Surgalign Holdings, Inc.

Good day, ladies and gentlemen, and welcome to your Search Align Holdings Incorporated second quarter 2022 results conference call. All lines have been placed in the listen-only mode, and the floor will be open for your questions and comments following the presentation. As a reminder, today's call is being recorded. If you should require assistance throughout the conference, please press star zero. At this time, it is my pleasure to turn the floor over to your host, David Lyle, Chief Financial Officer Sir, the floor is yours.

Good afternoon, everyone, and thank you for joining us on today's call. I'll begin with our customary forward-looking statement disclaimer and then turn the call over to Terry Rich, our CEO, who will talk about many of the key developments during the quarter and in the period since, along with some general updates on anticipated milestones. I'll finish with a recap of our financial results and will then open up the call for questions. Our Chief Accounting Officer, Chris Thunander, is here as well and will be available during the Q&A portion of our call. As for our forward-looking statement disclaimer, I'd like to remind everyone that on today's call and webcast, management will be making forward-looking statements about future events, Surgiline'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 Surgilign's SEC filings. This conference call contains time-sensitive information that is accurate only as of the date of this live broadcast, August 9, 2022. SurgeLine 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 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. With that, I would like to turn the call over to Terry.

Terry? Thanks, Dave, and I'd like to welcome all of you who are joining us today. We've made significant progress since our Q1 results with respect to innovation and new products brought to market, the early stage commercialization of our HoloPortal surgical guidance system, and other initiatives around the HoloAI platform. Q2 revenue came in roughly in line with the first quarter, and we expect a strong second half of the year, primarily in Q4, based on new products we've introduced. The revenue range we provided in our last earnings call for the full year remains in place and momentum is building. On our last call, we provided a lot of information with respect to our Holo AI platform and what it means for SurgeLine in the near term and in the future. We spoke about the HoloPortal surgical guidance system and our commercialization plans, the various use cases of the AI platform, and what we intend to pursue in the remainder of the year and beyond. We also spoke about the drive to innovate, and that's where I'll begin. Roughly two years ago, July of 2020, we closed on the sale of our OEM business, RTI, and effectively began our corporate transformation. At the time of that divestiture, we had no engineers remaining in the U.S. Fast forward to today, where we have almost 30 hardware engineers on staff based in the United States and Germany, and all with extensive spine experience from leading spine brands around the world. We have continuously been building out our engineering capabilities as this is what will drive our success. And the team we have assembled has been working around the clock to bring new products to market along with redesigned next generation solutions. In order to succeed, we must have innovation, value-added products, customers need, and we made a lot of progress towards that end of 2021 and more so in recent months. Our vision at SurgeLine is to drive optimal patient outcomes while advancing the standard of spine care. And two products that help us achieve this vision are our CoFlex interlaminar stabilization device and Symmetry SI fusion system. CoFlex, in particular, is one of the most studied devices in all of spines. exhibiting superior results compared to fusion in several instances at two years postoperatively. The unique design of the CoFlex device maintains stability in the spine after direct surgical decompression while preserving more natural movement in the treated area. Our Symmetry SI fusion system is a minimally invasive SI joint fusion system that uses proven orthopedic principles including joint decortication, bone grafting, and fixation to achieve true arthrodesis. We're the only ones that decorticate the joint, which is a standard orthopedic principle in trying to achieve fusion. Last month, we announced a strategic partnership with PREA Healthcare to support the patient access program we launched in May, tailored to improve patient access to our COFLEX interlaminar stabilization device and Symmetry SI fusion system. For the past decade, PREA Healthcare has been partnering with med tech companies, helping patients get access to the latest medical technologies and procedures, and to provide data to payers for coverage determinations. With this new program, we expect more patients will gain increased access to the COFLEX and Symmetry systems, which in turn, should result in better evidence-based patient outcomes, as studies show. This was followed by an announcement on the commercial relaunch of our Cervaline interior cervical plate system. The product was initially introduced in 2019 