Q2 2021 Surgalign Holdings Inc Earnings Call
[music].
Greetings and welcome to the search of line Holdings, Inc. Second quarter 2021 results conference call.
At this time all participants are in a listen only mode. A question and answer session will follow the formal presentation. If you would like to ask a question. During today's event. Please press star 1 on your telephone keypad, if anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad and.
And as a reminder, this conference is being recorded.
It is now my pleasure to introduce your host Mr. John singer Chief Financial and operating officer. Thank you. Sir. Please go ahead.
Thank you operator, good morning, and thank you for joining the surge line holding Inc. Second quarter Conference call. Joining me today on the call are Terry Rich, our President and Chief Executive Officer, and Dr. Chris <unk>, Our Chief Medical 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 acts.
Results may vary from our statements concerning our expectations about future events that are made during the call. We make no guarantees as to 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 forecasts.
And strategic plans to benchmark, our performance externally against competitors and for certain compensation decisions reconciliations between U S. GAAP and non-GAAP results are presented in the tables that accompany our earnings release, which can be found in the Investor Relations section of our website.
On today's call I'll begin by providing an overview of our second quarter performance and an update on our guidance for the year.
And then turn the call over to Terry and Doctor seminar to walk through our ongoing progress with our digital strategy and the whole low platform. We will then open the line for questions.
Starting with a review of the quarter.
Global spine revenue for the quarter ended June 32021 was $24.8 million or $4.3 million or 21% increase compared to $20.5 million for the prior year period. The increase in revenue was driven by the partial return of elective procedures and certain geographic regions, partially offset by quality and <unk>.
Regulatory issues impacting product availability from our global manufacturing partners.
Domestic revenue was $20.7 million, a $3.8 million or 22% increase from the second quarter of 2020 and international revenue was $4.1 million.
$5 million or 15% increase from the prior year quarter.
Gross profit for the quarter was $17.6 million or 71% of revenue compared to $11.1 million or 54% of revenue and the second quarter of 2020.
The improvement in gross margin is due to the elimination of certain manufacturing related costs as we move from and integrated manufacturer to a fixed purchase price when we sold the OEM business.
Marketing general and administrative expenses decreased $6.6 million or 21% to $25.5 million for the 3 months ended June 30th 2021, compared to $32.1 million for the 3 months ended June 32020.
The decrease in marketing general and administrative costs was driven by the reduction in spending as a result of the simplification of the distribution and administrative infrastructure and a reduction in spending due to the sale of the OEM business.
Research and development expenses and the second quarter of 2021 were $3.2 million compared to $3.3 million for the prior year period and.
Adjusted EBITDA for the second quarter of 2021 was a loss of $8.5 million compared with a loss of 21.4 million and the prior year period, the improvement and adjusted EBITDA is primarily driven by the increase in gross profit and the reduction in operating expenses outlined above.
We ended the second quarter with approximately $69.3 million and cash and cash equivalents reflective of the net proceeds of the financing completed in June and payments for tax liabilities and finalization of the working capital dispute related to the sale of the OEM business.
In addition at the end of July we entered into a binding term sheet to fully resolve the class action Securities litigation pending against the company. The term sheet provides for a $10.5 million settlement payment that is anticipated to be fully paid by the company's directors and officers insurance providers under existing policies.
Turning to guidance.
We now expect full year revenue and the range of 95 to 100 million compared to full year revenue of 102.002 million 20, looking at our forecast for the rest of the year, we are essentially a quarter behind where we thought we'd be at the beginning of the year and at the end of the first quarter. This setback is due to the continued quality.
Issues and our global supply chain related to the separation of the business as well as the ongoing impact of Covid generally on demand and both the U S and international markets and specifically its impact and co flex procedural volumes when looking at the cadence of revenue and the back half of the year, we expect the third quarter to be sequentially down.
And from the second quarter due to typical seasonality as well as the Covid headwinds.
Starting with the first issue.
<unk> issues and our global supply chain the business separation during the height of Covid. The Covid pandemic last year has presented a number of challenges that we are continuing to work through we've had a number of issues and the supply chain as well as recalls that have delayed the launch and relaunch of a number of our product lines as we rebid.
