Surgalign Holdings, Inc. (NASDAQ:SRGA) Q4 2021 Earnings Conference Call March 15, 2022 4:30 PM ET
Company Participants
Chris Thunander – Chief Accounting Officer
Terry Rich – President and Chief Executive Officer
David Lyle – Chief Financial Officer
Conference Call Participants
Brooks O’Neil – Lake Street Capital Markets
Operator
Greetings. Welcome to the Surgalign Holdings, Inc. Fourth Quarter and Full Year 2021 Results Conference Call. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host, Chris Thunander, Chief Accounting Officer. You may begin.
Chris Thunander
Thank you, operator. Good afternoon and thank you for joining the Surgalign Holdings, Inc.’s fourth quarter conference call. Joining me today on the call are Terry Rich, our President and Chief Executive Officer and David Lyle, our Chief Financial 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 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 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 non-cash 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. 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 will begin providing an overview of our fourth quarter performance as well as our guidance for 2022. I will then turn the call over to Terry 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 this 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 equivalent. Subsequent 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 investment into our digital strategy.
Turning to guidance. For the full year 2022, we expect revenue to be in the range of $83 million to $87 million. We continue to experience macro headwinds in January but are encouraged by the 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 in the remainder of the year as well as a positive incremental HOLO 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.
Terry Rich
Thanks, Chris. Before reviewing our 2021 accomplishments and providing our outlook for 2022, I’d like to welcome our recently appointed CFO, David Lyle, who joined us in early March. David has over 2 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. His expertise will be immediately impactful as we make continued progress in our turnaround and move into a new phase of our commercial efforts with HOLO. David?
David Lyle
Thank you for the warm welcome, Terry. I want to express how excited I am to have joined Surgalign. 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 an intelligence-driven revolution is the future of health care. I am very excited about what Surgalign is building with its HOLO 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 Surgalign.
With that I’d like to turn the call back over to Terry.
Terry Rich
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 CervAlign, 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 FibreX, ViBone Moldable and BiomaX. We also took steps to broaden the portfolio by launching a new line of titanium interbodies 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 HOLO 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 their continued hard work. 2021 was a difficult year for obvious reasons, but I’m 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 healthcare industry.
Before turning our thoughts on 2022, I want 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 felt 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 the HOLO 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 the HOLO platform and the early commercial success of HOLO Portal, while launching new products to support the growth of our hardware business. In January 2022, we took the first steps towards the continued progress of the platform outside of the spine surgery arena with our equity investment in Inteneural Networks or INN. INN has developed a proprietary AI technology to autonomously segment and identify neural structures and medical images and help identify possible pathological states.
We decided to invest in the technology after we worked through a strategic collaboration partnership with INN during which time we fully evaluated their technology and our ability to leverage it within HOLO. Our work with the team at INN has allowed us to fully appreciate the power of their AI technology, and we believe this transaction will accelerate our ability to apply AI and machine learning to healthcare. Importantly, this combination brings another foundational piece to our development efforts by introducing intracranial functionality to the HOLO technology platform, facilitating a move into neurosurgery. We plan to leverage this technology and future applications to address a wide variety of potential disorders, including dementia, autism, tumors, aneurysm, stroke and neurovascular structures.
As announced in January, we received FDA 510(k) clearance for the HOLO Portal System for use within lumbar spine procedures. Receiving the initial clearance for the HOLO Portal System is a significant milestone and represents a critical step toward building the foundation of digital surgery of the future and culmination of over 6 years of development, led by pioneers in the augmented reality, AI 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 at 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 a 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 to 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 at Surgalign. We have navigated through a significant evolution in who we are as an organization since I joined approximately 18 months ago. With our initial HOLO regulatory approval in hand, we have officially transitioned into a digital health company focused on improving patient outcomes.
I’m amazed by the power of HOLO and INN technologies and the ways it can revolutionize the healthcare industry. The first application of our digital health offerings inside the operating room was 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 core 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.
Question-and-Answer Session
Operator
[Operator Instructions] Our first question is from Brooks O’Neil with Lake Street Capital Markets. Please proceed with your question.
