical technology and shared our belief that it will help elevate the standard of care through the evolution of digital surgery. The quotes from Doctor Anderson and Dr. <unk> Sethi and our press release represent just two of the many accolades the group had to offer regarding this revolutionary.
<unk>.
Hello Serge.
Hello, surgical does not only provide best in class surgical navigation, but something that is still unique intelligent guidance.
Our intelligent guidance as a significant leap forward from true traditional navigation and robotics that required direction from the surgeon to understand anatomy and trajectories.
We need to remember that current robots the state despite the significant progress and production have not made progress on the two most fundamental aspects visualization and intelligence. The current robots are still blind and dumb as they do not know anatomy or difference and tissue therefore require a huge.
And to direct them and real time.
The whole of surgical technology with its comprehensive visualization and intelligent guidance is designed to do the opposite provides the surgeon with information to deliver improved patient outcomes.
Following FDA clearance and the second milestone for 2021 is the launch of the initial RB IRB studies.
In conjunction with the launch of IRB sites. We will also work to launch alpha sites or early adopters not involved and generating clinical data as part of the studies. We expect to have approximately 20 sites a combination of IRB and alpha Alpha sites up and running and relatively short order following the <unk>.
Clearance.
This year's final whole surgical milestone will be first cases performed and the United States and we currently expect.
Expect that to occur and the fourth quarter of 2021.
I am very excited about what we've accomplished during the quarter, while continuing to build the momentum we generated in 2020 as we drive towards our mission of becoming a digital surgery company since the launch of surge line and acquisition of Hollow surgical we have made substantial strides towards both our build and innovate pillars.
In addition to completing the Buildout of our leadership team, we have added top spy and experienced talent and literally every department of the company and tripled the size of what I believe is the most talented R&D team and spine and added to our unmatched digital team and Poland and the U S. We are moving from being a provider of <unk>.
<unk> surgeons use to being a technology company, we are highly focused on executing against our strategy. During the balance of 2021 as many of the critical components that will enable long term success of our digital platform will be put into place and the coming quarters.
With that I'd now like to open the line for questions.
At this time.
If you would like to ask a question.
Followed by the number one on your telephone keypad.
To withdraw your question press the pound key.
Keith.
Please standby, while we compile the Q&A roster.
Your first question comes from the line of Matthew O'brien with Piper Sandler.
Afternoon, and thanks for taking my question I guess, John just real quick.
I don't want to overstate this too much but the reiteration of guidance of five to 10 and your press release from mid March with seven to 10. So are you really kind of Sterne Agee.
<unk> towards more of that 5% kind of range for the full year.
Well I think the press release, our commentary and the quarter was last quarter was five to 10, so it's consistent with what we had and the script.
Yes, I would say based upon the first quarter and what we're guiding and the second quarter.
And we're trending towards the lower end of that guidance.
Okay makes total sense and then just a couple more for me.
And I think carrier kind of get into it but there's 20 IRB.
Slash.
Clinical site.
Group that youre going to be targeting right away.
What should we expect and turns out just kind of them getting the system paying for our system volume commitments and then do you need to get and really kind of compile a lot of usage data before you roll it out and more broadly to clinicians and centers and 22 or is it the expectation that youre going to still.
Youre going to be pushing to sell systems fairly quickly and the first first half from next year.
Yes.
The goal is to get these systems out here gain experience and publish on them and show what we believe to be true.
Which is that we have a highly differentiated and in fact revolutionary system that can help differentiate on patient outcomes, but to do that we need data and we need.
Variance with it.
And surgeon's hands and the other component of that is as I mentioned. This is the first submission and we will focus on the lumbar spine and we will continue to expand the application of the systems over time still.
We still expect to have.
Full release of the system next year and again, we will continue to use the models.
And that exist out there today.
Until we have fully demonstrated that we drive a difference and.
Patient reported outcomes.
Got it so Terry we should be expecting.
Pretty measured rollout of the system late this year and the next year that's fair.
That's fair Okay.