<unk> the organization, including the addition of high quality personnel and our R&D quality and supply chain groups, we have looked more closely and our products and processes under this scrutiny. We have been smarter around how we are remediated and the quality issues. This is the right thing to do to ensure the highest quality product, but it has caused a shift and.
And the cadence of new product launches. We are confident these actions will pay dividend over the long term.
And we've seen a prolonged negative impact from Covid and our served markets earlier in the year, we believe the impact will subside and the second half of 2021 and approach and approach a more normalized level of and customer demand. However, we continue to see varying levels of shutdown across European regions.
With specific pressures and Asia, Australia, and other regions, where vaccines are lagging.
Along these lines Covid has had a continued impact on co flex domestically with reduced access to elective procedures and periodic shutdowns, we have seen a slower than expected return to pre COVID-19 volumes and addition to Covid. We have continued to experience reimbursement related headwinds, which creates and economic disadvantage for surgeons to use co.
Flex versus more complex procedural solutions.
These factors have resulted in a moderation of expectation for Covid flex for the remainder of the year.
We are and a turnaround and are confident that we have built the right team are putting the right fixes in place and will return to predictable performance and growth and the long run.
We continue to expect full year, adjusted EBITDA will be and the range of a loss of $35 million to $40 million.
I would now like to turn the call over to Terry.
Thanks, John our main focus for driving accelerated growth and the business continues to be the development of the whole low platform.
With half the year already completed I'm happy to report we've made significant progress towards all of our whole low milestones for 2021 and remain on track with the development of the system.
Starting with the regulatory update last quarter, we announced that we have filed our initial 5.10-K submission to the FDA for hollow and continue to expect clearance and the second half of 2020.1.
As a reminder, this submission is the first of many as we expand the applications into neuro orthopedics general and many other surgical specialties and applications across the continuum of care.
We took our first steps towards the development of those additional applications during the quarter, when we announced the strategic collaboration agreement with internal networks, a developer of innovative AI applications and to.
<unk> software enables autonomous neural structure segmentation and the rapid delivery of information.
The algorithms used have been developed for inter cranial applications and neurosurgery identifying tutor tumor aneurysms stroke and neurovascular structures.
The partnership allow surge line to access to <unk> unique technology, we will be assessing and suitability for inclusion to our digital surgical portfolio.
This collaboration lays the groundwork for us to expand the application beyond spine and will enable us to grow to be the powerhouse and the use of AI and machine learning to deliver better patient outcomes.
We continue to expect first cases to be performed and the fourth quarter of 2021. After FDA clearance followed by a limited market release of the system, which will include both IRB sites to support the accumulation of clinical evidence and alpha sites or early adopters that will allow us to gain insights as we continue to refine the system and understand.
And the demands of surgeons hospitals, and <unk>, we expect to have multiple sites up and running and in relatively short order following the clearance.
The market opportunity for <unk> over the long term is tremendous and it encompasses diagnostics surgical planning interoperable support and post operative solutions. We believe each installed system can initially generate anywhere from 1 to $1.5 million and revenue on an annual basis.
When looking at the initial application within lumbar spine procedures, we estimate the total addressable market to be approximately $5 billion.
And as we expand into new indications and integrate additional SaaS capabilities, we would expect the figure to expand exponentially.
To provide a more in depth look at hollow and its capabilities. We wanted to bring Dr. Chris Scherman off our Chief Medical Officer, and co founder of Hollow surgical.
Thanks, Terry as we get closer to and FDA approval and our first procedures being performed using Colo. We wanted to provide an overview of the system and its capabilities its differentiation and the market and how we envision its role and the health care ecosystem and the future.
All of the surgical platform technology that combines artificial intelligence data analytics and augmented reality with a goal of improving patient outcomes, while reducing all our time and decreasing surgical complications.
What is truly unique about our solution and there'll be taught the computer anatomy and once you teach the computer anatomy. It enables an incredible amount of possibilities.
