Surgalign Holdings Inc. Q1 2023 Earnings Call

Speaker 1: I.

Speaker 1: You

Speaker 2: Good day ladies and gentlemen and welcome to Sergio Line holding's 2023 first quarter results conference call and webcast. All lines have been placed on a listen only mode and the floor will be open for your questions and comments following the presentation. If you should require assistance throughout the conference, please press star zero on your telephone. Keep that to reach a live out.

Speaker 3: One moment please.

Speaker 2: I apologize for that. One second.

Speaker 4: Conference recording has stopped.

Speaker 4: Thank you and good afternoon. I'll start today with our customary forward looking statement disclaimer and then turn the call over to Terry Rich, our CEO , so we'll provide updates on our business. Thank you.

Speaker 4: I will then review our first quarter financial results, and we will then open up the call for questions.

Speaker 4: Additionally, Chris Bunander, our Chief Accounting Officer, is with us today and will be available during the Q&A portion of our calling.

Speaker 4: I'd like to remind everyone that on today's call and webcast, management will be making forward-looking statements about future events, SearchAlign's business strategy, and future financial and operating performance.

Speaker 4: Actual results could differ materially from those stated or implied by these four looking statements Do risks and uncertainties associated with a company's business?

Speaker 4: These four looking statements are qualified by the cautionary statements contained in today's earnings release and surge lines SEC filings.

Speaker 4: This conference call contains time-sensitive information that is accurate only as of the date of this live broadcast May 11, 2023. Surgery line undertakes no obligation to revise or update any four-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.

Speaker 4: Please see today's earnings release for further details, including a reconciliation of the gap to non-gap results.

Speaker 4: I'll now turn the call over to Terry.

Speaker 4: out in the call over to Terry. Thanks Dave, good afternoon.

Speaker 5: We continue to make progress on the restructuring program and our outlook is not changed. Product rationalization programs have intensified and will continue throughout both the second and third quarters, and we've been managing distribution carefully to ensure we meet our customer's needs.

Speaker 5: Along with product rationalization, we right-sized and realigned many areas of our business and were operating more efficiently.

Speaker 5: Along with product rationalization, we right-sized and realigned many areas of our business, and we're operating more efficiently, which has enabled us to better manage resources.

Speaker 5: I'm very proud of our execution on this front and the team has done a remarkable job.

Speaker 5: As for the market, conditions remain unchanged since my comments six weeks ago in our earnings install.

Speaker 5: For the most part, we've seen the market stabilize, similar to what many have been reporting. Domestically, hospitals are still experiencing some staffing shortages and procedural delays, but it hasn't been all that impact on the hardware side of our business. With respect to whole-apportal, we're still seeing a long sale cycle, but discussions with many of the accounts in our pipeline are progressing well and several are in the final stages of contract negotiations.

Speaker 5: I'm pleased to report that we currently have two new sites in the onboarding process for our upgraded system with cases scheduled in the coming quarter.

Speaker 5: We remain focused on commercialization with a goal to expand our reach and drive adoption.

Speaker 5: The new system upgrades unveiled in March are designed to drive efficiencies in setup and workflow and support a broader range of instruments and procedures.

Speaker 5: On our last call, we discussed the launch of Holo AI Insights for spying imaging, which was a late Q1 event and the prospects have opened up new markets for surge line. Holo AI Insights is another offering in our portfolio. It's for research use only and uses AI to analyze and translate medical imaging into aggregated quantifiable data. Holo AI Insights is another offering in our portfolio.

Speaker 5: We partnered with San Diego Spine Foundation as part of our initial launch and subsequently formed new alliances, one with Dr. Pierce Nundley and the Spine Institute of Louisiana. And the other with Dr. Alexander Vicaro, one of the top-ranked Spine experts in the world. These are invaluable relationships and we couldn't be happier to be working with such prestigious surgeons in the area of spinal research.

Speaker 5: Our strategy is to align with the best of the best and gain insights into how AI can be applied in research and ultimately how it can be leveraged in the clinical decision-making process. I'd like to pull one reference from Dr. Vicaro from our most recent announcement.

Speaker 5: The relationships we have in place are all important alliances and we feel we have a strong foundation to build from. Just last week we announced the continued evolution of HoloAI Insights with a new research-based solution for use in neurovascular research. This latest addition to our AI portfolio can analyze large sets of cranial MRA images, automatically identify 16 different structures, and aggregates the data into configurable graphical and file formats. We kicked off the launch with a collaboration with Dr. Brian Jenkowicz, a senior researcher at the University of Minnesota.

Speaker 5: both spine imaging and neurovascular research with plans to replace a clinical product

Speaker 5: I'll turn the call over to Dave now to cover our financial results and outlook.

Speaker 6: Dave? Thank you Terry.

Speaker 4: We reported Q1 2023 revenue of $16.7 million ahead of our prior expectations.

Speaker 4: which was offset by a decline in international revenue of $667,000. In addition, we captured approximately $1.6 million in revenue from obsolete products which continued to contribute revenue in April and so far in May. As a side note, our COFLIX products generated about $2 million in revenue in Q1 for the months of January and February until it was sold.

