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spk00: Welcome to the Sugarline Holdings first quarter 2021 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. 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.
spk03: Thank you, operator. Good afternoon, and thank you for joining the Surge Line Holdings, Inc.' 's first quarter 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 this 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 forecasts 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 Terri.
spk05: On today's call, I'll begin by providing an overview of our first quarter performance, then turn the call over to John to provide a financial overview, after which I'll provide an update on the progress we have made thus far in 2021 before opening the line for questions. Total revenue for the first quarter was $23.3 million, down from $27.1 million during the first quarter of 2020. primarily driven by the negative impact of COVID-19 on elective procedures both in the U.S. and internationally. While our primary focus is the development of Holo and achieving key milestones during 2021, we continue to successfully deliver innovation within our product portfolio. During the first quarter, we launched a number of new products, including Fortalink in Europe and an expansion of Cofix in the United States. In addition, we recently acquired the assets of a fully capable medical device machine shop in San Diego, which will enable us to support the acceleration of our innovation agenda by providing our research and development team with state-of-the-art prototyping and manufacturing capabilities. The benefit of this investment was on display last week as we hosted a surgeon design meeting and turned out prototype implants for cadaveric testing in record time. This allowed us to quickly integrate the feedback into our next version of the design. This capability allows us to decrease the time to market and also allows for custom instruments to meet individual surgeon needs. Turning to Holo, we remain on track with the ongoing development of the platform and are very excited to announce that we have filed our initial 510 submission to the FDA for the Holo Surgical Intelligent Guidance System. With a clearance expected in the second half of 2021, We remain focused on incremental milestones leading up to the first U.S. cases being performed with the platform by the end of the year. With that, now I turn the call over to John for a financial review.
spk03: Thanks, Terry. Global spine revenue for the quarter ended March 31, 2021, was $23.3 million compared to $27.1 million for the prior year period. The decline in revenue was primarily due to the impact of the COVID-19 pandemic on global elective procedural volumes. Domestic's revenue was $19.8 million, a $2.4 million decline from the first quarter of 2020, and international revenue was $3.5 million, a $1.3 million decline from the first quarter of 2020. Gross profit for the quarter was $17.1 million or 73% of revenue compared to $17.9 million or 66% of revenue in the prior year first quarter. The improvement in gross margin rate is due to the elimination of certain manufacturer-related costs as we move from an integrated manufacturer to a fixed price purchase when we sold the OEM business. Marketing general administrative expenses decreased 11.4 million, or 31%, to 25.9 million for the three months ended March 31, 2021, compared to 37.2 million for the three months ended March 31, 2020. The decrease in marketing general administrative costs was driven by a reduction in spending as a result of the decline in revenue and the simplification of the distribution and marketing infrastructure, and a reduction in spending due to the sale of the OEM business. Research and development expenses decreased 1.4 million, or 33%, to 2.9 million from 4.3 million for the three months ended March 31, 2021. The decline in research and development expense is a result of a reduction in spending as the company has begun to build out its internal R&D organization after the sale of the OEM business. Adjusted EBITDA for the first quarter of 2021 was a loss of $9.8 million compared with a loss of $20.2 million in the prior year period. The improvement in adjusted EBITDA is predominantly driven by the reduction in operating expenses as outlined
spk00: Ladies and gentlemen, please be patient. We are experiencing technical difficulties at this time and your conference will resume shortly. Thank you.
spk05: I would start turning to guidance.
spk00: And you're back in, sir.
spk03: Sorry about that. I believe we're back. We were at guidance. The COVID-19 global pandemic continued to impact demand for our projects during the beginning of 2021 with a particularly strong impact on our international markets. We're beginning to see a slow recovery in our domestic markets, and as a result, expect total revenue for the second quarter of 2021 to grow by 5% to 7% sequentially over the first quarter of 2021. We continue to anticipate full-year revenue growth in the range of 5% to 10% compared to full-year revenue of $102 million in 2020. Our guidance assumes the global procedure volume continues to progress and begin normalizing towards the end of this quarter with a slow return to historical levels for COFLEX and limited contribution from Servaline ACP, which was withdrawn from the market due to a recall by our manufacturing partner in January. In addition, we assume certain biologic products will be impacted by a delay in 510K clearance of the products as the FDA has upclassified the regulatory requirements. Based upon this revenue, we continue to anticipate full-year adjusted EBITDA will be in the range of a loss of $35 to $40 million. I would like to now turn the call back to Terry.
