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spk00: Good afternoon, ladies and gentlemen, and welcome to the Surgiline Polling Sport Quarter and Full Year 2020 Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session, and instructions will follow at that time. If anyone should require assistance during the conference, please press star, then zero on your touchtone telephone. As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, John Singer, please go ahead.
spk08: Thank you, Operator. Good afternoon, and thank you for joining the Surgeon Line Holding Inc.' 's fourth quarter and full year conference call. Joining me today on the call is Terry Rich, our President and Chief Executive 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 our management's current expectations. They are subject to various risks and uncertainties associated with our lines 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 investor relations section of our website. Now, I will turn the call over to Terry.
spk03: Thanks, John. Good afternoon, everyone. On today's call, I'll provide an overview of our fourth quarter performance, an update on events that occurred during 2020, and then turn the call over to John to provide financial overview, after which I'll provide our thoughts on 2021. Total revenue for the fourth quarter was $26.2 million, down from $31.6 million during the fourth quarter of 2019, primarily driven by the negative impact of COVID-19 on elective procedures, both in the U.S. and internationally. Taking a step back, 2020 was a transformational year for the company. Amidst all of the uncertainty associated with COVID, we pursued an organizational overhaul in July, which included the separation of two businesses to create a standalone, pure-placed buying company now known as SurgeLine. Just a few months later in September, We acquired Holosurgical, immediately shifting our priority to becoming a leader in the digital surgery space with an initial focus on spine. At the time we launched Surgiline, we laid out our growth strategy for the business, which was made up of three components, build, innovate, and acquire. We have made tremendous progress towards each of these during the remaining five months of the year. Starting with build. We have assembled a world-class team throughout the organization from our employees, the management team, and the board of directors. We talked at length on previous calls about the talent we have been able to add, and we continue to do so in recent months. When looking at the senior leadership team, John, Enrico Sangiorgio, our head of international, and myself are the only members of the team who were part of the organization at the beginning of 2020. Along with senior leadership appointments, we have brought in substantial experience to round out the team in literally every department within the organization. Our marketing team is in large part completely new. Our R&D team is entirely new. And we have added a number of people within our finance, quality, regulatory, clinical, medical education, marketing, and communications functions. On the innovation side, we made progress towards the overall development of our portfolio during the third and fourth quarters, which included product line extensions and expansion of the biologics portfolio, the application of new materials and manufacturing capabilities, and most importantly, additional functionality of the digital platform. However, as we progressed through the back half of 2020, we intentionally slowed down the pace of new product launches. We want to take time to reimagine our current portfolio and our innovation roadmap to ensure it supports our shift to digital. In conjunction with the development of our product roadmap, we need to properly onboard, integrate, and align all of the new talent within the organization. We are now confident that beginning in the back half of 2021 and into 2022, a best-in-class portfolio will emerge, which includes innovative products and systems that are highly integrated with the Holo platform. Our last component is Acquire. Following the close of the Holo acquisition during the fourth quarter, core members of the Holo team have joined SurgLine in key roles, with two of its co-founders, Professor Christian Luciano and Dr. Chris Chimonoff, joining to head up the continued development of the Holo platform and lead our digital surgery R&D initiatives. In the fourth quarter, Paul Lewicki, the third co-founder of Holo, joined the Sturge Line Board of Directors. Paul is widely known as one of the forefathers of predicted data mining and continues to be a thought leader in the promotion of artificial intelligence in healthcare, and we are excited to have him as part of our organization. With the integration of Holo behind us, the company is completely aligned on our long-term strategy and what needs to be done going forward to deliver. We continue to believe that there are a variety of interesting products and technologies out in the market and we'll continue to evaluate acquisition, licensing, and partnership opportunities that we feel would fit within our strategic framework and be supportive of our digital portfolio. Our commitment to digital surgery aligns with the perspective of many industry thought leaders that medical device companies will see significant change in the near future as the currency of the industry moves from implants to digital services. These services include machine learning to leverage outcomes and additive manufacturing to create patient-specific implants, all informed by AI resources leveraging predictive analytics and a move towards personalized medicine. We believe companies that embrace this new paradigm will thrive in the transformation. 2020 was a transformational year for SurgeLine. where we made significant progress in building a foundation to deliver on the promise of digital surgery. While I'm proud of what we accomplished in the past six months, we expect that it will take an additional 12 to 18 months to complete our transition from an implants company to a digital surgery company delivering surgical solutions. With that, I'd like to call over to John for a financial update. Thank you, Terry.
