Q4 2021 Surgalign Holdings Inc Earnings Call

Greetings and welcome to the surge of Lion Holdings, Inc, fourth quarter and full year 'twenty 'twenty. One 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 anyone should require operator assistance during the conference. Please press star zero on your telephone keypad. Please note. This conference is being recorded.

I will now turn the conference over to your host Krista, Amanda Chief Accounting Officer, you may begin.

Thank you operator, good afternoon, and thank you for joining the surge of line holding Inc. 's fourth quarter Conference call. Joining me today on the call are carrier rich, our president and Chief Executive Officer, and David <unk>, Our Chief Financial Officer before we start let me make the following disclosure the Ernie.

<unk> and other matters, we will be discussing on this conference call well have all statements that are forward. Looking these statements are based on management's current expectations. They are subject to various risks and uncertainties associated with our line of business and with the economic environment in general our actual results may vary from our store.

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.

<unk> 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 plans to benchmark our performance externally against competitors and for certain compensation decisions rec.

Reconciliations between U S GAAP and non-GAAP results are presented in the tables accompanying our earnings release, which can be found in the investors section of our website.

On today's call I'll begin, providing an overview of our fourth quarter performance as well as our guidance for 2022.

I'll, then turn the call over to Teri to walk through our recent progress as well as our plans for the coming year.

We will then open the line for questions.

Starting with the review of the quarter Global spine revenue for the fourth quarter was $21 8 million compared to $26 2 million for the prior year period. The decrease in revenue was primarily due to a decreased demand as a result of COVID-19 related headwinds in the fourth quarter.

Domestic revenue was $18 7 million compared to $22 7 million in the prior year quarter and international revenue was $3 1 million compared to $3 5 million in the prior year quarter.

Gross profit for the quarter was $12 3 million or 56, 5% of revenue compared to $12 8 million or 48, 8% of revenue in the fourth quarter of 2020.

General and administrative expenses were $25 4 million compared to $27 3 million in the prior year quarter.

Research and development expenses were $4 9 million compared to $2 2 million in the prior year.

Adjusted EBITDA for the fourth quarter was a loss of $12 9 million compared with a loss of $7.7 million in the prior year period.

We ended the fourth quarter with $51 3 million in cash and cash equivalents.

Close to the end of the quarter, we closed an equity financing raising net proceeds of approximately $17 $8 million.

Moving forward, we will continue with our cost control efforts, while allowing for the continued strategic investments into our digital strategy.

Turning to guidance.

For the full year 2022, we expect revenue to be in the range of 83 to 87 million. We continue to experience macro headwinds in January but are encouraged by increased demand in February and early March.

As a result, we would expect the first quarter to be down sequentially compared to the fourth quarter of 2021, but we would expect sequential growth in each of the remaining quarters of 2022. We are looking forward to a return to a more normal operating environment and the remainder of the year as well as the positive incremental.

<unk> revenue contribution late in 2022 from units placed into the field during the second and third quarters.

With that I would like to turn the call over to Terry.

Thanks, Chris before reviewing our 2021 accomplishments and providing our outlook for 2022 I'd like to welcome our recently appointed CFO David Lyle.

Joined us in early March David has over two decades of financial leadership experience with high growth technology companies. He has a proven track record of success in helping public company turnarounds and launching novel technologies and his expertise will be immediately impactful as we made continued progress in our turnaround and move into a new.

Phase of our commercial efforts will follow David.

Thank you for the warm welcome Terry.

I wanted to express how excited I am to have joined surge ally as the health care space has rapidly advanced in recent years the lines between medical devices digital health and technology companies have been blurred.

While the level of technological sophistication across health care has increased exponentially patient outcomes have not improved with the same velocity.

Having spent most of my career involved with cutting edge technology, I've seen what AI and machine learning can offer and I am a firm believer that in intelligence driven revolution is the future of health care.

I'm very excited about what search online is building with its whole low platform and its potential to change the way health care is provided.

I very much look forward to working with this world class organization to deliver to shareholders. The tremendous value of the technology that I believe already exists here at searchlight.

With that I'd like to turn the call back over to Terry.

Thanks, David.

Despite the headwinds our team faced during 2021, we made solid progress throughout the year to put ourselves in the best position to be successful over the longer term.