spk05: Thanks, John. Our primary focus this year is on the ongoing progression of our digital strategy, which includes the build-out of the organization and the continued development of the Holosurgical platform and to reimagine our product portfolio to accelerate the pace of new product introductions that will integrate seamlessly with the Holosurgical digital platform to deliver better patient outcomes. Starting with some of the recent developments with our product portfolio, we continue to work to align our long-term product development roadmap to support Holosurgical and the promise of digital surgery. In addition to focusing on identifying new development initiatives, we are undergoing 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 the near term, we've accelerated our innovation agenda and are building out our portfolio of products that can be integrated into the whole surgical platform. Turning to developments related to our digital surgery platform, We came into 2021 with a tremendous senior leadership group, which included the fully integrated team from Holo. Shortly after the end of the first quarter, we added to the talent within the leadership team focused on our digital strategy with the addition of Mark Mackey, our recently appointed Executive Vice President of Digital Surgery. In this position, Mark will head up our digital surgery team, which is tasked with leading our efforts to redefine and lead our digital surgery efforts. This team includes clinicians, engineers, technologists, medical device veterans working together to reimagine what is possible with digital surgery. Mark brings tremendous digital surgery and robotics experience, having spent more than 20 years at Brain Lab prior to its acquisition by Smith & Nephew. We are excited to have someone of Mark's caliber join the team and look forward to his contribution at this critical point in our development of a revolutionary digital platform. There are a number of key milestones that we expect to achieve in 2021, the first of which is the FDA 510 clearance of the platform. We are very happy to announce that we have made our initial submission to the FDA. The Holosurgical Intelligent Guidance System combines augmented reality and artificial intelligence to automatically segment the spine and define implant trajectories for surgical planning combined with real-time, interoperative, 3D surgical guidance. The system allows the surgeon to see the target of the surgery, which in the initial stages will be the patient's spine, with all the relevant anatomical details as if the patient had no skin, muscles, or connective tissue in the way. The system also provides intelligent AI-based validation and guidance for the surgeon regarding such aspects of the procedure as the location, size, angle, trajectory of the implant. All the system's functionality is available via the augmented reality display above the surgical field so the surgeon does not have to look away from the patient for guidance as they are required to do with traditional navigation systems that only provide 2D images and does require the surgeon to look away from the surgical field. Holosurgical represents a one-of-a-kind combination of technologies as confirmed by the quote in our press release this morning from Dr. Greg Anderson, Having utilized digital technology in my practice for more than two decades, the SurgLine system is the first transformational innovation I've seen in the digital realm. Its unique combination of augmented reality and artificial intelligence will not only allow me to make better decisions for my patients, but will allow me to deliver more accurate and efficient care in the surgical environment. It's truly a game-changer. Dr. Anderson is Professor in the Department of Orthopedic and Neurological Surgery at the Thomas Jefferson University and Clinical Director of the Spine Section of the Orthopedic Research Laboratory at the Rothman Institute. We look forward to working collaboratively with the agency and continue to expect to receive clearance during the second half of 2021. This is the first of many holosurgical-related FDA submissions we will file as we continue to work to bring incremental capabilities to the platform and expand its applications beyond spine and orthopedics, neuro, general, and many other surgical specialties and applications across the continuum of care. We recently hosted a lab with surgeon thought leaders in which we gained their input on certain of our new product development initiatives and introduced them to the holosurgical technology. The surgeons were incredibly enthusiastic regarding the holosurgical technology and shared our belief that it will help elevate the standard of care through the evolution of digital surgery. The quotes from Dr. Anderson and Dr. Sethi in our press release represent just two of the many accolades the group had to offer regarding this revolutionary technology. Holosurgical does not only provide best-in-class surgical navigation, but something that is still unique, intelligent guidance. Our intelligent guidance is a significant leap forward from traditional navigation and robotics that require