Q4 2022 Surgalign Holdings Inc Earnings Call
Okay.
Greetings and welcome to the surge of Lion Holdings, 2022 fourth quarter and year end conference call.
At this time all participants are in a listen only mode.
A question and answer session will follow the formal presentation.
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As a reminder, this conference is being recorded.
I'd now like to turn the call over to David Lyle <unk> Chief Financial Officer. Thank you you may begin.
And good afternoon, I'll start today with our customary forward looking statement disclaimer, then turn the call over to Terry Rich, our CEO , who will provide updates on our business operations and key milestones.
I will then review our fourth quarter financial results and outlook, followed by closing remarks from Terry.
And then open up the call for questions. Additionally, Chris <unk>, our Chief Accounting officer is with US today and will be available during the Q&A portion of our call.
I'd like to remind everyone that on today's call and webcast management will be making forward looking statements about future events.
Sir your lines of business strategy, and future financial and operating performance.
Results could differ materially from those stated or implied by these forward looking statements due to risks and uncertainties associated with the company's business. These forward looking statements are qualified by the cautionary statements contained in today's earnings release and charge aligns our SEC filings.
This conference call contains time sensitive information that is accurate only as of the date of this live broadcast March 30th 2023.
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 a discussion of non-GAAP financial measures. Please see today's earnings release for further details, including a reconciliation of the GAAP to non-GAAP results.
With that said I'll now turn the call over to Jerry.
Thank you, Dave and good afternoon.
We've been quite busy over the past several months executing on our restructuring plan.
Closing the sale of our co flex and co fixed product lines and further enhancing polo portal and our whole AI platform.
I'll begin today with an update on our restructuring.
Last November we announced a restructuring program to drive long term growth lower costs strengthen our balance sheet and put us in a much stronger position operationally.
Much of our planning centered on product line rationalization as we had a number of products that had been on the decline for years, where had low rois and required not only financial resources for both operational resources and human capital to support them.
Our evaluation resulted in the plan, which will reduce our product lines by approximately two thirds and in turn enable us to eliminate large amount of infrastructure costs, which will more than offset reduced revenue, resulting from removing lower performing product lines.
Some have already been discontinued and others will be over the coming quarters.
End result will be a simplified business a more focused offering.
And lower ongoing cash requirements to run the company.
Now, let's move to the market and an update on our business.
The market overall hasn't changed much since our remarks in November were still seeing a slow sales process and conditions remain challenging both here in the U S and abroad.
Hospitals and health care systems globally are facing unprecedented times and are coming off perhaps the worst financial year they've experience.
According to the American Hospital Association.
Hospitals are incurring losses with more than half projected to have negative margins in 2022.
Expenses have been estimated to be nearly $135 million higher than the prior year and beyond financial issues. They continue to face workforce shortages supply disruptions along with lower patient volumes.
On the other hand, the need for new technologies that can drive efficiencies in health care systems, not just within your visibility.
Which brings me to our digital health platform.
In 2022, we fell short of our hollow portal projections, well below plan with over 70 opportunities in our pipeline and more than 15 currently in the administrative.
Ruble part of the sales funnel so demand is strong.
As I noted the buying environment remains challenging and it has been difficult to forecast timing.
Thus given the current environment, we're going to refrain from forecasting the number of target sites today, but we do intend to provide updates throughout the year as more information becomes available and especially with system enhancements, we've made and have planned in the coming quarters.
Yeah.
Since whole portal was launched with gathered very important feedback from surgeons, which in turn has been used to enhance the systems capabilities.
New software hardware and additional features are part of the upgraded system.
With over 20, new instruments added we can now support a broader range of procedures and drive efficiencies and setup and workflow.
Yeah.
Earlier this month, we launched polo AI insights for spine imaging.
Which we believe will lead to important discoveries to research that will transform patient care with artificial intelligence.
According to EMC digital universe, and I D C.
Two highly respected industry research firms more than 90% of patient generated as health data is in the form of unstructured medical imaging data.
And we addressed this with our new offerings.
Hello, AI insights translate medical imaging data into the structured data sets of key Biomarkers, which is currently used for research.
Insights analyzes lumbar imaging for MRI images, providing quantitative measurements of 16 different anatomic structures in the spine and can process thousands of MRI isn't just a few hours.
In comparison today the processes men.
Radiologists Surgeons read reports take measurements and make assessments.
Hello, AI insights and for the first time ever there will be able to analyze medical images based on quantifiable data rather than just someone subjective view.
This process is automated and will help surgeons make more informed decisions again based on that.
This is only the beginning over time, we plan to leverage below AI insights for precision precision medicine.
