Q1 2022 Surgalign Holdings Inc Earnings Call

Greetings and welcome to the surge of Lion Holdings incorporated first quarter 2022 results conference call.

At this time all participants are in a listen only mode a.

A brief question and answer session will follow the formal presentation.

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As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host.

David Lau Chief Financial Officer. Thank you, Sir you may begin.

Good afternoon, and thank you for joining us today I'll start with our customary safe Harbor statement and turn the call over to our CEO Terry Rich I'll, then cover our financial results capital allocation plans and some key initiatives underway before we open up the call for questions, Our Chief Accounting Officer, Chris.

Ananda will be here as well to answer your questions.

Like to remind everyone that on today's call and webcast management will be making forward looking statements about future events, Sir your line's business strategy and future financial and operating performance.

Actual results could differ materially from those stated or implied by these forward looking statements due to the risks and uncertainties associated with the company's business. These forward looking statements.

Qualified by the cautionary statements contained in today's earnings release, and <unk> SEC filings.

This conference call contains time sensitive information that is accurate only as of the date of this live broadcast may.

May 10 2022.

Sir your line undertakes no obligation to revise or update any forward looking statements to reflect events or circumstances. After the date of this conference call. In addition, this conference call May include discussion of non-GAAP financial measures. Please see today's earnings release for further details, including a reconciliation of the GAAP to.

<unk> non-GAAP results.

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

Thanks, Dave and good afternoon, it's been a little less than two months since we reported our fourth quarter and 2021 annual results and discussed our most recent milestones our equity investment in internal networks, which was late Q4 event and FDA five 10-K clearance.

For our whole portal surgical guidance system, which occurred in the first quarter.

We've made significant progress since and the momentum is building.

In the first quarter, we delivered revenue of $20 6 million, which came in ahead of our expectations.

When the year began COVID-19 related issues, we are still impacting elective procedures and as a result January started off slow.

However, as the environment improved we saw an increase in surgical volumes and a stronger revenue.

While hospitals still face some staffing issues I'm pleased to report the market conditions have continued to improve and we expect to see topline improvements throughout the year.

This is a key takeaway and one of the factors leading to our increased revenue guidance.

Today, I'll provide more color around the market opportunity related to our whole surgical acquisition and internal networks investment.

What we envisioned what we've accomplished in our strategy to bring these revolutionary technologies to the health care market.

This should provide you with more insight into our commercialization plans and the resources needed to drive adoption and why we pursued the equity raise at the time we did.

Most of my comments will focus on the market opportunity ahead of us and our strategy to unlock shareholder value.

I firmly believe <unk> line will be a substantially different company beginning in earnest in 2023, and then to 2024 and beyond.

We have opportunities to grow product revenue as we continue to innovate.

Spanned our portfolio and leverage distribution as well as capture market share.

While we anticipate growth in the spine device market, especially if market continues conditions continue to improve the greatest opportunity for value creation is through the whole AI platform and the complementary technology and to neural networks brings to the table.

Artificial intelligence or AI is already well recognized and expect it to revolutionize the medical field in so many ways our host portal surgical guidance system is the first system cleared for surgery, combining AI and AR.

And the AI in this application provides automatic segmentation of the anatomy and suggests a surgical plan to the user that is specific to each patient.

We intend to build upon these AI applications to deliver greater clinical value to surgeons facilitate cost savings to hospitals and improve outcomes for patients.

Vision for our Hollow AI platform, which is currently under development is much more grant as it can expand our footprint outside of the operating room.

When our whole AI platform is integrated into a hospital environment and leveraged by health care providers I believe we can become the first company in the world to deliver predictive outcomes related to the spine.

We are bullish that surgeons institutions, payors and patients will be drawn to this digital health care solution.

We have numerous AI algorithms, which can be applied beyond spinal anatomy and to other various medical disciplines to drive improvements more broadly in healthcare thus.

Thus improving patient lives through insights from data.

Sticks, preop surgery and post up.

This was the premise for our vision and the driving force behind our transactions.

But we also knew and still believe that the applications within AI are limitless.

We know the spine market. It is our core foundation and we believe we have a strong product portfolio distribution and medical network. Thus, it's logical that our initial focus with AI relates to spine care.

