Surgalign Holdings, Inc.

Greetings and welcome to the Surgiline Holdings 2022 fourth quarter and year end conference call. At this time, all participants are in a listen-only mode. The question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the call over to David Lyle, Chief Financial Officer. Thank you.

You may begin. 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 operations and key milestones. I will then review our fourth quarter financial results and outlook, followed by closing remarks from Terry. We will then open up the call for questions. Additionally, Chris Dunander, 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, Surgilign'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, March 30, 2023. Surge Align 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. With that said, I'll now turn the call over to Terry.

Thank you, Dave, and good afternoon. We've been quite busy over the past several months executing on our restructuring plan, closing the sale of our CoFlex and CoFix product lines, and further enhancing HoloPortal and our HoloAI platform. I'll begin today with an update on our restructuring. Last November, we announced a restructuring program to drive long-term growth, lower costs, strengthen our balance sheet, and put us in a much stronger position operationally. Much of our planning centered on product line rationalization, as we had a number of products that had been on the decline for years or had low ROIs and required not only financial resources, but both operational resources and human capital to support them. Our evaluation resulted in a plan which will reduce our product lines by approximately two-thirds and in turn enable us to eliminate a large amount of infrastructure costs, which will more than offset reduced revenue resulting from removing lower performing product lines. Some have already been discontinued, and others will be over the coming quarters. The end result will be a simplified business, a more focused offering, and lower ongoing cash requirements to run the company. Now let's move to the market and an update on our business. The market overall hasn't changed much since our remarks in November. We're still seeing a slow sales process, and conditions remain challenging both here in the U.S. and abroad. Hospitals and healthcare systems globally are facing unprecedented times and are coming off perhaps the worst financial year they've experienced. According to the American Hospital Association, hospitals are incurring losses with more than half projected to have negative margins in 2022. Expenses have been estimated to be nearly $135 billion higher than the prior year, and beyond financial issues, they continue to face workforce shortages, supply disruptions, along with lower patient volumes. On the other hand, the need for new technologies that can drive efficiencies in healthcare systems, not just within the OR, is building. which brings me to our digital health platform. In 2022, we fell short of our HoloPortal projections. While below plan, we have over 70 opportunities in our pipeline and more than 15 currently in the administrative approval part of the sales funnel, so demand is strong. As I noted, the buying environment remains challenging, and it has been difficult to forecast timing. Thus, given the current environment, we're going to refrain from forecasting the number of target sites today, but we do intend to provide updates throughout the year as more information becomes available, and especially with system enhancements we've made and have planned in the coming quarters. Since HoloPortal was launched, we've gathered very important feedback from surgeons, which in turn has been used to enhance the system's capabilities. New software, hardware, and additional features are part of the upgraded system. With over 20 new instruments added, we can now support a broader range of procedures and drive efficiencies in setup and workflow. Earlier this month, we launched HoloAI Insights for Spine Imaging, which we believe will lead to important discoveries through research that will transform patient care with artificial intelligence. According to EMC Digital Universe and IDC, two highly respected industry research firms, more than 90% of patient-generated health data is in the form of unstructured medical imaging data. And we address this with our new offering. HoloAI Insights translates medical imaging data into structured data sets of key biomarkers, which is currently used for research. Insights analyzes lumbar imaging for MRI images providing quantitative measurements of 16 different anatomic structures in the spine, and can process thousands of MRIs in just a few hours. In comparison, today the process is manual. Radiologists and surgeons read reports, take measurements, and make assessments. With HoloAI Insights, and for the first time ever, they will be able to analyze medical images based on quantifiable data rather than just someone's subjective view. This process is automated and will help surgeons make more informed decisions, again, based on data. This is only the beginning. Over time, we plan to leverage HoloAI Insights for precision medicine. HoloAI quickly generates very detailed patient-specific data for medical images. Because it is designed to automate these measurements, very large data sets can be built and combined with existing patient data electronic health records, EHR systems to get metrics at the population level. This will allow us to build a much more comprehensive model of the factors leading to positive outcomes for very specific groups of patients. Ultimately, we believe that prognostic models based on this data will facilitate physician decision-making, and patients will benefit by having a much more informed view of how well treatment options succeed with very similar patients. The first adopters of HoloAI Insights are doctors, Hany Malone, Greg Mundus, and Robert Eastlack, spine surgeons with the San Diego Spine Foundation. We couldn't be happier to be working with such an experienced team and leading foundation. Which brings me to the question of what's next for the Holo portfolio. The first generation of the HoloPortal surgical guidance system was about seeding the market and gaining experience. We've had some early successes and adoptions moving forward. At the same time, we've gathered valuable feedback from surgeons, which was incorporated in our latest launch. Each next-gen upgrade thereafter will advance the system, adding valuable features to improve the surgical experience. Over the long term, we believe the HoloPortal has a head start on the competition as it is the first FDA system cleared to incorporate both artificial intelligence and augmented reality to expand on the capabilities of stereotactic navigation. Our plan is to follow up just about every quarter in 2023 with additional enhancement. We'll be upgrading and redesigning the system's form factor, looking to provide physicians and their OR staff more flexibility in OR workflows. The two bigger initiatives center on the platform itself, as we'll be migrating towards a more open platform so that HoloPortal can be used with most, if not all, implant systems. We believe this will result in greater hospital and surgeon adoption. Second, and of equal importance, is system capability. Today, the HoloPortal is only compatible with Medtronic's OARM, which limits the number of accounts we can work in. By expanding system capability with more imaging devices, we've increased the number of hospitals and ASCs that we consult to. With respect to our HoloAI portfolio, we plan to follow up on the spine application of HoloAI Insights with a research-based application for AI assessment of intracranial aneurysms later this year. In addition to the research applications, we plan to release a clinical product for AI assessment of lumbar MRI images in 2024. Surgilign is playing in a much larger global market than ever before, with first mover advantage in AI as it relates to spine, we believe highly valuable AI technology that can be applied to many different use cases and treatments. Our global addressable market is in excess of $11 billion today and expect to grow to over $180 billion by 2023. There has been a global transformation towards advanced technologies following COVID with AI machine learning being key driving forces behind what is expected to be massive growth in the coming years. I will add, software is leading the fastest growing segment. The global AI healthcare market in North America has been the most aggressive in AI adoption in particular, and this is where we play today. AI is not about replacing medical professionals, but rather leveraging its power to capture and assess data. AI can use and process information to assist in more efficient medical decision-making. That's what we're focused on at SurgeLine, data insights that can be applied first to the spine, then expand to other areas of the anatomy and different fields of use. We are confident in our technology and its potential. Moving on to the sale of our CoFlex business in Q1. In February, we sold the COFLEX and COFIX product lines in the United States and worldwide intellectual property rights therein to Extant Medical Holdings for $17 million, a transaction that netted approximately $14.8 million in cash to surge line, cash which was needed to extend our cash runway. We will pursue to have discussions about other assets, both domestically and internationally, and we'll pursue every avenue to improve our liquidity and competitive position. With that, I'll turn the call over to Dave now to cover our financial outlook. Dave?