Okay, and then last one for me is interesting to hear you guys are you acquire that new machining company.
Out West and you've got this massive R&D group as well now.
So I would say Hello is important but you're also going to try to augment that with new products can you talk about what we should anticipate in terms of new product flow over the next couple of years and then I guess more importantly on top of that are you going to have the capacity to support that for your product flow.
Yes.
And look met the key as we stated.
Everything we're doing is going to be compatible with hollow.
And so we need to have.
Best in class hardware and differentiated hardware and will look to use hollow to help us differentiate as we continue to move the the platform forward.
And currently.
Having those machine.
Machine shop capabilities.
Our development process can get dragged out for forever waiting to get prototypes in running testing on them, making changes more prototypes.
This substantially increases our speed to market. So currently again, we're focused on some of the key areas that we'll be able to support.
And our hollow next year.
But.
It should not be an issue for us.
Got it thank you.
Thanks, Matt.
Your next question comes from the line of Ryan from Yes.
Yes.
With BT and EE.
Hey, Thanks for taking the question. So just Terry you mentioned.
A dynamic and I think youre looking at some of your hardware some of your product.
In terms on what you mean.
May or may not keep can you just maybe put a little finer point on that kind of maybe size that up.
Help us understand kind of volume.
May not be continuing on.
One point and time.
And sorry, you were cutting out a little bit there, but I think I got the gist of it.
We've got.
Almost 90 brands over I forget how many countries and.
And that is a lot.
To maintain and so we need to be smarter about the products that we're going to continue to invest in and so we're looking to do is to.
Effectively rationalize the portfolio.
And smart ways, because the products that we want to continue to come out with.
We're going to be the products that support.
And the hollow platform.
And help us to drive outcomes. So.
And not going to get into specifics on 80, some brands here today, but.
That's the gist.
Okay, and then just Directionally, maybe for John as a follow up to that will this have a dilutive accretive impact on margins I would assume it'll it'll help boost margins but.
And maybe you could just provide your thoughts on it John.
Look I think we've given guidance that we're targeting 70%, 75% margins and this this rationalization of products is contemplated in that guidance. So I don't see it as something thats different than what we had guided at this point and tie and as Terry indicated we're going to we're going on.
And intelligently might migrate out of these products.
In a way that will hopefully be transparent.
As we bring on as we consolidate brands and bring on new product families.
And we'll be able to transition surgeons and a way that doesn't create significant change from an operational perspective.
Okay. Thank you for taking the questions.
Your next question comes from the line of.
And <unk> with Craig Hallum.
Good afternoon, just a couple of questions I guess following up on the on the gross margins, they're obviously, another nice little uptick.
And Q1 here.
Should we anticipate that continuing to trend higher over the course of the year as procedure volumes pick up or.
Are there other factors at play that it is going to bounce around a little bit.
No we don't get because we are buying our products and that Theres no.
Manufacturing leverage so the margin should the margins should be and the ranges and which you've seen it is predominantly a function of mix at this point and time than.
And then anything else.
Okay Fair enough and then during your prepared remarks, you commented on.
Some potential.
Delays with some new product launches.
The other classing on certain biologics will that only impact existing.
Our products and the pipeline or will it have an impact on some of the existing products and how should we be thinking about that.
Yes. They are in particular Theres, a DBM our legacy DBM that we're getting from.
Florida that yes they.
And they went through.
The process they got pushed back from the FDA.
So it's specific to an existing product.
Debt.
We are potentially going to have GAAP and sales, we've identified and alternative and we're working.
With a part on new partner and order to fill that gap, but I think during the quarter. We took this quarter in particular, we could have a temporary disruption.
Okay.
They give and impact is that a couple percent headwind or.
Any way to help us with <unk>.
Sizing that up.
Yes.
It is contemplated in that.
The guidance I gave you on the projection for the quarter. So it's already embedded in the numbers.
Okay fair enough.
Alright that helps thank you very much.
Your next question comes from the line of Brooks O'neil with Lake Street capital.
Good afternoon, guys I cut out a little bit during the call. So if I ask something debt.