We made several important updates to our hardware portfolio, we relaunched our cervical plate called servo line and navigated our way through a number of supply chain issues that impacted several of our biomaterial products, resulting in the launch of next generation products, including <unk> <unk> multiple and biomass.

We also took steps to broaden the portfolio by launching a new line of titanium inner bodies in both the U S and international markets.

In addition, we continued to strengthen and optimize our organization in support of our ongoing evolution towards becoming a digital health company.

We made key hires throughout the business to bolster our digital health experience and capabilities to help drive the development of the whole platform.

We also realigned our commercial organization to allow them to better serve customers in their respective markets across the globe.

As part of our efforts to build a world class organization. Following our separation from RTI in 2020, we significantly improved our foundational operations during this year, including the successful implementation of a new ERP system and the consolidation of warehousing operations.

Most importantly, we remediated all of our material weaknesses.

I want to thank our team members for all of their continued hard work 20.

2021 was a difficult year for obvious reasons, but I am proud of what we were able to accomplish as we work to build a solid foundation for growth while at the same time delivering for our customers all while developing what we believe is the most innovative technology within the health care industry.

Before turning to our thoughts on 2022 I wanted to provide more context around our recent equity financing.

Based on the significant volatility that has existed in the capital markets the trajectory of equity valuations for small cap healthcare companies as well as the ongoing uncertainty associated with macro events across the globe, we call it prudent to bolster our balance sheet.

We believe it was critical to secure capital to allow ourselves to invest to support our initial commercial launch of a whole platform and the continued development of its functionality.

Turning to our key areas of focus for 2022.

We continue to be squarely focused on the ongoing development of a whole a platform and the early commercial success the polo portal, while launching new products to support the growth of our hardware business.

In January 2022.

The first steps towards the continued progress of the platform outside of the spine surgery arena with our equity investment in internal networks or I am at.

<unk> has developed a proprietary AI technology to autonomous lease segment, and identify neuro structures and medical images and help identify possible pathological states.

We decided to invest in the technology worked through a strategic collaboration partnership with I M M.

During which time, we fully evaluated their technology and our ability to leverage it within hollow.

Our work with the team and I and that has allowed us to fully appreciate the power of their AI technology.

We believe this transit transaction will accelerate our ability to apply AI and machine learning to help there.

Importantly, this combination brings another foundational piece toward development efforts by introducing intracranial functionality to the hollow technology platform facilitating a move into neurosurgery.

We plan to leverage this technology in future applications to address a wide variety of potential disorders, including dementia autism tumors aneurysm stroke and neuro vascular structures.

As announced in January we received FDA five 10-K clearance for the whole portal system for use within the lumbar spine procedures.

Receiving the initial clearance for the whole of portal system.

A significant milestone and represents a critical step towards building the foundation of digital surgery.

Future.

And culmination of over six years of development led by pioneers in the augmented reality.

And predictive analytics and surgical fields.

The result is a platform that has the potential to offer a quantum leap in the way surgical procedures are performed.

With the clearance in hand, we have now moved into the early stages of our initial commercial launch.

We will focus our efforts of the commercial organization to drive demand and leverage key elements and conferences throughout the year to exhibit the platform's capabilities.

Early demand for the system has been extremely encouraging and we are currently in discussions with a number of hospitals as they work to negotiate the various approvals required before implementing our new technology.

We expect first cases in the U S to be completed during the second quarter and expect to have 10 to 15 sites up and running this year.

These early adopters will be critical as we look to generate real world data on the utilization and benefits of the platform that we can leverage the support broader adoption.

Using learnings from these sites, we expect to shift into a full commercial launch early in 2023.

We are incredibly excited about the future of surgical we have navigated through significant evolution in who we are as an organization since I joined approximately 18 months ago.

With our initial hollow regulatory approval in hand, we haven't officially transitioned to a digital health company focused on improving patient outcomes I'm amazed by the power of polo, and iron and technologies and the ways. It can revolutionize the help revolutionize the health care industry.

The first application of our digital health offerings inside the operating room with spine surgery.

However, the time a patient spends in the or is just one component of their journey.

There are a variety of other steps involved with each patient's care continuum that individually contribute to the poor outcomes, we see today.

Each and every one of those steps can benefit from advanced intelligent capabilities and collectively represent a massive opportunity for our technologies.

With that I'd like to turn to Q&A.

At this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.

You May press star two if you'd like to remove your question from the queue.

For participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys.