Speaker 4: Non-Gapgro Smart Gening Q1 was 69.5% on the higher end of our previous guidance range and down slightly sequentially compared to Q4.

Speaker 4: Gap gross margining Q1 was 63.7%. Items taken out for non-gap purposes were $730,000 of international inventory, which continues to be rationalized and $235,000 of inventory purchase price adjustments.

Speaker 4: As for operating expenses, Q1 non-gap operating expense was $23 million as compared to $24.6 million in Q4, and improvement of $1.6 million sequentially.

Speaker 4: Excluded from Q1 non-gap operating expense was a gain of approximately $1.1 million related to acquisition contingency, asset impairment, and abandonment expense of approximately $550,000, severance and restructuring costs of approximately $460,000, transaction and immigration expense of approximately $460,000, and $1 million in non-cash stock-based compensation expense.

Speaker 4: Adjusted the dot in Q1 was a loss of $10.8 million as compared to an adjusted the dot loss of $9.1 million in Q4. The sequential decline was driven primarily by lower revenue and gross margin somewhat offset by lower operating expense. As for the balance sheet, we had 22.4 million.

Speaker 4: approximately 21 million dollars in cash on our last call for Q1 and the improvement versus our plan was driven primarily by continued reduction in operating expenses during the period.

Speaker 4: Managing cash is critical, and we are looking at all expenses to extend our runway.

Speaker 4: But that said, we continue to explore all strategic avenues to improve our liquidity position, including additional potential investors.

Speaker 4: mergers, and restructurings. Operator, we're now ready to open up the call for questions.

Speaker 2: Thank you. If you have a question, please press star 1 on your telephone keypad at this time. If at any time your question hasn't been answered, you can remove yourself from the queue by pressing 1. Again, ladies and gentlemen, if you do have a question or comment, please press star 1 on your telephone keypad at this time. One moment while we poll for questions.

Speaker 7: and Co-Flex, but you're also saying that you're still continuing to do product rationalization and will continue not only in this quarter but also next quarter, which is third quarter. So...

Speaker 7: I'm just trying to think, what sort of products are we talking about and how does it, you know, when we think about year on year, how would it impact?

Speaker 7: Get you???.

Speaker 7: The R&U is from the second quarter and in relationship to what happened in 2021.

Speaker 4: Yeah, I think the easiest way to look at this RK is to kind of look at Q1 and take out. Co-flex and co-fix, which we generated revenue of 2 million dollars in that Q1 number of 16.7.

Speaker 4: That brings you down to 14.7 for the first quarter.

Speaker 4: and then take out an additional $1.6 million of the products that we obsoleted in Q1 that actually still generated revenue for us.

Speaker 4: You know, once we obsolete those products, you know, at some point we expect them that revenue to ramp down. We've been very fortunate though that that revenue has continued into Q1 and now even in the Q2, so it's a little harder to predict what those obsolete products revenue contribution will be.

Speaker 4: But if you take out those numbers and say, you know, looking out into the future, what would that look like? You know, you're talking about a number that's down into the 13 million a quarter range, just taking Q1 as a proxy.

Speaker 7: Teri, you were saying that the sales cycle continues to be long. Can you add some additional commentary around it in terms of what you mean by long? You had the second and last centers that you would be able to achieve by the end of the year. What is the target now in terms of installation base for end of 2023? Unfortunately, 33.

Speaker 7: that the sales cycle continues to be long. Can you add some additional commentary around it in terms of like, what do you mean by long? You had, do you know the certain number of centers that you will be able to achieve by the end of the year? You know, what is the target now in terms of installation base for end of 2023?

Speaker 5: Yes, sure. So, Arkey, we didn't provide a target, but, you know, and part of that is because it's been long, you know, the sales cycle for all capital out there has been, you know, very long now, regardless of the model they view it all as capital. And so it has been, you know, long could be.

Speaker 5: We've got a couple accounts that are getting hopefully close to coming on now that have been in the funnel for over a year. So it has been a long path on a lot of these. That typical.

Speaker 5: Capital sales cycle just in broadly in the industry is anywhere from six to 18 months So it's about getting the funnel for and pulling them through and and so we've got a very full funnel now and and so you know Or looking to get more units placed

Speaker 5: What is your, what comment are you hearing from the surgeons that are actually using the system as of now? Yeah, so look, we're getting, you know, very positive feedback about how easy the system is to use and how the enhanced visualization with the AR, and it's really enhanced because of the segmentation that we use AI to generate, you know, how much easier it makes things for them because they can identify the anatomy so quickly. So it's been...

Speaker 8: and then you're going to be in that circle down on your end of the hole.

Speaker 5: Yeah, I'm not. Sure, if we have any tenant accounts we're working on, but yes, we do have HCA accounts and they did move through pretty nicely there.

Speaker 8: Okay and then final question could you remind us how many sites are up and running using a Holo platform currently?

Speaker 5: Yeah, there are 5 active and we're in process of bringing up 2 more.

Speaker 3: Okay, thank you for taking my questions.

Speaker 3: Thank you for taking my questions. Thank you. Thank you.

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

And F I gover.

Thanks.