direction from the surgeon to understand anatomy and trajectories. We need to remember that current robots, despite the significant progress since their introduction, have not made progress in the two most fundamental aspects, visualization and intelligence. The current robots are still blind and dumb as they do not know anatomy or difference in tissue, therefore require a human to direct them in real time. The whole of surgical technology with its comprehensive visualization and intelligent guidance is designed to do the opposite, provide the surgeon with information to deliver improved patient outcomes. Following FDA clearance, The second milestone for 2021 is the launch of the initial IRB studies. In conjunction with the launch of IRB sites, we will also work to launch alpha sites or early adopters not involved in generating clinical data as part of the studies. We expect to have approximately 20 sites, a combination of IRB and alpha sites, up and running in relatively short order following the clearance. This year's final holosurgical milestone will be first cases performed in the United States, and we currently expect that to occur in the fourth quarter of 2021. I am very excited about what we have accomplished during the quarter. While continuing to build the momentum we generated in 2020 as we drive towards our mission of becoming a digital surgery company, since the launch of SurgeLine and acquisition of Holosurgical, we have made substantial strides in towards both our build and innovate pillars. In addition to completing the build out of our leadership team, we have added top spine experience talent in literally every department of the company and tripled the size of what I believe is the most talented R&D team in spine and added to our unmatched digital team in Poland and the U.S. We are moving from being a provider of tools surgeons use to being a technology company. We are highly focused on executing against our strategy during the balance of 2021, as many of the critical components that will enable long-term success of our digital platform will be put into place in the coming quarters. With that, I'd now like to open the line for questions.
spk00: At this time, if you would like to ask a question, press star followed by the number one. on your telephone keypad. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Your first question comes from the line of Matthew O'Brien with Piper Sandler.
spk04: Afternoon. Thanks for taking my questions. I guess, John, just real quick, and I don't want to overstate this too much, but reiteration of guidance of 5 to 10, your press release from mid-March was 7 to 10. So are you really kind of steering us towards more of that, you know, 5% kind of range for the full year?
spk03: Well, I think the press really, our commentary in the quarter was, last quarter was 5 to 10. So it's consistent with what we had in the script. Yeah, I would say, you know, based upon, you know, the first quarter and what we're guiding in the second quarter, you know, we're trending towards the lower end of that guidance.
spk04: Okay, makes total sense. And then just a couple more for me, and I think, Terry, you were kind of getting to it, but this 20 IRB slash, you know, clinical site group that you're going to be targeting right away, what should we expect in terms of just kind of them getting the system, paying for a system, you know, volume commitments, and then do you need to get and really kind of compile a lot of usage data and before you roll it out more broadly to clinicians and centers in 22? Or is it the expectation that you're going to still be, you know, you're going to be pushing to sell systems, you know, fairly quickly in the first half of next year?
spk05: Yeah, so, you know, Matt, the goal is to get these systems out here, gain experience and publish on them and show, you know, what we believe to be true, which is that we have a highly differentiated and, in fact, you know, revolutionary system that can help differentiate on patient outcomes. But to do that, we need data and we need, you know, experience with it in surgeons' hands. You know, the other component of that is, as I mentioned, you know, this is the first submission. and we'll focus on the lumbar spine. We will continue to expand the application of the systems over time. Still expect to have full release of the system next year, and again, we'll continue to use the models that exist out there today until we have fully demonstrated that we drive a difference in patient-reported outcomes.
spk04: Got it. So, Terry, we should be expecting a pretty measured rollout of the system late this year into next year. That's fair? That's fair. Okay. And then last one for me is it was interesting to hear you guys acquired that new machining company out west. You've got this massive R&D group as well now. So, obviously, Holo is important, but you're also going to try to augment it with new products. Can you talk about what we should anticipate in terms of new product flow over the next couple of years? And then I guess more importantly on top of that, are you going to have the set capacity to support that through product flow?