We're going to start providing the tools to help surgeons perform better spine surgery in the or but our broader vision is to improve patient outcomes by touching every part of the continuum of care not just surgical procedures and not just related to the spine.

So first our journey begins with the hollow portal surgical guidance system, which is used intra operatively to guide surgeons through spinal procedures, leveraging AI and AR technologies the.

The augmented reality improved visualization and reduces the surge events cognitive load in the operating room.

It's the AI platform, however that differentiates us from our competitors.

Our AI automatically segments of spinal anatomy and suggests a surgical plan with the surgeon can follow or adjust and helps improve user confidence efficiencies and outcomes in the operating room.

Second we plan to apply.

Hi technology outside of the operating room to perform autonomous analysis of both diagnostic imaging and post op results.

Here data is collected and applied to better understand the patient's condition severity of disease, Comorbidities and other relevant data to support the surgeon and medical team and developing the treatment algorithm.

Currently with Mris, CP scans X rays et cetera set of human eyes looks at a shade of gray on an image it makes decisions on where to measure.

They cannot analyze every single pixel like a computer Ken.

Our algorithms are designed to differentiate bone soft tissue vascular and nervous structures from one another in these common forms of medical imaging down to the pixel level.

After our software identifies the anatomical structure, we can take very specific volumetric measurements and quantify values that are clinically relevant and developing the treatment algorithm.

Our first clinical applications for the whole AI platform in spine will be stenosis and this to generation.

As an example in the evaluation of a patient presenting potential spinal pathologies, the algorithms or a ton mostly provide precise quantifiable volumetric analysis of the severity of the spinal stenosis, eliminating potential for human error and with greater efficiency.

We also believe this can make payor prior authorization and workflows more efficient and provide physicians with more data to drive better clinical decision, making that will improve patient outcomes.

We will build on those capabilities to address a variety of other pathologies in spine.

With the addition of into neural networks to the whole platform, we will extend into intracranial indications. Our first application will be to autonomous we identify and monitor the surveillance of aneurysms overtime.

We will then follow on with additional clinical applications to autonomously identify and monitor highly complex diseases, such as all timers multiple sclerosis, dementia autism tumors stroke and other pathologies in the brain.

Third the whole AI platform has neural networks that we are applying to many other muscular skeletal areas and a variety of organs and vessels to include liver lung kidneys et cetera.

Our strategy is to expand our whole AI platform to other medical specialties and many other types of diagnostic and treatment therapies.

We believe the whole portal surgical business, although a substantial market opportunity will most likely be a smaller piece of the pie. When you consider the role AI will play in developing the appropriate course of treatment.

As many patients who seek medical care never undergo surgery.

Our platform approach will enable us to quickly add on capabilities for other parts of the body and broaden our capabilities across the entire continuum of health care with data as the central component.

So right now we're focused on the spine and inter cranial shortly thereafter, but our strategy is to expand our platform. So that we can significantly participate in the broader markets within medicine.

As we think about our market opportunity and what we see.

Addressable market there are so many different ways of addressing this question.

The reality is the market today is not what we envision the market of the future because we intend to move far beyond spine and surgery as we expand our hollow AI platform, but.

But looking at a few data points to show our addressable market today.

In the United States, there are more than 7000 hospitals and over 200000 operating rooms.

There are approximately $1 5 million instrumented spinal procedures performed annually and published research based on patient reported outcomes shows that as many as 40% resulted non successful outcomes.

There is certainly room for enhancements and many clinicians we've spoken with agreed that significant improvements outcomes will occur through innovation and digital technology and big data.

The surgical and avid.

Surgical navigation robotics market continues to be an area, where hospitals are willing to invest and it's an estimated this will grow to $8 billion market by the end of 2025.

So if we coupled the existing spine hardware and biologics markets. We play in today with the navigation robotics piece, and then layer in our unique opportunity with AI and diagnostic imaging and big data the addressable market for <unk> is billions of dollars annually and again this is <unk>.

Just for spine surgeries. It does not represent the full power of our AI networks applied to diagnostics intervention and continuum and other areas of medicine.

Looking at the broader market opportunity.

<unk> and other applications that will be built into our AI platform over time.

We're talking about a 200 plus billion dollar market opportunity for AI and healthcare for the next 10 years and you better believe surge line will be a leading player in this space.