One moment, please while we poll for questions.

Our first question is from Brooks O'neil with Lake Street Capital markets. Please proceed with your question.

Good afternoon, Terry and welcome David I have a couple of questions.

I guess I'd like to start off Terry with just you know as you are.

Are out in the marketplace talking with doctors and hospitals.

Can you tell us a little bit about what you're finding as it relates to.

Sort of the <unk>.

Omics of bringing.

Paulo into a commercial environment sort of what.

What what will the product you know what kind of revenue will the product generated how will generate revenue for us.

Kinds of things can you give us a little color on that.

Yeah, absolutely Brooks.

So I guess first of all.

As we contemplate the conversations.

We're having I think everybody is very excited about the technology.

You know there's been numerous articles and and you know things put out on the internet that suggest how much surgeons.

We're looking forward to these disruptive technologies that can help them deliver patient care outcomes. So everyone's.

Excited about it.

And I believe that our system has.

Some significant advantages to offer you know as we've suggested you know prior we plan to generate between one and one and a half million dollars per unit per year, and that's a combination of things.

The models you know are really already established in the market Brooks, whether it's you know other guidance systems or robots or the variety of things out there and it really just depends on the hospital. So you know we're leading with a.

A fee per use where rental but there's lease options there's capital sale agreements.

Agreements.

We're going to aim to have the flexibility.

Our customers are in need and helping to secure these types of technologies.

Okay.

That's great and would you say based on what you're seeing so far you have.

Enough.

This suggests that the product is your.

Working through it in the marketplace has the potential to be a significant commercial success in a classic sort of our revenue and earnings kind of.

Wei.

Yeah, absolutely Brooks, we're very excited and encouraged by the level of interest we have.

And the conversations that we're currently having and as we continue.

Since clearance to expand the universe of surgeons that we're showing the product too.

The excitement continues to be very high so we're very much.

Looking forward to begin commercializing the product here in short order.

Great. Let me just ask one more I think I heard you say you are continuing to invest in new products and what I think of as sort of the traditional.

Spine device portion of the business can you just talk about how you are thinking about that now for 'twenty to 'twenty two and beyond.

Yeah, absolutely so.

What we do.

Look over as we came out of RTI.

Was a traditional hardware business that had very broad application. It can handle more most procedures, but you know.

As you know in orthopedics and spine.

You have to continually be updating and innovate.

And so you know it's taken us some time to get here as we came out of RTI, We had zero engineers in July of 2020.

You know today.

We've got quite a number of them are fully staffed.

We're in process of releasing our titanium inner bodies currently we're in launch there.

And later this year, we'll be introducing.

Two new pedicle screw system is an open and mis system that we believe will compete exceptionally well with the top systems in the market.

Of course, we will look to have whole a compatibility.

Great. Thank you very much and.

I'm excited to see how 'twenty to 'twenty two unfolds.

Me too Brooks I appreciate it.

Yep.

Our next question is from Matt Hewitt with Craig Hallum. Please proceed with your question.

Hi, guys. Thanks for taking my questions just Lucas on for Matt Hewitt, I guess first off it sounds like you're still on track for the first procedures to be performed with Colo in Q2 do you expect those initial procedures to benefit gross margin.

How should we be thinking about that as this initial launch progresses.

Yeah absolutely.

Have an impact but again.

Looking to get 10 to 15 units up by the end of the year. So I would suggest that the units we place in Q2 and Q3 will have their greatest contributions in Q4.

Okay Fair enough and then I guess with the omicron variant starting to fade or your sales reps finding that it's easier to get in front of surgeons now.

Yeah. So you know look I think like most companies.

We felt the impacts you know coming out of fourth quarter ended January but see things freeing up nicely and are very optimistic.

A mistake there will be returning.

Two.

Normality, if you will over the next couple of quarters and Yep, our reps are having access in and.

Enjoying the opportunity to get back out with their customers.

Okay. Thank you very much that's all I had.

Thanks Lucas.

We have reached the end of the question and answer session and I will now turn the call over to management for closing remarks.

Yes.

Great. Thanks, operator, and thank you all for joining US today, we're incredibly excited about the future of surge line as we continue to innovate with our digital health solutions and look forward to updating you on our next quarterly call.

This concludes today's conference and you may disconnect. Your lines at this time. Thank you for your participation.

Okay.

Yeah.

[music].