spk05: Yeah, so, you know, look, Matt, the key is, as we stated, you know, everything we're doing is going to be compatible with Holo. And so we need to have, you know, best-in-class hardware and differentiated, you know, hardware, and we'll look to use Holo to help us differentiate as we continue to move the platform forward. And currently, without having those machine shop capabilities, your development process can get dragged out for forever, waiting to get prototypes in, running testing on them, making changes, more prototypes. This substantially increases our speed to market. So currently, again, we're focused on some of the key areas that we'll be able to support Holo next year. But, you know, sets, you know, should not be an issue for us. Got it. Thank you. Thanks, Matt.
spk00: Your next question comes from the line of Ryan Zimmerman with BTIG.
spk01: Hey, thanks for taking the question. So just, Terry, you mentioned a dynamic. I think you're looking at some of your hardware, some of your product in terms of, you know, what you may or may not keep. you just may put a little finer point on that kind of, if you sized it up, you know, help us understand kind of what you may not be continuing with and at what point in time.
spk05: And sorry, you were cutting out a little bit there, but I think I got the gist of it. You know, we've got, you know, almost 90 brands over, I forget how many countries. And, you know, that is a lot of, to maintain. And so we need to be smarter about the products that we're going to continue to invest in. And so what we're looking to do is to effectively rationalize the portfolio in smart ways, because the products that we want to continue to come out with are going to be the products that support the Holo platform and help us to drive outcomes. So, you know, not going to get into specifics on, you know, 80-some brands here today, but, you know, that's the gist.
spk01: Okay, and this just directionally maybe for John as a follow-up to that, will this have a dilutive, accretive impact on margins? I would assume it'll help boost margins, but, you know, maybe you could just provide your thoughts on it, John.
spk03: Look, I think, you know, we've given guidance that, you know, we're targeting 70 to 75 percent margins. And, you know, this rationalization of products is contemplated in that guidance. So I don't see it as something that's different than what we've guided at this point in time. And, you know, as Terry indicated, we're going to intelligently migrate out of these products in a way that will hopefully, you know, be transparent and as we consolidate brands and bring on new product families, we'll be able to transition surgeons in a way that doesn't create significant change from an operational perspective.
spk01: Okay. Thank you for taking the questions.
spk00: Our next question comes from the line of Matt Hewitt with Craig Hallam.
spk02: Good afternoon. Just a couple questions. I guess following up on the gross margins there, obviously another nice little uptick in Q1 here. Should we anticipate that continuing to trend higher over the course of the year as procedure volumes pick up, or are there other factors at play that, you know, it's going to bounce around a little bit?
spk03: No, you know, we don't get, you know, because we're buying all our products, Matt, there's no manufacturing leverage, you know, so the margin should the margin should be in the ranges in which you've seen it. It's predominantly a function of mix at this point in time than anything else.
spk02: Okay, fair enough. And then during your prepared remarks, you commented on some potential delays with some new product launches regarding the upclassing of certain biologics. Will that only impact existing products in the pipeline, or will it have an impact on some of the existing products and how should we be thinking about that?
spk03: Yeah, in particular, there's a DBM, a legacy DBM that we're getting from Florida that as they went through the process, they got pushback from the FDA. And so it's specific to an existing product. that we're potentially going to have a gap in sales. We've identified an alternative, and we're working with a new partner in order to fill that gap. But I think during the quarter, this quarter in particular, we could have a temporary disruption.
spk02: How big of an impact is that, a couple percent headwind, or any way to help us with sizing that up?
spk03: Yeah, I mean, I think it's contemplated in, you know, the guidance I gave you on the projection for the quarter, so it's already embedded in the numbers.
spk02: Okay, fair enough. All right, that helps. Thank you very much.
spk00: Our next question comes from the line of Brooks O'Neill with Lake Street Capital.
spk07: Good afternoon, guys. I cut out a little bit during the call, so if I ask something that you've already talked about, I apologize. I'm curious if you would be willing to talk a little bit about how quickly you anticipate being able to integrate and align the Holo capabilities with your existing product line, at least to the extent of as you anticipate the product line being configured going forward.