spk08: Global spine revenue for the quarter end of December 31st, 2020 was 26.2 million compared to 31.6 million for the prior year period. The decline in revenue was primarily due to the impact of the COVID-19 pandemic on global electric procedural volumes. Domestic revenue was 22.7 million, a 4.5 million decline from the fourth quarter of 2019, and international revenue was 3.5 million a 0.9 million decline from the fourth quarter of 2019. We believe that demand for our core implants and biologics, both domestically and internationally, will return to historical levels globally in line with the return of global elective procedures. However, we anticipate the COFLEX product family will return to historical levels at a slower pace than the rest of our portfolio. Gross profit for the fourth quarter of 2021 was $12.8 million, inclusive of $6.9 million in incremental inventory charges, predominantly related to the recall of the Servaline ACP system and purchase accounting-related markups to inventory. Adjusted for the impact of charges, gross prize $19.7 million, or 75% of revenue, compared to $23.6 million, or 75% of revenue, in the fourth quarter of 2019. Marketing, general, and administrative expenses for the fourth quarter of 2020 was 27.3 million compared to 39.9 million in the prior year period. The decline in marketing, general, and administrative expenses is predominantly driven by the decline in sales-related costs due to the decline in revenue and a reduction in the administrative infrastructure as a result of the OEM sale. R&D expenses for the fourth quarter of 2020 was $2.2 million compared to $4.4 million in the prior year period. The reduction in R&D relates to the separation of the OEM business and the transition of R&D headcount. We expect R&D spend to return to prior year levels as we rebuild the competency with enhanced spine experience and invest in the holosurgical platform. The company incurred approximately $101 million of non-recurring operating expenses during the fourth quarter of 2020 and primarily related to the Holo acquisition. In conjunction with the purchase of Holo, we determined that substantially all of the fair value of the acquisition was in the acquired in-process research and development asset, which resulted in us treating the acquisition as an asset purchase with a total purchase price of $95 million comprised of $30 million in cash, $12.3 million in common stock, $2.1 million of transaction-related costs, and a $50.6 million related to our present value assessment of the contingent payments. Since the ARRAI platform is pre-commercial and has not reached technical feasibility as defined by the accounting rules, the transaction was expensed in the fourth quarter, resulting in a one-time charge of $94.5 million. Adjusted EBITDA for the fourth quarter of 2020 was a loss of $7.7 million, compared with a loss of $14.3 million in the prior year period. The improvement in adjusted EBITDA was predominantly driven by the reduction in operating expenses as outlined above. As of December 31st, we had approximately $44 million in cash. And on February 1st of 2021, we closed the secondary equity offering, raising approximately $40 million of incremental cash. Turning to guidance, The COVID-19 global pandemic has continued to impact demand for our products through the first quarter, which will be sequentially down by approximately 10% from the fourth quarter of 2020. We anticipate full-year growth in the range of 5% to 10% compared to 2020 full-year global spying revenue from continuing operations of approximately $102 million. Our guidance assumes that global procedures volume return to normal levels during the second quarter of 2021 with a relatively slower return to historical revenue levels for COFLEX and limited contribution from the server line ACP, which was withdrawn from the market due to a recall by our manufacturing partner in January. Based upon this revenue, we anticipate adjusted EBITDA will be in the range of a loss of $35 to $40 million. I'd now like to turn the call back to Terry.