and quickly became one of our fastest-growing product lines until we issued a voluntary recall last year. While it curtailed results in 2021 and the first half of 2022, and gave us time to properly assess market needs and develop the best product. Designed for anterior cervical discectomy infusion procedures, or ACDF, Servalign works to minimize tissue disruption and complications such as dysphagia. Moving on to inner bodies. Although we haven't publicly announced this yet, we recently launched another innovative product with our FortiLink A with TiPlus technology. Used for anterior lumbar interbody fusion procedures, this is the first in a family of 3D-printed titanium interbody cages and marks our first entry into the 3D-printed titanium interbody market. We've had great success with our Fortaline family of products with Tetrafuse technology, supporting thousands of cases in the U.S., more recently in Europe, and believe with this new titanium solution we'll open up new growth opportunities for the company. We expect to issue an announcement on this launch shortly. We have more products slated to come to market in the second half of the year, and we are continuing to build out our engineering capabilities at our innovation center in San Diego, where there is so much spine talent. The team we have compiled has enabled us to enhance our product portfolio significantly and will help us generate a consistent cadence of next generation products in the coming years. We hope to be launching our first-ever product designed at Surgilign as it is pending 510K. It is not currently available, but we expect it will be soon. One more point to make with respect to new products. We believe they will positively impact our results in the second half of the year. Even with the current hospital staffing shortages and supply chain issues both we and the industry at large have experienced, We are confident that barring any unexpected macro environmental issues, the new slate of products, along with the continued demand for surge line solutions, including the Holo Portal system, will lead to improvements in the second half of the year, with Q4 being the strongest. Let me shift to Holo and provide some updates on second quarter activity in the weeks that follow. For those of you who may be new to our story, we acquired Holo Surgical a company focused on artificial intelligence and augmented reality targeting spine surgery in September of 2020. And in December 2021, we made an equity investment in Interneurial Networks Inc., hiring their entire engineering team and licensed rights to their IP, which is focused on artificial intelligence for intracranial applications. Collectively, These transactions provided us with innovation and highly differentiated AI and AR technology, which we have been deploying further on our road to more widespread commercialization. When I talk about our transformation, these transactions are at the center of it, and a big part of what drives our confidence is we build long-term shareholder value and then work to sustain it. Artificial intelligence is not new in the medical field, but it's used in surgery is. And Surgilign has the only system, FDA cleared for spine surgery, combining both AI and AR. This is our holoportal surgical guidance system. I'll say it again, we're the only company. Every week you see a piece of news regarding an AI application or an AR company announcing FDA clearance or things of this nature. But no one to date has been cleared for for use both for surgery, other than SurgeLine, and investors have been inquiring about the differences. We received FDA clearance in January for our HoloPortal surgical guidance system, making our official commercial entry into the spine fusion market. As I said, this system combines AI and AR and is used intraoperatively to guide surgeons through spinal procedures. The AI autonomously segments the spinal anatomy and suggests a surgical plan to improve efficiencies and outcomes. The autonomous anatomic segmentation of the spine is very unique and is patent protected. AR improves visualization and reduces the surgeon's cognitive load and physical load in the operating room as the surgeon doesn't have to carry a large, heavy device on their head and can still look straight down at the surgical field rather than the current standard requiring the surgeon to look off to the side at a monitor somewhere else in the OR. Most competitive products today are built on stereotactic navigation, which is a technology that's been around since the 70s and little has changed since. For reference, stereotactic navigation is the basis of all spine navigation systems to include spine robots, where it's used to guide a robotic arm which holds a drill guide. A few companies, us included, and more in the pipeline, are combining augmented reality with stereotactic navigation, most of which are headset-based. On the other hand, our HoloPortal system, by virtue of its AI, is a smart system that recognizes anatomy of the spine, and this is the number one differentiator when comparing our technology to other systems. The HoloPortal system provide surgeons real-time information about the patient's anatomy that helps them perform their jobs with a goal to improve