So how do we get there.

First we focus on early adoption of our hollow portal system.

I've mentioned previously there will be different sales models available for commercialization.

We sell the system outright is a capital sale.

Have a fee per use model rental models or lease options as.

As we are in the initial stages, it's hard to predict what the split will be as budgeting decisions operating room needs and discretionary spend varies.

As I mentioned previously in Q1, we received five 10-K clearance for the use of the hollow portal surgical guidance system and the lumbar spine.

First major milestone as we now begin commercialization of our digital health platform in the future.

This was the culmination of more than six years of development led by pioneers in the augmented reality AI big data mining and medical communities.

We have now moved into the early stages of commercial launch.

Last week, we reached another major milestone.

In line with our expectations, we had our first site up and running and performed our first successful case using our hollow portal.

Hmm.

I'd like to thank and congratulate the entire surge align team.

As we move through the year, we'll have more data and feedback to more accurately assess the models that work best and the result in quicker adoption.

As a reminder, we have plans to have additional sites up and running this quarter and our goal is to have at least 10 to 15 operational by year end with a broader commercial launch early in 2023.

And the total revenue generated from one unit per year is expected to be approximately 1% to one $5 million.

Yeah.

Over the next two years, our focus will be on commercialization of the hurdle whole portal system integrating relevant procedural technologies and expanding our whole AI platform capabilities.

We will do this through data aggregation.

Upgraded algorithms continued investments in innovation and by pursuing expanded indications and FDA clearances, all focused on bringing new solutions to market powered by hollow AI technology.

We believe this new applications are layered onto our platform, we will create new and recurring revenue streams and operate on a lower cost basis with greater bottom line impact the development team, we acquired with the whole surgical our acquisition and investment and Turner networks are.

The biggest assets and transactions in a dramatically expanded our capabilities in building AI and machine learning algorithms.

We have a platform now.

Now it's about building scale.

New networks that can run on top of our platform to improve patient lives.

To get there we have to invest.

The opportunity is clear as is our strategy two.

To commercialize the technology enhance our operational capabilities as we scale.

Support sales and marketing efforts, we will require capital.

That is the primary reason, we did the equity raise in Q1 to extend our runway, allowing us to enhance our team and resources Opportunistically invest and move beyond the R&D stage.

Without that capital, we would have had to scale back resources needed to achieve the necessary holder portal cases, which have begun and will be ramping throughout the year.

We are laser focused on moving from R&D to full scale commercialization in early 2023.

We are incredibly excited about the future surge line the power of hollow and internal networks platform technologies have the potential to revolutionize the health care industry.

We are also proud of the talent, we've hired and the progress made to update our existing spine portfolio and are excited about the cadence of new product introductions that will support adoption within the spine market.

This year is critical for surge line.

I am confident in our ability to execute our plan and realize our full potential.

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

Thanks Terry.

Starting with the review of the quarter Global spine revenue for the first quarter was $26 million compared to $23 $3 million for the prior year period.

The decrease in revenue was primarily due to decreased demand as a result of COVID-19 related headwinds in January with sequential improvement seen in February and then again in March as Terry noted earlier.

Domestic revenue was $17 2 million compared to $19 $9 million in the prior year quarter and international revenue was $3 $4 million compared to $3 4 million in the prior year quarter.

Q1, non-GAAP gross margin was 79% compared to 75, 5% of revenue in the first quarter of 2021.

Q1, GAAP gross margin was 68, 9% compared to 73, 2% in the first quarter of 2021.

Excluded from Q1, non-GAAP gross profit was $410000 of inventory purchase price adjustments.

Moving onto operating expenses Q1, non-GAAP operating expense were $28 4 million compared to $27 9 million in the prior year quarter.

Investment and development of the whole AI platform was partially offset by a decrease in general and administrative expenses due to the simplification of the distribution and administrative infrastructure.

Excluded from Q1 non-GAAP operating expense.

It was approximately $939000 in asset charges related to the impairment of instruments during the quarter.

$916000 in transactions and integration expenses related to issuance cost associated with newly issued warrants.

Noncash stock based compensation expense of $1 4 million and a gain of $8 $5 million or accounting adjustments to the fair value of milestones.

Adjusted EBITDA for the first quarter was a loss of $13 3 million compared with a loss of $9 8 million in the prior year period.