A key feature of the platform is it autonomous segmentation.
Because the computer knows anatomy it can automatically differentiate between the different levels of the spine and other anatomical structures, such as bone nerve blood vessels and more.
The platform and then automatically segment and label the different pieces of the anatomy.
All of this information is analyzed and deliver to the surgeon in real time.
The next key feature of the platform will be our autonomous surgical planning capabilities, because the computer knows and understands the anatomy, we are able to deliver and autonomous surgical plan to the search.
And the system can suggest the sites position and trajectory of the implants, which are surging and then approval.
Currently there is not another competitive platform that provides the autonomous anatomy identification or planning feature on the market.
A third key feature of the platform is our real time 3 D guidance display that enables the execution of the surgery.
All of the functionality and information is delivered to the surgeon through the augmented reality display that is directly above the surgical field showing the surgeon a fully segmented color coded overlay as if the patient had no skin muscles are connective tissues and the way.
We believe that the really color coded image and the associated guidance and dramatically reduce and surgeons cognitive load.
So with all of that how are we different and existing technologies and methods used by spine surgeons today.
And the 2 primary technologies and leveraged by spring spine surgeons today to perform lumbar procedures, our navigation and surgical robots.
At the end of the day these are simply tools and the offer limited visualization of the anatomy.
And the lack intelligence.
And they complicate surgical workflows.
We are moving surgeons from navigation to intelligent guidance currently.
Currently and navigation requires a doctor to take the role of interpreting images presented on the screen, which are typically in 2 dimensions and not located in the surgical field and.
And make surgical decision based on his or her understanding of the patient's anatomy seen on that to the screen.
This dramatically increases the cognitive load on the surgery.
How the Doctor interprets the image impacts how they perform the surgery.
This is an outdated and antiquated way of approach a surgery, given the evolution of machine learning and artificial intelligence and <unk>.
We have a different approach, where the computer assisted doctor by autonomously identifying and segmenting the anatomy and.
Analyzing each individual anatomical component and preparing the surgical plan.
And then guiding the doctor during the procedure.
So home and not only enhances visualization and a surgeon friendly way.
But growth intelligent capabilities with the goal of improving patient outcomes.
We are often asked to compare whole low to robotics, which is a popular technology amongst surgeons because of its ability to and hence specific movements or surgical techniques during a procedure.
However, we know Rob robots to effectively be another instrument that has both dumb and blind.
Since the robots lack the ability to autonomously identify anatomical structures they cannot deliver usable insights to a surgeon and let alone plan a procedure or provide intra operative guidance.
While the initial capabilities of the whole system are and evolution and the way surgical procedures are performed.
We have a much larger vision.
Our strategic roadmap includes a variety of additional capabilities for the platform.
And the near term we are focused on.
Advanced spine planning, which offers fully automated planning for implants, such as crews and cages to improve surgical workflows, while offering optimal alignment for the patient.
Additional segmentation capabilities and other anatomical areas.
Which would expand into preop mris and ex rates.
Among others.
And smart instruments, which would integrate with the platform to deliver execution of the autonomously developed surgical plan.
In addition to these enhanced capabilities, we are working to expand the applications into neuro orthopedics and general surgery.
And many other surgical specialties.
And then to a larger portion of the care of continuum, including diagnostics and.
In summary.
Paul is a highly differentiated machine learning based technology platform that is delivering intelligent solutions to the surgeon.
Allowing them to deliver superior care to their patients.
I'd now like to hand, the call back over to Terry.
Thanks, Chris we're very excited about the future of surge line since the beginning of the year, we have invested heavily in the business and the team.
As Dr. <unk> mentioned, we are developing and incredible technology that will materially evolved the way surgery is performed by bringing intelligence and advanced visualization to the or we can help surgeons performed better surgery more quickly and ultimately deliver on the promise of better outcomes and patient satisfaction.
Surgeon feedback and demand to use the system upon clearance has been beyond our expectation and validates our belief that we have the most innovative solution to support our leadership and the future of digital surgery.