I already talked about I apologize I'm curious if you would be willing to talk a little bit about how quickly you anticipate.
Being able to integrate and align the whole low capabilities with your existing product line, Italy the debt.
As you anticipate the product line being configured going forward.
Yes, Thanks, Brooks I think we cut out for a while during the call as well but.
Hi.
So day, one we will.
Immediately upon clearance in fact, the submission is for clients with our existing systems.
So.
Day one.
Great Fantastic.
Question.
Obviously, you've made tremendous progress realigning the organization and whatnot.
Do you feel like you're at a pretty good spot with regard to your organization today and B can you speak and kind of the cultural integration and how that's all going across what is it.
Essentially today and global organization.
Yeah, absolutely and so Brooks as I've mentioned in the past and.
And the organization is the thing I'm proud of stuff Alright, we are very clearly a rebuild and.
And the talent that we're bringing into this organization and.
And is literally on <unk>.
<unk>.
And again and every department highlighting our most recent executive hire Mark Mackie, but literally true every level of the organization.
And.
Everybody here.
Understands what we have to do and.
And there is for alignment and I would suggest that.
And the culture continues to grow.
And get better literally every week I couldnt be more excited about what we're building.
That's fantastic.
And one more.
We're pretty excited about the opportunity internationally obviously.
COVID-19 has been and then those internationally and I'm just curious if you can.
Give us a sense for what youre seeing outside the United States.
B, what the regulatory pathway looks like for Hull and maybe when you think you might be and a place to start doing surgeries with doctors.
Outside the United States as well, thanks, a lot and congratulations on all you've accomplished.
Yes, Thanks, a lot Brooks and yes.
What we've and.
Encountered is that things have been very difficult and the international markets and we had a call this morning, where they talked about.
Our sales meeting and Germany. They were trying to have live but because of the lockdown had to move it back to virtual.
Number of surgeries have been canceled and.
And difficult times and and.
And a number of the countries over there and and so we're thankful that.
Our team is in good health and great spirits and look forward.
Things hopefully continuing to open up as they get the vaccines out as it relates to our strategy for hollow.
We're still working through what our regulatory strategy is going to be to get hollow cleared and the international markets.
As you May know.
The change from Mbd to MBR.
Has some.
Significantly more.
And our clinical components of it and so we're in process of.
Understanding that pathway now.
Perfect. Thanks, and thanks, a lot for all the color.
Thanks Brooks.
As a reminder to ask a question press star one on your telephone.
Your next question comes from the line of Jim Sidoti with.
Sidoti.
Hi, good afternoon.
Two quick ones for me.
It sounds like most doctors and their most surgeons are used to using the <unk> system.
How long do you think it will take for them to make the transition from <unk> to <unk>, how many cases or how many.
Just in general how long will it take for them to adapt this newer technology.
Yes, Hey, Jim and thanks, a lot.
It'll happen and Theyre training right, we're going to be.
Required.
Trained before they use the system and then it'll happen there.
It is literally going to be something that is far more familiar to them than what they've used before as well as.
A feature set that make surgery easier that they've never had before either again we had.
Design meeting and on a number of our other products a bunch of surgeons.
And here in town and we showed it to them and I could not have been.
And more excited about the accolades for system received we had surgeons requesting units.
Right right there.
Understanding they have to wait for clearance obviously, but.
Wanting to be part of the alphas and Irb's.
Okay and.
Second one for me its John I don't know, if you said this or not but.
After the <unk>.
And the first quarter, what should we be using for diluted share count going forward.
Yes. So we've got just right around 110 to 111 million shares outstanding right now Jim. So that's probably when you look at the weighted average for the year, that's probably directional.
Okay. Thank you.
You have no further questions at this time and now I will turn the call back over to Mr. Terry Rich for any closing remarks.
Yes.
Excellent. Thanks, everybody again for joining us here today look forward to updating you on our progress.
And next quarter as we couldnt be more excited about what we're building here at search on.
Thanks.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation and you may now disconnect.
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Operator.
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