spk03: Thanks, John. Before shifting to our 2021 outlook, I wanted to discuss our long-term vision for SurgeLine and how we are approaching our transformation from a spinal implants company to a digital surgery technology company. The Holo platform is a revolutionary foundational technology, and we believe it will impact how surgery is performed and ultimately how care is provided to patients. The initial application of the HOLO platform is enabling digital spine surgery. The platform addresses limitations that exist in today's computer-assisted surgery and robotic platforms by introducing smart applications, enhanced visualization, real-time guidance, warnings, and alerts, thus enhancing surgical performance. We will leverage the autonomous anatomy segmentation and identification software to develop smart instruments to improve surgical workflows, make spine surgery safer, which we believe will lead to better patient outcomes. We intend to expand the applicability of the platform outside of the OR, as we believe it has the potential to provide benefits throughout the surgical landscape from diagnostic and predictive analytics capabilities to autonomous pre-op planning and intelligent post-op analysis functionality. While the spine market is a significant opportunity, we view it as a stepping stone application for the platform. Once the model has been proven, we intend to expand into other surgical specialties beyond spine. We're in the early innings of our journey through this transformation, but we are excited about the potential of this innovative technology. As part of this transformation, we intend to move away from the traditional model of selling screws, implants, and access as a package for procedural pull-through, instead moving towards delivering better outcomes by reimagining what is possible through integrated intelligent technology. This shift will not happen immediately, but everything we are doing from this point onward will be done with the intention of moving towards personalized medicine through the application of the digital platform and supporting technologies. Before opening the call up to Q&A, I'd like to discuss our key priorities for 2021. At a high level, 2021 will be a year of transition and investment, building the foundation for growth in 2022 and beyond. Our priorities for the year are, first, continue to build out the organization in support of our digital strategy. Second, continue the development of our Holo platform with the goal of performing first cases in the U.S. by the end of the year. And third, reimagine our product portfolio to accelerate the pace of new product introductions. Starting with the continued build-out of our organization in support of our digital strategy, we have put tremendous senior leadership team in place over the last nine months, which includes the integration of the team from Holo, and we have now shifted to optimizing the structure and scale of the company. We also brought on a significant number of very talented people across the organization and will continue to add talent aligned with our strategy. Turning to the ongoing development of Holo, there are a number of key milestones we expect to achieve this year. First is the FDA 510K clearance for the platform. We expect to happen in the back half of the year. We are very confident in the technical foundation of the platform and continue to work to put together the absolute highest quality filing to ensure a timely clearance. Despite a short delay associated with a requirement to complete additional third-party testing, we expect to file the initial submission in the near term. We expect the initial indication for use to be specific to lumbar spine procedures. Following clearance, we expect to file a steady stream of submissions for indication expansions as well as for additional software capabilities related to diagnostic and predictive analytics. After FDA clearance, the second milestone for 2021 is the launch of the initial IRB studies. The purpose of these studies are to prove the efficacy in humans, optimize the software and hardware interactions, and prepare the platform for initial use before proceeding to the marketing development phase of our launch. Following the successful clearance, we anticipate having the first cases using the Holo platform performed in the U.S. later this year. Shifting to our third priority, reimagining our product portfolio. Given the material change to our focus, we are working to reimagine our long-term product development roadmap to support Holo and the promise of digital surgical solutions. In addition to focusing on identifying new development initiatives, We will also undergo a critical assessment of our existing portfolio to identify any individual products or product segments that we don't believe will be supportive of our digital strategy going forward. In summary, we are very excited about the future at Surgilign. 2020 was a transformational year for the organization. We stood up a peer-placed spying company, brought together a world-class spying leadership team, and positioned ourselves as a leader in digital surgery through the acquisition of Holosurgical, all while successfully managing our operations during an ongoing global pandemic. Looking ahead, 2021 will be a year where we invest to build the foundation of our digital surgery offering to support our long-term growth initiatives in the years to come. With that, I'd like to open the line for questions.
spk00: At this time, I would like to remind everyone In order to ask a question, press star then the number 1 on your telephone keypad. Again, that is star then the number 1 on your telephone keypad. We'll pause for just a moment to compile the Q&A roster. We have our first question coming from the line of Matthew O'Brien with Piper Sandler. Your line is open.
spk07: Matthew O' Thanks for taking my questions. Terry or John, can you just talk a little bit more about that delay that you saw On Holo, maybe just quantify a bit, you know, how long the delay was and specifically what it was on. Was it software? Was it hardware? Was it something else? Just any more color there would be helpful.