patient outcomes. If a surgeon only wants to see the pedicle as an example, the HoloPortal software can show the surgeon just the pedicle, removing all other tissues and bony anatomy simply by looking straight down through our AR display directly in the surgical field. The thing that most people don't understand is that when you open up the shoulder, a knee, a hip, or an ankle, the anatomy prevents itself in a very straightforward way relative to the spine. Now, if you look at the spine, all you see is a white sheet of connective tissues, making it difficult to easily identify the bony anatomy. Our artificial intelligence identifies and segments the bony spinal anatomy, and we then use our augmented reality to color code and display the segmentation over the native anatomy, which in turn helps optimize surgeons' performance. Another point with respect to AR and our current form factor using the portal to deliver the augmented reality display versus us developing a headset to compete against companies like Microsoft, Google, Apple, Lenovo, Qualcomm, and Magic Leap. Instead of competing against these industry giants, We intend to design our technology to port onto their platforms in the future. Our strategy is to be agnostic, align with technology leaders, and provide solutions that surgeons and other medical professionals covet and need. As for some updates with respect to our HoloPortal commercial launch, in May, we announced the first successful surgical procedure utilizing the HoloPortal surgical guidance system. This was performed by Dr. Mario Berkrich, a board-certified orthopedic surgeon at the Indiana Spine Hospital in Carmel, Indiana, and an additional case was performed thereafter with more expected. In July, we announced our second site and clinical expansion in Ohio with a case performed by Dr. Selvon St. Clair. Dr. St. Clair is a board-certified orthopedic and spinal surgeon at the Orthopedic Institute of Ohio. Our plan remains to have between 10 to 15 sites up and running by year end and we are currently in discussions with nearly 20 additional potential sites throughout the United States. Now, similar to what we've experienced on the spine device product side, the market has been somewhat challenging to navigate, but we are working through this. Interest in the HoloPortal system is very strong and there are a number of opportunities on the horizon that will help expand our reach and lead to more procedures. The path forward is clear, and we believe we can hit our target goals. And let's not forget the longer-term premise of the HoloAI platform brings to SurgeLine. This is not just about the spine, nor just about the operating room. The HoloAI platform is about the entire continuum of care, from diagnostics to pre-op to surgery, post-op care, and determination of real patient outcomes. AI algorithms can be applied far beyond spinal anatomy into various medical disciplines, autonomous analysis of both diagnostic imaging and post-op results, segmentation between bone, tissue, vascular and or nervous structures, intracranial indications, pathologies of the brain, musculoskeletal areas, and more. Our first clinical applications for the HoloAI platform in spines will be stenosis and disc degeneration. As we continue to gain medical buy-in and concurrently improve our financial strength, we believe we can expand further in a meaningful way. Over the next two years, we are focused on the commercialization of the HoloPortal system, integrating relevant procedural technologies, and expanding our HoloAI platform capabilities. We will do this through data aggregation upgraded algorithms, continued investments in innovation, and by bringing new solutions to market powered by HoloAI technology. We believe as new applications are layered onto our platform, we will create new and recurring revenue streams and operate on a lower cost basis with a greater bottom line impact. The development team we acquired with the HoloSurgical acquisition and our investment in interneural networks are the biggest assets in the transactions and have dramatically expanded our capabilities in building AI and machine learning algorithms. We have a platform. Now it's about building scale, new networks that can run on top of our platform to improve patient lives. Simultaneously, we are focused on driving innovation in our hardware portfolio, developing and launching new products that have competitive differentiation and customer value. To sum up the quarter, we have made great progress and our business is on track to improve. Our confidence in achieving our full year 2022 plan is driven by the new products we continue to bring to market and strong pent up demand. Longer term, we expect to see more significant improvements, especially as Holo evolves. We have proven that we can successfully bring hardware products to market and the future should be no different. With respect to Holo, we are now playing in a very large global market with technology that we believe will revolutionize the medical industry. We remain committed to turning our vision into reality for the sake of patients around the globe, and in the process, creating higher sustainable shareholder value. With that, I'd like to turn the call over to Dave. Dave?