We ended the first quarter with $44 $7 million in cash and cash equivalents compared to $51 3 million in Q4, a $6 6 million net decline.

Key cash outflows were from $15 $1 million in cash used from operations $4 million for our 2021 annual short term incentive program payout $1 3 million and capital expenditures.

And $4 one.

$1 million for a portion of the hollow surgical earn out milestone related to the achievement of five 10-K clearance.

These cash outflows were somewhat offset by $17 7 million of net cash proceeds received from our equity raise completed in February .

Turning to guidance for the full year 2022, we are raising our expected revenue range.

<unk> $86 million to $90 million or $88 million at the midpoint of the range.

$85 million previously.

We are encouraged by the increased demand we saw in February and March which continued in April .

As a result, we continue to expect the second quarter to be up sequentially compared to the first quarter of 2022 and expect further sequential growth in the third and fourth quarters.

We believe we have returned to a more normal operating environment and do not expect any material impact from COVID-19 during the remainder of the year in our guidance range.

We expect both GAAP and non-GAAP gross margins.

Q2 to be consistent with Q1.

We expect non-GAAP operating expenses to grow slightly from Q1 to Q2 as we invest in talent for our digital strategy, while maintaining prudent cost control activities.

Turning to an update on our cash position, we believe additional financing will be required by the end of the year in order to fund the investment in our digital health platform and to return our spine device revenue to historical pre COVID-19 levels.

We are currently evaluating a variety of financing options and we'll be very mindful of shareholder dilution.

We also believe that with commercialization ramping and early successes, we've had with Hello, any raise would generate a meaningful ROI for shareholders long term.

In the meantime, we have implemented cash conservation plan that includes prudent operating expense curtailments, while allowing us to continue to invest in our digital strategy.

Our infrastructure and R&D, which we're confident will result in long term shareholder value.

Before handing it back to Terry I'd like to provide the voting results for our annual stockholders meeting held earlier this morning.

All of our board nominees were reelected and proposals were approved.

Given we received approval for a reverse share split we will not be increasing our authorized shares.

With regard to the reverse share split let me give you a little more insight into our thinking for that proposal.

As you know our share price is trading below the minimum threshold of $1 per share as required by NASDAQ and NASDAQ has notified the deadline to rectify this expires June 21 of this year.

To ensure we maintain our listing we will implement a reverse share split of either 15 to 120 to one or 30 to one.

We also believe there are additional benefits to our reverse stock split for example, the current price of our stock closes limitations for certain institutions professional investors and other members of the investing public.

A reverse split can help in cases, where certain brokerage houses and institutional investors.

Internal policies and practices that either prohibit them from the investing in low price stocks or tend to discourage individual brokers from recommending low priced stocks to their customers with.

With approval from our shareholders received this morning, we will consult with our board to determine which option we will choose and when we execute a reverse split.

We expect to complete this process over the next few weeks.

That concludes our remarks, operator, we are now ready to open the call for questions.

Thank you.

At this time, we will conduct a question and answer session. If you will.

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One moment, while we poll for our first question.

Our first question comes from Brooks O'neil with Lake Street Capital. Please proceed.

Hi, Good afternoon, guys I have a couple of questions.

I guess first.

Yes.

I picked up a little bit about this during the prepared remarks, but to what extent.

Does your current regulatory approval the five 10-K gives you.

The opportunity to bid.

To explore areas.

And.

To the extent that you don't have that.

That approval today, what do you see the regulatory pathway to get it.

As you think about it now.

Yes, Hey Brook thanks.

Of the current approval is for the lumbar spine, which is the vast majority of the cases and will continue to move up the spine here.

Here in short order and then we are.

Preparing for pre submission meetings with the FDA.

For both.

The diagnostic components that we're looking at within spine being able to read the mris autonomously as well as the applications. We're looking at for intracranial functions, we're going to focus as we said on the.

The spine and inter cranial applications first and then we'll move into the other areas mentioned.

Great.

Then.

Obviously, you gave us a tremendous amount of information in the prepared remarks.

Probably have to read 10 times over before I understand that but could you just.

How much commercial interests you detected in the spine area and perhaps as you as you've begun to explore in the cranial.

Try to give us some feel for how much interest in the marketplace.