Hello, AIG quickly generates very detailed patient specific data for medical images.
Because it is designed to automate these measurements very large datasets can be built and combined with existing patient data and electronic health Records.
<unk> systems to get metrics at the population level.
This will allow us to build a much more comprehensive model of the factors leading to positive outcomes for very specific groups of patients.
Ultimately, we believe the prognostic models based on this data will facilitate physician decision making.
And patients will benefit by having a much more informed view of how well a treatment option succeed with very similar patients.
The first adopters of Hello, AI insights, our doctors Honey Malone, Greg Mundus, and Robert East lack spine surgeons with the San Diego Spine Foundation.
We couldnt be happier to be working with such an experienced team and leading foundation.
Which brings me to the question of what's next for the whole portfolio.
The first generation of the hollow portals surgical guidance system was about seeding the market and gaining experience.
We've had some early successes and adoption is moving forward.
At the same time, we gathered valuable feedback from surgeons, which was incorporated in our latest launch.
Each nextgen upgrade thereafter will advance the system, adding valuable features to improve the surgical experience.
The long term, we believe the whole portal has a head start on the competition as it is the first FDA system cleared.
Incorporate both artificial intelligence and augmented reality to expand on the capabilities of stereotactic navigation.
Our plan is to follow up just about every quarter in 2023 with additional enhancements will be upgrading and redesigning the systems form factor looking to provide physicians in their or staff more flexibility and O our workflows.
The two bigger initiatives centered on the platform itself as we'll be migrating towards a more open platform. So that whole portal can be used with most if not all implant systems.
We believe this will result in greater hospital and surgeon adoption.
Second and of equal importance this system capability.
Today, the whole portal is only compatible with medtronic or which limits the number of accounts, we can work in <unk>.
By expanding system capability with more imaging devices, we increased the number of hospitals and a S sees that we can sell to.
With respect to our whole AI portfolio, we plan to follow up on the spine application of hollow AI insights with a research based application for AI assessment of intracranial aneurysms later this year.
In addition to the research applications, we plan to release, a clinical product for AI assessment of lumbar MRI images and 2024.
Yeah.
<unk> is playing in a much larger global market than ever before with first mover advantage in AI as it relates to spine and we believe highly valuable AI technology that can be applied to many different use cases and treatments.
Our global addressable market is in excess of $11 billion today and expect to grow to over $180 billion by 2023.
There has been a global transformation towards advanced technologies, following COVID-19 with AI and machine learning being key driving forces behind was expected to be massive growth in the coming years.
I will add software is leading the fastest growing segment the global AI health care market in North America has been the most aggressive in AI adoption in particular and this is where we play today.
AI is not about replacing medical professionals, but rather leveraging its power to capture and assess data.
I can use and process information to assist them more efficient medical decision, making.
That's what we're focused on a surge line.
Data insights that can be applied first to the spine and then expand to other areas of the anatomy in different fields of use we are confident in our technology and its potential.
Yeah.
Moving on to the sale of our <unk> business in Q1.
In February we sold the co flex and co fixed product lines in the United States and worldwide intellectual property rights, there and to extent medical holdings for $17 million, a transaction that netted approximately $14 8 million in cash to surge of la <unk>.
Cash, which was needed to extend our cash runway.
We will pursue to have discussions about other assets, both domestically and internationally.
And we will pursue every avenue to improve our liquidity and competitive position.
With that I'll turn the call over to Dave now to cover our financial data.
Dave.
Thanks Terry.
I'll start with our fourth quarter 2022, the financial results and then focus my remarks on our 2023 outlook.
We reported Q4 2022 revenue of $26 million, which represents a $400000 increase over Q3 due primarily to growth from the Cartera pedicle screw alpha launch and our streamlined pedicle screw system.
Domestically on a sequential basis revenue was essentially flat and international increased modestly due to growth out of our H P. S product line and this despite a weak European environment.
non-GAAP gross margin in Q4 was 71, 9% as compared to 74, 9% in the third quarter, primarily driven by a product mix shift.
GAAP gross margin in Q4 was negative 13, 6% compared to 72, 8% in Q3.
With the difference almost entirely attributable to a noncash inventory write down associated with product line rationalization.
As for operating expense Q4, non-GAAP operating expense was $24 $6 million as compared to $26 $5 million in Q3, an improvement of $1 $9 million sequentially.
Cost controls implemented throughout the year and related to the restructuring program as well as a reduction in bonus accrual led to lower expenses in Q4.
Excluded from Q4, non-GAAP operating expense was a gain of approximately $683000 related to acquisition.