spk03: Yeah, thanks, Matt. So, yeah, the software is perfect, which is, you know, the great news is we had to go through, you know, some third-party, you know, testing and prior that was, you know, required for the submission. You know, we ran into, you know, a couple minor issues relating, you know, to some hardware and electrical systems that, you know, the fix was quickly identified and are in process of finishing up that testing now. So it's, you know, really a nominal delay. Okay, we're talking, you know, a couple weeks basically? Yeah, yeah, that's exactly right.
spk07: Got it. Okay. And then on the new product side, I guess the first thing, you know, it sounds like you feel pretty comfortable with the approval timelines. I don't know how much you're kind of factoring in some of the slowdown at FDA that we're seeing just COVID-related. But, you know, I'd love to hear just confidence again in that timeline that you're talking about. And then secondly, on the new product side, I guess what happens if Holo does get delayed? Can you still roll out those new technologies? And then How differentiated can you really make those products? Can you get pricing premiums on them, you know, et cetera?
spk03: Yeah, sure. So, you know, again, we don't have any insight to the FDA and how COVID has backed them up, but, you know, we've had, you know, good conversations with them and have put together an outstanding submission, and so we feel very confident in about that and certainly, you know, are contemplating, you know, what you mentioned, you know, into the timeframes. You know, the other products, you know, that you refer to, you know, look, our sales force has been starving for products for a number of years now. So we believe that just getting them into the field, you know, will continue, you know, to drive revenue growth. It'll increase, you know, our, you know, products, you know, per distributor, per surge, and drive all of those metrics up. You know, as for, you know, premium pricing, you know, there isn't a lot of it anymore with, you know, IDNs and GPOs, you know, really driving, you know, pricing, you know, at the product level. But, you know, we will certainly, you know, look to, you know, maximize the opportunity the best we can.
spk07: Okay. And the last one for John, just on the EBITDA loss for the year. How do we think about that ramp over the course of the year as you're getting closer to the hollow approval and rollout? You know, are we going to see a big loss in Q4 and then that carries into next year? How do we think about the cadence there? Thank you.
spk08: Yeah, no, we don't anticipate, you know, we're going to build the competency, you know, through the course of the year. You know, so as you kind of, you know, we were at, you know, 7-7 in the fourth quarter and And, you know, I think, you know, it's pretty – the cost will build a bit between now and the end of the year. But, you know, we're talking, you know, less than, you know, 10 resources incrementally to support the IRB. And then really based on the output of that, we'll get an assessment of what we need for, you know, the full commercial alpha launch And so I think that it will look – I don't anticipate that it's going to grow significantly in the fourth quarter. It's going to be more in line with the overall revenue cadence. Understood. Thank you.
spk00: We have our next question coming from the line of Ryan Zimmerman with BTIG. Your line is open.
spk06: Hey, Terry. Hey, John. Thanks for taking the questions. Just to follow up on Matt's question on Array and Holo real quick. So if we think about, you know, first cases kind of at the end of the year, how are you thinking about that launch in 2022 in terms of, you know, the size and scale? Is that, you know, should we think of that as kind of a gradual launch with, you know, kind of beta testing going on maybe in the first half of 2022? Just some color in terms of once we get that product out to market, what that could look like initially?
spk03: Yeah, sure. Look, we plan on getting a number of these systems out as quickly as we get clearance, and we'll be prepared to do so so that we can begin to gain experience. Based on the success of the initial experience, we should be ready to begin to launch multiple units throughout the course of 2022, especially through the back half. And the key is that we want to do it responsibly as we scale up and build the field competency to ensure that these units are deployed in the way that delivers the best possible outcomes for physicians and patients.
spk06: Understood. And then with the launch of products that are coming, just for John, kind of how to think about the capital expenditures that you're anticipating, you know, particularly with SET investments and things like that. You know, what are you thinking you may need this year as you launch some of those other products?