Around there.

Yeah of course, so like.

We said before we've had.

More interest than units. So we have a ton of interest we're very excited about it we've got a.

Quite a number of surgeons.

Trained and validated for the unit and so we're fighting through the hospital approval processes.

Expect like we said to have some more units approved this quarter and so we're very excited about that and we see a ton of excitement.

Around the inter cranial applications.

<unk>, both from Neurosurgeons, Neuro Arabia, Allergist, and neurologists alike and believe there is a.

Great deal of utility.

It can be applied throughout the continuum of care with these products. So we're very excited to.

To continue the development efforts and move forward with the FDA process.

Great and then I'll just ask one more.

Honestly.

Youre a public company today and you are taking steps to address this year price in all of those kinds of things at the same time.

The significant development work and the scope of the work Youre going to try to do I assume you've given at least some thought.

So the concept of being a private company as opposed to a public company and I am just curious if you could share with us any.

Any of your kind of current thinking in that regard.

Well I'll take I'll take that and then Terry you can chime in with some color if you'd like.

We're actually we talked a little bit about the fact, we're going to have to go do additional financing sometime.

Before the end of the year, given our cash runway.

And we've got some pretty incredible prospects on the AI.

AI and Hello portal platform.

So we're pretty excited about that we need to continue to invest there.

While still eyeing, some prudent cost savings efforts.

So we'll need to go raise.

Raised more money those financing options, we're looking at we're looking at everything across the board.

<unk>.

Is it pretty complete list.

Okay. David Thank you very much I appreciate that color.

No problem once again, ladies and gentlemen to ask a question. Please press star one our next question comes from Matt Hewitt with Craig Hallum. Please proceed.

Good afternoon, and thank you for the thorough update.

Maybe first off obviously you just got your first procedure done congratulations on that I'm curious, how we should be thinking about a cadence of procedures out of just that one site.

Is it something that you anticipate kind of a slow and steady build over the course of the year or do they does that site have a backlog of cases that are anxious to utilize this platform.

Yes, so we have more.

More cases, and more surgeons booking cases at that site.

As we sit here today so.

I think it'll be a steady increase.

Difficult to predict.

The volumes at this point in time, but.

We're excited with how the first case went and Super excited to get some more under our belt.

That's great and.

With with that site I would imagine that they will be in addition to actually performing some procedures, they're going to be looking to potentially.

Get into a publication or two.

Any idea is there a conference or two this fall or is there a timing.

For such publications.

Yeah, No look we'll look to get.

Our series done and.

It's definitely something.

Both them and us are excited about studying and getting something out.

Again, having done one case, we don't have a specific time.

Time, yet but.

We will also.

Look to use them as a training site for the technology as well.

That makes sense and then.

As far as.

Do you have discussions or have you had any discussions with payers.

Regarding the technology is this something that.

You see interest from a payer standpoint to that because it should increase.

<unk>.

The effectiveness of the actual surgery that maybe the peers.

I wanted to have a say in the matter and maybe they want to encourage providers to kind of steer this direction or have you anything along those lines.

We have not.

And I think number one we need to develop.

Large body of clinical evidence.

Imported first.

But do believe.

That there could be interest in a number of the diagnostic things that we're working on in brain spine and other areas that can be a significant interest too.

Payers and providers as well.

Understood and then maybe last one for me and I'll hop back in the queue.

One of the things or what are the appeals early on I think it's still appealing is the potential pull through through your for your core spine products and ultimately as you move into other areas products, along those lines as well but.

How should we be thinking about that as this year progresses.

Should we expect that we should be seeing more and more pull through of your core products. In addition.

With those sites that are using the whole platform.

Yes, absolutely and Thats part of.

The one to one $5 million per unit placement that we discuss it.

The sale of the unit be it lease speed for use of our capital sale. The disposables and then the pull through of the hardware as well.

Got it alright, thank you very much.

Thank you.

Thank you at this time I would like to turn the call back over to management for closing comments.

Thanks, operator, and thanks again for joining us today.

Credibly excited about the future of surge line as we look to continue to bring innovative digital health solutions to the market look forward to updating you on our next quarterly call.

Thank you. This does concludes today's teleconference. You may disconnect. Your lines at this time and thank you for your participation and have a great day.