<unk> asset impairment and abandonment expense of $1 1 million severance and restructuring costs of $1 1 million and $1 1 million in noncash stock based compensation expense as well as $18 million and transaction and financing expense.
To note the $18 million and transaction and financing expense are predominantly noncash accounting charges related to the difference between the fair value of warrants and the amount raised in our offering.
Adjusted EBITDA in Q4 was a loss of $9 1 million as compared to an adjusted EBITDA loss of $11 2 million in Q3, an improvement of $2 $1 million. The sequential improvement was driven primarily by higher revenue and lower operating expense.
Now I'd like to spend a few minutes to walk through our view of 2023, considering the many changes we have made to our business over the past two quarters more specifically, our restructuring effort and the sale of our co flex business, which materially impacts both our P&L and <unk>.
Alex sheet.
For the full year 2022, we reported revenue of $82 million, which was in line with the range. We provided on our Q3 call.
Using this as a basis for 2023.
And building from the pro forma financials in our SEC filings I'd like to walk through how we arrived at the 2023 revenue outlook.
In 2023 through our product line rationalization effort, we are removing approximately approximately $18 million in revenue with much of the heavy lifting complete.
Some products will be discontinued throughout the year, but are accounted for in the $18 million estimate.
Additionally, we saw co flex on February 28, 2023.
<unk> family that generated revenue of approximately $14 million in 2022.
Given that we sold the business at the end of February we expect to remove approximately $12 million in revenue for this in 2023.
Thus using $82 million as a starting point to determine 2023 revenue and then removing approximately $30 million for products that had been rationalized out and for co flex being sold that brings us to roughly $52 million in sales.
As we look out into 2023, we expect revenue to be in the range of $50 million to $54 million.
We believe this is a conservative forecast as we are projecting modest growth from our Hello portal.
And across several hardware and biologics product lines at the same time, we are taking into account some potential lost revenue, resulting from product rationalization.
We intend to update revenue guidance throughout the year as we see the impact of rationalization and the new enhancements made to the whole lot portal system.
So, let's now move to where we think we can be in 2023 for gross margin.
As a starting point, we reported non-GAAP gross margin of 72, 8% for the full year in 2022.
The co flex business sale, where we expect non-GAAP gross margin to decline in 2023 as it was a high gross margin product lines generating about 17% of our global revenue.
With co flex no longer part of our mix and with ongoing rationalization efforts, we expect 2023, non-GAAP gross margin to be approximately 65% to 70%.
As for the balance sheet, we had about $60 million in cash at year end.
Netted about $15 million in cash by selling co flax and will have burned approximately $10 million by the end of Q1.
So we'll have about $21 million as of the end of this first quarter of 2023.
Given our expected cash burn looking forward, we believe we have sufficient cash to get us into the fourth quarter of 2023, we continue to explore all strategic avenues to enhance our balance sheet and extend our runway.
We remain focused on long term sustainable growth, providing value to our stakeholders and maximizing value for our shareholders.
Products that align with our digital health strategy are Paramount to our strategy and we intend to continue investing in innovation, but smartly given our capital requirements and the plans we have for a whole lot of AI platform in the coming years.
Now I'll turn the call back to Terry for closing remarks.
Thanks, Dave we've done a lot of work over the past few years to remove many of the corporate overhangs on our business and drive our digital health strategy forward.
Executing our restructuring and remain on track to realize the savings we set out to achieve while strengthening our infrastructure and technology.
Throughout everything we've managed our business with our customers needs in mind and relationships with suppliers distributors and partners remain strong.
We've lowered our working capital needs simplified our business and believe we have the resources that are currently needed to execute our plan with that said, we know we will need additional capital we remain focused on this.
Proving our balance sheet to capitalize on the massive opportunity in digital health ahead of us.
It is my belief that we have market, leading AI technology, which will generate value for our shareholders and all key stakeholders.
Our AI platform opens up a much larger market on a global scale and the use of AI and AR in the medical field is only going to intensify.
While we have had some speed bumps as it happens when introducing advanced technologies, we're even more bullish on the opportunity we are creating.
We have over 115 employees supporting digital health and more than half of them are focused on innovation, whether it's software hardware cloud design testing or product management, we're going to continue to invest in digital health, which in our view is the right path for surge line to maximize value for all share.
Our holders.
Operator, we're now ready to open up the call for questions.
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One moment, please while we poll for your questions.
Yeah.
Our first questions come from the line of Matt Hewitt with Craig Hallum. Please proceed with your questions.
Good afternoon, and thank you for taking the questions and for providing the update maybe the first question is and I just wanted to confirm I believe you're at five sites are currently using the platform and I realize that you're kind of.
