Surgalign Holdings, Inc. (NASDAQ:SRGA) Q1 2023 Earnings Call Transcript May 11, 2023

Surgalign Holdings, Inc. beats earnings expectations. Reported EPS is $-0.03, expectations were $-2.31.

Operator: Good day, ladies and gentlemen, and welcome to Surgalign Holdings 2023 First Quarter Results Conference Call and Webcast. [Operator Instructions] At this time, it is my pleasure to turn the floor over to your host, David Lyle, Chief Financial Officer of Surgalign.

David Lyle: 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, who will provide updates on our business. I will then review our first quarter financial results and we will then open up the call for questions. Additionally, Chris Thunander, 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, Surgalign’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 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 Surgalign’s SEC filings. This conference call contains time-sensitive information that is accurate only as of the date of this live broadcast, May 11, 2023. Surgalign 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. I’ll now turn the call over to Terry.

Terry Rich: Thanks, Dave, and good afternoon. We continue to make progress on the restructuring program, and our outlook has 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 customers’ needs. Along with product rationalization, we rightsized and realigned many areas of our business, and we’re operating more efficiently, which has enabled us to better manage resources. I’m very proud of our execution on this front, and the team has done a remarkable job. As for the market, conditions remain unchanged since my comments 6 weeks ago in our earnings call. 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 HOLO Portal, we’re still seeing a long sales cycle, but discussions with many of the accounts in our pipeline are progressing well and several are in the final stages of contract negotiations. 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. We remain focused on commercialization with a goal to expand our reach and drive adoption. The new system upgrades unveiled in March are designed to drive efficiencies and set up and workflow and support a broader range of instruments and procedures.

On our last call, we discussed the launch of HOLO AI Insights for spine imaging, which was a late Q1 event and the prospects of opening up new markets for Surgalign. 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. We partnered with San Diego Spine Foundation as part of our initial launch and subsequently formed new alliances, one with Dr. Pierce Nunley and the Spine Institute of Louisiana; and the other with Dr. Alexander Vaccaro, one of the top rank spine experts in the world. These are in valuable relationships, and we couldn’t be happier to be working with such prestigious surgeons in the area of spinal research. 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. Vaccaro from our most recent announcement “Surgalign, in my opinion, is one of the most exciting, given the groundbreaking work they are doing with artificial intelligence.” The relationships we have in place all important alliances and we feel we have a strong foundation to build from. Just last week, we announced the continued evolution of HOLO AI 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 Jankowitz, a neurosurgery specialist with extensive experience in neurocritical care disorders.

This is only the beginning. And as I’ve mentioned previously, we believe that HOLO AI Insights can be leveraged for precision medicine and apply to many different applications and population health, clinical research and in the future, patient care. Expect to see more news from Surgalign regarding our HOLO Portal commercializations and new technology upgrades. We are working to expand alliances within the medical community for HOLO AI Insights for research use, both spine imaging and neurovascular research with plans to replace a clinical product for AI assessment of lumbar spine MRI images in 2024. I’ll turn the call over to Dave now to cover our financial results and outlook. Dave?

David Lyle: Thank you, Terry. We reported Q1 2023 revenue of $16.7 million, ahead of our prior expectations. Breaking it down into key components of our restructuring and taking out Coflex and CoFix, which we sold on February 28, and our U.S. hardware business grew by approximately $745,000 or 6.7% on a sequential basis, which was offset by a decline in international revenue of $667,000. In addition, we captured approximately $1.6 million in revenue from obsoleted products, which continued to contribute revenue in April and so far in May. As a side note, our Coflex products generated about $2 million in revenue in Q1 for the months of January and February, until it was sold. Non-GAAP gross margin in Q1 was 69.5% on the higher end of our previous guidance range and down slightly sequentially compared to Q4.

GAAP gross margin in Q1 was 63.7%. Items taken out for non-GAAP purposes were $730,000 of international inventory, which continues to be rationalized and $235,000 of inventory purchase price adjustments. As for operating expenses, Q1 non-GAAP operating expense was $23 million as compared to $24.6 million in Q4, an improvement of $1.6 million sequentially. We continue to manage our costs diligently and have removed expenses through the restructuring program with a greater impact anticipated in future periods. Excluded from Q1 non-GAAP 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 integration expense of approximately $460,000 and $1 million in noncash stock-based compensation expense.

Adjusted EBITDA in Q1 was a loss of $10.8 million as compared to an adjusted EBITDA 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 in cash at the end of Q1 compared to $16.3 million at year-end. The improvement in our cash position is related to the sale of our Coflex business in February, which netted $14.8 million in cash to the company. We had guided to approximately $21 million 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. Managing cash is critical, and we are looking at all expenses to extend our runway.

With that said, we continue to explore all strategic avenues to improve our liquidity position, including additional potential divestitures, mergers and restructurings. Operator, we’re now ready to open up the call for questions.

Q&A Session

Operator: [Operator Instructions] And our first question is from H.C. Wainwright.

Operator: Our next question is from Matt Hewitt.

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