Looking ahead to the rest of 2021, we are confident in achieving our near term goals and are positioned to be the leader and digital surgery with that I'd like to open the line for questions.
Thank you the floor is now open for questions.
Star 1 on your telephone keypad at this time.
Confirmation tone will indicate your line is and the question queue. You May Press Star 2 if you would like to move your question from the queue.
Participants using speaker equipment may be necessary.
Yeah.
Right.
Once again that is star 1 to register a question at this time.
Our first question is coming from Matt Hewitt of Craig Hallum Capital Group.
Net.
Good morning, Thank you for taking our questions maybe first step if we could dig in a little bit on the quality and regulatory issues are these new issues.
Is this something that just popped up since the divestiture of the OEM or is this something maybe that was kind of percolating and it wasn't recognized until the divestiture occurred.
Well many of the products and which we're having the issues and that had been and the market.
And quite a while.
So.
They were they were stable and we really werent seen when you look at kind of the history and the quality system.
And at the level to which we've experienced.
We were we talked about the <unk> line recall.
Some of the issues related to delays and the launch of new products.
Which I think between Covid and the work being done on the separation.
Just you know caused.
Disconnect and timelines.
And then we're having issues internationally.
And with our suppliers as well, which is a combination.
Bad raw material and then just their difficulty in driving timelines with Covid. So it's really a combination of factors.
The.
The separation has been hard right like even harder than expected.
The key is.
We're transforming this organization and a really meaningful way and we are becoming the AI powerhouse.
In surgery.
And and that's the critical thing and what we need to be looking for it's what we're measuring against.
Okay, and then I guess the next step is and I think 1 of the key elements to this transformation is going to be the pull through that you expect.
With the base product portfolio.
It sounds like you're making all of these changes and enhancements to the quality and regulatory teams. So that once the platform is approved you're going to actually see that that pull through is is that the expectation.
Yes look the pull through is certainly a key component.
And we're going to monetize the system and a variety of ways.
And the.
This thing is.
Well, we're now and <unk>.
And recently saw and we're going to revolutionize surgery and.
And not just spine surgery, but.
We've got to be laser focused on giving this thing out there.
Applying it and spine and then continuing.
To diversify and.
Pre up.
During the surgery, and then post op as well.
This thing is going to make a meaningful difference and patient lives.
Okay, Great and then I guess last question from me and then I'll hop back into queue.
And you know.
Back what.
Dialogue have you had with the F D a and I'm, assuming there has been some back and forth at this point, but what dialogue. If you had that gives you the confidence that you can get this.
<unk> and launch by the end of the year. Thank you.
Yes of course.
Look I'm not going to.
Comment directly on our dialogue with the FDA and.
To suggest that.
We believe that we're on track and.
Should have clearance and for surgeries and Q4 and.
And we couldnt be.
And more excited about the opportunity in front of us.
Okay, great. Thank you.
Yeah.
Thank you. Our next question is coming from Matthew O'brien of Piper Sandler. Please go ahead.
Yeah.
Martin and thanks for taking my questions.
And a follow up a little bit on the last question.
John.
The manufacturing issues that you guys have run into.
On the implant side of things potentially bleed into anything that could impact your ability to start manufacturing hello, and getting that system and the bill.
No absolutely not I mean, how low is essentially an assembly operation and that's been handled.
And separately and distinct.
From.
The legacy implants.
And all of the disposables and related products.
And our kind of what you would call new supply chain and.
And we're comfortable that we're on track with what needs to be done in order to deliver and the timeline series outlet yes.
And now.
And I talked about transforming the organization the key to understand is.
We're a software company now alright.
It's really.
And we're.
Transforming into and.
And.
The software.
We have and whole low is different than anything that has been introduced into the surgical environment. Prior.
The first time at the computer has been taught anatomy like this is this is a major deal.
Got it okay very helpful.
And that's understandable and then certainly clear as.
As well.
Curious.
Terry when you talk about getting to a $1 million per system.
Eventually I mean is that I see.
And the 3 year kind of timeframe to get up from that level of revenue per system and then how do you frame up.