spk08: Yeah, so, you know, I think overall when you look at our CapEx budget for the year, you know, between Holo and SET, you know, there's probably somewhere between, you know, $4 and $7 million of capital. And then the other piece of capital that comes into play is, as we've talked about previously, we're working through an ERP implementation as part of the separation from RTI. That's probably another $3 million of capital. And then there's probably another $2 to $4 million related to a variety of activities you know, as, you know, we're beginning to prepare for, you know, movement into a new space in San Diego. You know, we just signed a lease last week that you'll see a K on that, you know, it's going to take about a year to build it out. But as we work through the build out, you know, we're going to be, you know, building surgical suites that highlight the digital technology. And there'll begin to be some capital for that this year.
spk06: Got it. All right. Thanks for taking the questions, guys.
spk00: Again, in order to ask a question, simply press star, then the number one on your telephone keypad. We have our next question coming from the line of Matt Hewitt with Craig Hellam. Your line is open.
spk02: Thank you for taking the questions. First up, with the step back or the step down a little bit here in Q1 versus Q4, how much of that is COVID versus the winter storms that you saw in the southern part of the country? If not for those storms, has the market somewhat stabilized from a COVID perspective?
spk08: Look, there's probably a handful of surgeries that were impacted by the winter storms, but it's really hard to tease that out from the COVID perspective. I would say the vast majority of the shortfall was COVID related. And it's global, right? And I think the important thing to keep in mind is that 20% of our revenue is international. And the impact of COVID, they were much more draconian in the way they shut down elective procedures. And so the impact was felt more significantly as that portion of the business. You know, I would say as we've gone through the end of, you know, Q1, you know, everybody's watching the statistics. And so you're starting to see, you know, the return of elective procedures. I don't think we're going to, you know, what we're seeing is that, you know, many patients are waiting to get vaccinated. at this stage in order to, you know, return to procedures. So, you know, I'm not sure we'll see a full return to the levels we saw in Q3, but we think we should see, you know, kind of steady return to normalized levels in the second half of the year.
spk02: Got it. All right. And then as far as gross margins are concerned, I think you said your adjusted gross margin in Q4 was 75%. Is that how we should be thinking? Maybe a little bit lower for Q1, but then kind of getting back up and maybe above that level as the year progresses, or how should we be thinking about gross margins?
spk08: Yeah, that's probably a reasonable way to think about it.
spk02: Fantastic. All right, that's it for me. Thank you.
spk00: We have our next question coming from the line of Frank Tagenen with Lake Street Capital Markets. Your line is open.
spk04: Hey, thanks for taking my questions. Just two today. I know this has been brought up in the past, but just curious if you could elaborate a little bit further on some of the potential models that Holo could use once it's commercially approved. And then speaking to some of the different packages, software packages that you develop over time, are those going to be additional add-on services, or is there potentially going to be some sort of subscription model, pay-per-click? I'm just trying to get a little bit of an understanding of the potential models on the Holo platform.
spk03: Yeah, sure. So, you know, look, I think, you know, we'll follow, as we've said before, in the short term to improve out, you know, the technology and the ability to validate better patient outcomes, the existing models, which depend on a variety of factors. You know, some hospitals, you know, like the capital purchase programs, others like the lease programs, there's certainly, you know, the need for some software, you know, licenses. But, you know, the key portion, you know, of the revenue for the next, you know, couple years anyhow will be the pull through of the hardware implants. Got it.
spk04: Okay. And then maybe one for John just to finish it off. Any comments on assumptions of international growth within the fiscal year 21 guidance you're comfortable sharing with us?
spk08: Yeah, you know, I think international will grow slightly faster than the overall business. You know, they've got a number of new product introductions. We talked about HPS 2.0, which is a dynamic coupler, which is approved in Europe. But, you know, now it's a PMA pathway in the United States, so, you know, we're not introducing it here. And then a number of, you know, the Fortalink family has gotten CE marks, so they'll be launching that. So we anticipate the international market will grow slightly faster than the domestic market. But overall, we're not going to see a significant deviation from kind of 20% of the overall revenue.
spk04: Perfect. All right. Thanks for taking my questions.
spk00: We have our next question coming from the line of Brandon, folks. Your line is open.