spk05: Yeah, thanks, Brooks. And I think we cut out for a while during the call as well. But so day one. We will, you know, immediately upon clearance, in fact, the submission is for clearance with our existing systems. So day one.
spk07: Great. Fantastic. Second question, obviously you've made tremendous progress realigning the organization and whatnot. A, do you feel like you're in a pretty good spot with regard to your organization today? And B, can you speak to kind of the cultural integration and how that's all going across what is essentially today a global organization?
spk05: Yeah, absolutely. And so, you know, Brooks, as I've mentioned in the past, the organization is the thing I'm proudest of, right? We are very clearly a rebuild organization. And the talent that we are bringing into this organization is literally unparalleled. And, again, in every department, you know, highlighting our most recent executive hire, Mark Mackey, but literally through every level of the organization. And, you know, everybody here, you know, understands what we have to do, and there is full alignment. And I would suggest the culture continues to grow and get better literally every week. I couldn't be more excited about what we're building.
spk07: That's fantastic. Let me just ask you one more. We're pretty excited about the opportunity internationally. Obviously, the COVID has been in the news internationally. I'm just curious if you can, A, give us a sense for what you're seeing outside the United States, be what the regulatory pathway looks like for OLO, and maybe when you think you might be in a place to start doing surgeries with doctors outside the United States as well. Thanks a lot, and congratulations on all you've accomplished.
spk05: Yeah, thanks a lot, Brooks. And, yeah, you know, what we've, you know, encountered is that things have been very difficult in the international markets. You know, we had a call this morning where they talked about a sales meeting in Germany they were trying to have live, but because of the lockdown, had to move it back to virtual. You know, a number of surgeries have been canceled. You know, it's been, you know, difficult, you know, times in a number of the countries over there. And so, you know, we're thankful that, you know, our team is in good health and great spirits and look forward, you know, to things, you know, hopefully continuing to open up as they get the vaccines out. As it relates to our strategy for Holo, we're still working through what our regulatory strategy is going to be to get Holo cleared in the international markets. As you may know, the change from MDD to MDR has some significantly more clinical components of it, and so we're in process of understanding that pathway now.
spk07: Perfect. Thanks, Ed. Thanks a lot for all the color.
spk05: Thanks, Brooks.
spk00: As a reminder, to ask a question, press star one on your telephone. Your next question comes from the line of Jim Sidoti with Sidoti.
spk06: Hi, good afternoon. Two quick ones for me. One, It sounds like most doctors now, most surgeons, are used to using a 2D system. How long do you think it will take for them to make the transition from a 2D to a 3D? You know, how many cases or how many, you know, just in general, how long will it take for them to adopt this newer technology?
spk05: Yeah, hey, Jim, you know, thanks a lot. You know, it will happen in their training, right? We're going to be, you know, required – you know, to train before they use the system, and it'll happen there. It is literally going to be something that is far more familiar to them than what they've used before, as well as, you know, a feature set that makes surgery easier that they've never had before either. Again, we had, you know, design meeting on a number of our other products, a bunch of surgeons you know, here in town, and we showed it to them, and I could not have been, you know, more excited about the accolades the system received. We had surgeons requesting units, you know, right there, you know, understanding they have to wait for clearance, obviously, but, you know, wanting to be part of the ALFAs and IRBs.
spk06: Okay, and the second one for me is, John, I don't know if you said this or not, but... After the raise in the first quarter, what should we be using for diluted share counts going forward?
spk03: Yeah, so we've got, you know, just right around, you know, 110, 111 million shares outstanding right now, Jim. So, you know, that's probably, when you look at the weighted average for the year, that's probably directional.
spk06: Okay. Thank you.
spk00: We have no further questions at this time, and now I will turn the call back over to Mr. Terry Rich for any closing remarks.
spk05: Excellent. Hey, thanks, everybody, again, for joining us here today. Look forward to updating our progress. You know, next quarter is we couldn't be more excited about what we're building here at Search Align. Thanks.
spk00: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation.
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