Our thoughts on how low going into 'twenty, 2 I know you want to get too much and our guidance side of things, but how big of a revenue contributor could this be both from a system and an implant perspective.
Yes so.
Yeah.
We're not there.
The $1 million per unit will occur.
Almost instantaneously as soon as we start.
Putting them out there and it'll be a combination of certainly implant pull through but.
And also whether it's.
Lease software fees.
Per case, the disposable component and so it'll be made up of.
A variety of revenue streams and.
We're certainly not.
Providing guidance for next year, but we have expressed our goal.
To.
Get 15% to 20 units up and running and relatively short order so that we can.
Continue.
And to learn and move the platform forward, so it'll be a variety of both.
And alpha sites, and even more importantly, <unk>, where we can collect clinical data, which will allow us to continue.
And to evolve the system and add.
Additional features and benefits.
Got it and just to be clear.
And is not going to cost a million bucks.
The system plus other other feature and et cetera, and be up $2 million pretty quickly.
Yes, the system should cost a heck of a lot more than a million bucks, but no what we're talking about.
As you know.
Recurring revenue.
Got it and then just the last 1 from me is you know.
And things are little bit softer here and maybe some of your peers and.
And in the near term thing and I know you guys are kind of reshaping the business how are things going from a sales force perspective.
And that group is still pretty stable and then.
And just.
No.
And they are waiting for how low.
Just talk about how that group and kind of.
Investing I guess.
The lack of a better word.
Yeah. So look I think the group is incredibly stable.
There are certainly looking forward to us delivering.
New products and Hulu is at the forefront of that but having something like whole low.
That is so incredibly differentiated.
As I believe a significant component and.
And why these folks continue to be excited about surge line and when we have.
Meetings like the spine summit last week.
People get to see it and they hear their surgeons comments right.
And again.
Well, we're announcers and we're going to rebel line revolutionize.
Surgery.
These are.
Meaningful comments made by.
<unk>.
Guys that are key influencers and spine and they not only influence their peers, but they influence the distributors and the sales force out there.
That's helpful. Thank you.
Thank you. Our next question is coming from Brooks O'neil of Lake Street Capital markets. Please go ahead.
Yes, good morning.
Was hoping Chris could talk just a little bit about how and how you anticipate the learning curve for doctors and I know, it's early but is.
This is this something that you think they can incorporate relatively quickly or is this something you think it's going to take.
A number of years to both convince doctors to try and then get them to fully incorporate into their surgical practices.
Yes Brooks.
I've got Chris talked to EBIT.
The first thing I'd like to say as you know.
Theres no user manual for your iPhone and this system is going to be.
Just as intuitive Chris please.
Alright, Thanks, Brooks and that's a great question and 1 that we get a lot.
And I think that question.
Predominantly generated based on your experience and and perhaps other people on the call is experience with systems that are currently on the market.
And the robotics, the navigation systems, they're not simple to operate.
And I can tell you with very high confidence that the learning curve here is very very flat.
To the point, where are we from numerous tests with individuals' various capabilities and.
And you were from medical students all the way through experienced physicians and they all perform.
Very well in terms of their precision and accuracy and ability to deliver the implant literally on the first try okay and just to give you a little bit of an anecdote. We frequently have non surgeons come through for the labs, such as you can imagine we have a board of directors and our board members also demo the system and for us and a record.
We do not have any spine surgeons on our board, but every 1 of the board members Thats tried to system was able to perfectly placed the implant and the right spot on essentially the first time by using the intuitive guidance of the system and the keyword here is guidance as you heard me on the on the.
The call I said that we're going away from navigation and towards guidance and the key differentiator here for our system is that we literally guide you how to do this and and intuitive way, which we feel will decrease the cognitive load on the surgeon, which will and.
Our result, and increased adoption of the system because for the simple fact, we make the surgeons job.
<unk>.
And I hope that answers your question.
Yes. It does it's great I really appreciate it and then I'll just ask 1 follow up.
And have you had any experience or kind of gotten feedback about what do you think it's going to take to get the systems in 2 hospitals and.