Stepping back from the 10 to 15 that you had previously expected to get to but one of the things that you had talked about a year ago was your expectation that once you've got two seven to 10. Your hope was at that point you can start working on some publications are your sites would be working on some publications at which time.
You would roll the system out more broadly is that still your intention is to kind of get to that seven to 10, and then hopefully start to see some publications or what do you think is going to drive that second layer of adoption.
Yeah, Hey, Matt Thanks, a lot yes so.
We are working on some publications with some physicians currently and you know.
We open up more sites will be more to come but what.
We found in these early stages is it.
Terms of Guinea.
Getting the system to market quickly.
And we thought the system would be used mostly in percutaneous cases, and so we had.
Very few instruments to support that and so <unk> seen that a lot of the business has been an open cases, that's where we just added the 20 plus instruments.
To support workflow.
In open cases, and upgrade a couple of components and so we believe that this will significantly help drive better adoption.
Additional sites I should say and.
Give the surgeons and the staff what they need from a workflow perspective to make the system easier to use but we're also very excited about the release of the whole AI insights.
This is this is really a huge.
No opportunity to get into.
<unk>.
Water patient analytics.
And.
If we get down the path of predictive outcomes in spine.
And we're very excited about what that offering and our first research projects with San Diego Spine Foundation with more to come soon.
Got it and then I guess another question early on and I realize I'm you know as markets change you've had to deal with the pandemic and all of that.
It forces decisions, maybe but one of the early promises of the technology was that as the platform was adopted you would have this almost a structured sales channel into your proprietary pedicle screws and everything that went with it.
And it sounds like you've run into some complicating factors with that and now needing to go to open source, how does that change kind of our long term model or is it your hope and expectation that a decade from now you're going back to proprietary and needing to use your your implants with the whole low plaid.
Yeah. So.
You know look I think it's really driven by market forces and certainly you know we're having.
Degrees of success using it with our current screw system and we're now integrating our new core terrorists screw offering which believe.
It will help as well.
But really the key is these yeah implant systems, our surgeon preference and.
Some surgeons are tied for various reasons are different implant systems.
You know it can potentially limit.
Their desire to use hollow. So we're opening it up because we believe we can catch.
You know much broader share in the accounts that we're currently in as well as as we go into other accounts I think the other thing you'll find is that a lot of hospital administrators are really becoming weary of.
These new technologies.
Guidance robotics, whatever it has.
Being tied to.
Hardware usage.
And they've run into a number of issues with this and it's caused some problems and so they're starting to look at things differently. That's why there's a variety of companies coming out now in spine in.
Large bone orthopedics in other areas.
But arent offering and implants are just offering the advanced technology and the ability to work with all systems.
Yeah.
Got it and then maybe one last question I'll hop back into the queue and Dave. Thank you for providing some of the granularity on the puts and takes for the twenty-three guidance.
The one thing I'm curious how much how should we be thinking about organic growth I realize that you've got the Cove works headwind. If you will on the revenue side and you're going to still have some additional product line rationalization, but on an apples to apples basis, whether you're looking at whole or some of the other products that you've introduced.
Are you anticipating some growth there or are you kind of looking at this conservatively, saying, okay, let's let's just given what's going on in the market hospitals are struggling and all of that let's just assume that were were flattish. This year and then 24 is where we start to see some growth.
Yeah, I'd say, it's a it's a great question is there going to be complicated when it comes to looking at the actual results quarter to quarter in 2023 because of all the things that are going on right. Now. So for instance, if you remember we sold co flex at the end of February . So we had two months of Teleflex revenue hitting our Q1 number this year.
Which is going to make that revenue look higher as we move forward.
So by default not having co flex you know all things being flat or equal we're gonna have a lower Q2 then.
Then than we did in Q1.
However.
There are some.
Other.
Puts and takes here.
The rationalized products, meaning the products that we are obsoleting. The two thirds of the portfolio commentary that we talked about are still selling.
Even though we've obsolete it and then they will continue as we harvest.
The inventory that we have on hand through some period of time over the coming months and quarters.
And then lastly will you know I think that process will start ramping down and should be pretty much complete into Q3. So.
That being said, it's going to be hard to see when you see the end revenue numbers quarter to quarter. However, when it comes to growth.
Terry talked about our new pedicle.
Alpha launch out of those two alpha launch Court Tara.
It's done really well for us since it launched over the summer we saw some growth into Q4. It was one of our bigger growth drivers in 2022, we expect that to continue and be our biggest growth driver in 2023, so underneath all of those variables I just described you're going to see growth out of product.
Like that and out of some of the products that we had product issues in past years that has now been fixed.
Got it. Thank you I appreciate the color.
No problem.
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