Brooks O’Neil
Good afternoon Terry and welcome David. I have a couple of questions. I guess I would like to start off, Terry, with just as you are out in the marketplace talking with doctors and hospitals, can you tell us a little bit about what you are finding as it relates to sort of the economics of bringing HOLO into a commercial environment. Sort of what will the product – what kind of revenue will the product generate? How will it generate revenue, those kinds of things? Can you give us a little color on that?
Terry Rich
Yes, absolutely, Brooks. So, I guess first of all, as we contemplate the conversations that we are having, I think everybody is very excited about the technology. There has been numerous articles and things put out on the Internet that suggest how much surgeons are looking forward to these disruptive technologies that can help them deliver patient outcomes. So, everyone is excited about it and believe that our system has some significant advantages to offer. As we have suggested prior, we plan to generate between $1 million and $1.5 million per unit per year. And that’s a combination of things. The models are really already established in the market, Brooks, whether it’s other guidance systems or robots or the variety of things out there, and it really just depends on the hospital. So, we are leading with a fee per use or rental, but there is lease options, there is capital sale agreements. We are going to aim to have the flexibility that our customers need in helping to secure these types of technologies.
Brooks O’Neil
That’s great. And would you say, based on what you are seeing so far, you have enough evidence to suggest that the product as you are working through it in the marketplace has the potential to be a significant commercial success in the classic sort of revenue and earnings kind of way?
Terry Rich
Yes, absolutely, Brooks. We are very excited and encouraged by the level of interest we have and the conversations that we are currently having. And as we continue, since clearance to expand the universe of surgeons that we are showing the product to, the excitement continues to be very high. So, we are very much looking forward to begin commercializing the product here in short order.
Brooks O’Neil
Great. Let me just ask one more. I think I heard you say you are continuing to invest in new products in 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 2022 and beyond?
Terry Rich
Yes, absolutely. So Brooks, what we took over as we came out of RTI was traditional hardware business that had very broad application that could handle most procedures. But as you know, in orthopedics and spine, you have to continually be updating and innovate. And so it’s taken us some time to get here. As we came out of RTI, we had zero engineers in July of 2020. Today, we have got quite a number of them, are fully staffed. We are in process of releasing our titanium interbodies, currently, we are in launch there. And later this year, we will be introducing two new pedicle screw systems in open and an MIS system that we believe will compete exceptionally well with the top systems in the market. And of course, we will look to have HOLO compatibility.
Brooks O’Neil
Great. Thank you very much. And I am excited to see how 2022 unfolds.
Terry Rich
We too, Brooks. Appreciate it.
Brooks O’Neil
Yes.
Operator
Our next question is from Matt Hewitt with Craig-Hallum. Please proceed with your question.
Unidentified Analyst
Hi guys. Thanks for taking the questions. This is Lucas on for Matt Hewitt. I guess first off, it sounds like you are still on track for the first procedures to be performed with HOLO in Q2. Do you expect those initial procedures to benefit gross margin or how should we be thinking about that as this initial launch progresses?
Terry Rich
Yes. Absolutely, they will have an impact, but again, looking to get 10 units to 15 units 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.
Unidentified Analyst
Okay. Fair enough. And then I guess with the Omicron variant starting to fade, are your sales reps finding that it’s easier to get in front of surgeons now?
Terry Rich
Yes. So look, I think like most companies, we felt the impacts coming out of fourth quarter into January, but see things freeing up nicely. And we are very optimistic that we will be returning to normality, if you will, over the next couple of quarters. And yes, our reps are having access and enjoying the opportunity to get back out with their customers.
Unidentified Analyst
Okay. Thank you very much. That’s all I had.
Terry Rich
Thanks Lucas.
Operator
We have reached the end of the question-and-answer session, and I will now turn the call over to management for closing remarks.
Terry Rich
Great. Thanks, operator and thank you all for joining us today. We are incredibly excited about the future of Surgalign as we continue to innovate with our digital health solutions and look forward to updating you on our next quarterly call.
Operator
This concludes today’s conference, and you may disconnect your lines at this time. Thank you for your participation.