And surgery facilities.
Is that going to be a cumbersome process and your opinion or do you think do you think the acceptance will be.
Nick and intuitive like you you believe the doctors will.
Gravitate to this stuff. Thank you.
Yes, so brooks getting anything into a hospital is a cumbersome process. These days right and the right.
Likely rightfully so.
What I'm confident in.
Is that.
Orthopedics spine surgeons and neuro spine surgeons.
Still drive decision, making especially.
Around technologies like this that deliver better patient outcomes and so.
Based on that and the team we've assembled I have all the confidence and the world.
We will break down these barriers.
Very effectively.
Perfect. Thank you very much.
Thank you. Our next question is coming from Jim Sidoti of Sidoti <unk> Company. Please go ahead.
Hi, good morning, Thanks for taking the questions.
Can you tell us.
And what can you do now pre approval with regards to how are you able to scheduled training.
And just what.
What steps can.
And you take now.
And in anticipation and approval.
Yeah. So so.
We are not doing any formal trainings and.
Jim now there are a number of things that we're continuing to do.
4.
Our continued FDA submission so there's various testing so we're doing labs and and.
And a variety of things that require.
Surgeons and so.
Based on.
And those types of things to continue to provide information to the FDA.
We are using.
Surgeons for the testing of the system, but there is there is no training.
Going on and at this point and time and prior to clearance.
Theres not a lot we can do beyond the necessary testing.
Okay. So I'm just trying to get a sense of how quickly things can pick up once the income so it sounds like maybe it takes a couple of quarters to get to get to get the process started.
Yes.
Is that reasonable.
Yes.
And I don't think its going to take a couple of quarters.
And were outlining.
And the training now and <unk>.
And believe that.
We will be able to move forward.
Relatively quickly.
Post clearance.
Got beyond clearances, a variety of things and we need to do.
And to get systems, and disposables and all of the necessary things things on the shelf.
But.
And don't believe that training or anything else will be a barrier.
Okay and there are some things you can do now ahead of approval to get ready to.
The launch itself.
Yeah absolutely.
Absolutely.
I'm not trying to get you and trouble with the FDA and I'm just trying to understand.
Yeah.
Yes.
I appreciate it the relationship with the FDA has been a very good 1.
And we respect the process and are following and appropriately.
Okay Alright.
Alright, and then.
And the quality issues you experienced.
Do you think those were all resolved.
And that hopefully is ready to go and even though they don't really affect all over there.
Other devices.
You think youll have all of those devices available one's Hello and is approved.
Yes look we're making.
Tremendous progress with our suppliers and.
And again like John stated, we're about a quarter behind where we thought we would be as a result of these things.
But we continue to make good progress and expect to have them.
Resolved in the coming quarters.
Alright, and then last 1 from me for John.
<unk> made a tax payment in the quarter I assume that's on sale from the OEM businesses is that the.
Do you anticipate other test and.
And this year.
No no.
As we indicated in the release that's the settlement from the OEM sales you referenced Jim and we believe at this point and time.
That.
Were settled with the IRS and in fact, now that we're going through the year and returned.
We're optimistic that we're actually going and they're going to actually owes money.
Okay, Alright, and I just want to make sure I was clear on that.
Thank you. Our next question is coming from Brandon Folkes of Cantor Fitzgerald. Please go ahead.
Hi, Thanks for taking my question and maybe just a broader question and Kansas sort of the tenor out.
We're not giving guidance yet for 2022, but how do you think about the timeframe to get the business to where.
Most of the turnaround is behind you or is this maybe 2022 being sort of a normalized year 4 and things.
Sir your line can control like go onto none of us can control COVID-19.
And then either hang but.
And just any color there would be helpful. And then maybe just on the 2021guidance.
And it doesn't imply a massive pump and <unk>.
<unk> 21 is that driven more by these disruptions.
Caution around Covid and.
Thinking that maybe we won't get this bolus of patients taking advantage of deductibles at year and thank you.
Yes so.
And as we've said and again as we said and the guidance.
And we think we're about a quarter behind.