spk05: Hi, thanks for taking my questions and congratulations on the quarter. Sorry if I missed this, this is hopping between two calls here, but I saw this fine revenue guidance. Do you contemplate any potential HOLO revenue in 2021? I did hear, Terry, your comments on installs in 2022, but just wondering sort of how early you could get an impact from HOLO. And then maybe secondly...
spk08: Go ahead, sorry I interrupted. Finish your question.
spk05: Sorry. And then maybe secondly, can you just talk about, you know, whilst it's early days, the sort of the expansion of the Vibone partnership into the moldable, the impact you've seen there, and your willingness to continue to do these sort of partnerships as you sort of launch Holo into the field. Thank you.
spk08: Yeah. So, you know, as Terry referenced in the previous question, You know, in the short term, the majority of the revenue that we anticipate seeing from Holo is going to be through product pull-through. You know, there's a small disposable portion that goes along with the procedure. And so, you know, and that revenue, you know, would be recognized in conjunction with, you know, IRB placement. And so, you know, we do anticipate, you know, what I would call some, you know, pretty moderate revenue driven as we start placing the products for purposes of the study. But again, it's going to be predominantly seen through implants. And we anticipate that that will accelerate, obviously, as we transition from the IRB and the alpha to the full commercial launch. But, you know, that's going to take most of 22 to work through. You know, from a standpoint, you know, by bone moldable, you know, it's early days in the relationship. And, you know, we're seeing, you know, a subset of users that like the handling characteristics of that product. And, you know, but it's difficult to assess at this point in time. you know, the progression of that. It's a nice product, but early, I guess would be the best way to characterize it. And then, you know, from a standpoint of similar relationships, yeah, I think we're very open to, you know, partnering, licensing, acquiring for purposes of accelerating the transformation of the product portfolio. And so there's certain competencies that we have no intention to develop internally. So biologics is an example. There's a lot of categories within the biologic space that we're not currently competing in. So as we work to either upgrade or expand our biologics offering, we anticipate there'll be a number of additional distributions or licensing relationships. And then as we look at the new product development pathway, we're going to constantly do a make or buy decision on the product portfolio in order to determine what's the best economic use of cash. I mean, I think that we've got aggressive goals for the investment in R&D of the organization to reimagine the portfolio and exploit the whole of technology, but there are some gap fillers that I think would be very valuable to our customers that probably make more sense to partner on than to develop internally.
spk05: Great. Thanks very much, John.
spk00: We have our last question coming from the line of Jim Sedity with Sedity & Co. Your line is open.
spk01: Hi. Good afternoon. So, Terry, the company's changed quite a bit since you've been there, a much simpler model now. And you made some pretty significant changes to the distribution and the sales team. Now that you're going in the direction of becoming more of a digital story, do you think that you have the right people in place for distribution, or do you think there will be more changes on that front going forward?
spk03: Yeah, you know, Jim, it's a great question, and it's an evolution. So, you know, we will begin to add those competencies you know, to support the sales teams. But, you know, as we continue to build out and become more of a digital player, it's going to come down to, you know, those partners and whether they're willing, you know, to go through the various, you know, trainings and protocols that we have if they want access to the technology. So, you know, my thought is that we'll have, you know, a broad internal organization to support them. And we'll move to both direct and distributors that are committed to following the same path.
spk01: All right. And then my second question for John, can you just give us an update on where you think the share count will end up for 2021 and what you think the cash burn for the year will be?
spk08: The share count will be $110 million, which is kind of representative of of the shares we issued for the HOLO acquisition, as well as the impact of the offering that we did in Q, the first quarter here. And so that's what I would use for modeling purposes at this stage. And then we anticipate EBITDA guidance. We don't anticipate a significant investment in the working capital. As we move through the year, I think there's some opportunity to improve, you know, in certain of those categories. You know, so I think if you just look at the EBITDA guidance plus the direction that we gave around CapEx, it should give you a sense of the cash burn for the purposes of the year.
spk01: Okay. All right. Thank you.
spk00: There are no further questions at this time. I will now turn the call back over to Terry Rich for closing remarks.
spk03: All right, thanks again for joining us today, everyone. We look forward to updating you on our progress on our next quarterly call.
spk00: This concludes today's conference call. You may now disconnect.
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