Some of the separation related activity.
So to your question, we're still going to have initiatives around the separation and stabilization and building out of the organization and 'twenty 2 but we do believe that 'twenty 2 should be more of a forward leaning year, that's the expectation.
Asian.
That point and time, if you look at the number of new team members that we've brought into the organization.
It will be they will at least have some 10 year under their belt, which will create stability.
And the organization going forward, so, yes, 'twenty 2 should be.
Less disruptive from factors that we've been dealing with.
This year.
And then from a guidance perspective, yes, there's just a fair amount of continued caution.
Around both Covid and the supply chain.
We have and expectation.
We said that we're a quarter behind but we came out of the first quarter with an expectation of what we're going to see coming out of this quarter and it hasnt come into fruition. So I think that we're just we're just being cautious at this point and time.
Given that this is such a turnaround year and just making sure that we are smart around the way, you and which we fix things and move forward. So that going back to your original portion of your question. So as we move into 'twenty.
2.
We're not dealing with these issues.
Yeah.
Okay do you have any other questions.
Okay.
Yeah.
Our next question is coming from Ryan Zimmerman of <unk>. Please go ahead.
Hey, Thanks for taking my questions and just a couple of follow ups from me a lot's been asked already but.
On Hollow Terry I know you are agnostic to kind of weather you place. It leaves. It however, it may be sold but.
How do we think about the margin expectations for the whole low system.
Regardless and in terms of high weighted.
And to make these 4 versus where you think the ultimate asps kind of shakes out at.
Yes, Ryan I think I don't think when you look at our long term margin.
Guidance of 70% to 75% I think in the short term how low will not have any impact on it from a blend perspective, I think as we evolve the system and move more towards a SaaS model.
And where were.
And we're getting per click charges on some of the.
Functionality that Chris Overviews and development.
And we will obviously be pretty significant margin because the incremental.
Cogs so to say.
And we'll be nonexistent.
But in the short term.
And really 'twenty 2 'twenty 3.
The guidance, we gave for long term margins contemplate the cost of building out the systems relative to the economics and placement.
Okay I appreciate that John and then.
And a lots been asked what these quality issues and and as it relates to guidance, but.
1 thing I was wondering if you could put a little color around our guardrails as we think about the third quarter commentary and it being down sequentially I mean.
If you have too.
Think about it from the perspective of whats driving the impact to guidance.
Is it more.
And the quality issues is it more COVID-19 caution.
And I don't know if you could frame up kind of the impact of the size of the 2 but would love some color around kind of that and that.
Interplay between those 2 components that are impacting the business. Thank you.
Yes look at the end of the day there are 3 factors as we look and between now and the end of the year that we outlined.
There's quality issues there is COVID-19 and there is the COVID-19 related impact on complex.
And overly simplified its probably a third a third a third.
When we look at.
What we've pulled back.
And that's the simple answer I mean, I can go deeper into it but that's kind of a wait and best way to think about it.
Okay and then.
The other factor to take into consideration is just.
Between Q2 and Q3, there's just naturally a reduction in procedures because of the vacations and whatnot. So Q3 is normally down anyhow and then what we are seeing with the resurgence of Covid is that there is a lot of regions and which we're seeing.
And the reduction in elective procedures and.
And and so you know what.
What a lot of our customers are doing is they're just taking longer vacations.
And the anticipated we've got a number of surgeons, where we've gotten feedback that theyre getting 1 or 2 slots are weak right now.
And so that's also impacting it.
And the cohort.
To be clear the complex dynamic as domestic and international or it's both.
It's predominantly domestic.
Yeah, Okay. Thank.
Thank you.
Thank you at this time I'd like to turn the floor back over to management for any additional or closing comments.
Yes, so thanks, everybody for joining the call again, we continue to be.
Completely bullish on the transformation that we're making and this company and our exceptionally excited to get the whole platform to market. Thanks, everybody for your time.
Ladies and gentlemen, thank you for your participation. This concludes today's event you may disconnect your lines log off the webcast at this time and have a wonderful day.
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And.
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