Surgalign Holdings, Inc. Announces First Quarter 2022 Results and Raises Full Year 2022 Revenue Guidance Range

·19-min read
Surgalign Holdings, Inc.
Surgalign Holdings, Inc.

DEERFIELD, Ill., May 10, 2022 (GLOBE NEWSWIRE) -- Surgalign Holdings, Inc., (NASDAQ: SRGA) a global medical technology company focused on elevating the standard of care by driving the evolution of digital surgery, today announced financial results for its 2022 first quarter ended March 31, 2022.

Financial Highlights and Key Events:

  • Received FDA 510(k) clearance for HOLO Portal™ System, the world's first AI-driven AR guidance system for spine surgery;

  • 1st Holo Portal™ site up and running;

  • 1st successful Holo Portal™ case completed;

  • Total global spine revenue of $20.6 million;

  • Adjusted EBITDA loss of $13.3 million;

  • Cash and cash equivalents of $44.7 million; generated approximately $17.7 million in gross proceeds from underwritten public offering.

“I’m pleased to report that during the first quarter, we began to see market conditions improve with fewer COVID-related restrictions in place, and higher demand for our products as a result. With the improved environment, we now expect higher revenue for 2022 than our prior forecast with opportunities to further grow product revenue as we continue to innovate and expand,” stated Terry Rich, President and Chief Executive Officer of Surgalign Holdings.

Mr. Rich continued, “During the quarter, our most significant milestone achievement was receipt of FDA 510(k) clearance. With approval to move forward, we have now entered the initial commercial stage to bring this new revolutionary technology to market. This past week, we reached another major milestone with our first site up and first successful cases completed using our HOLO Portal. We expect more sites to be launched this quarter and our goal remains to have between 10-15 sites up and running by the end of the year with a more widespread launch in 2023. While our initial focus is the spine, we believe our artificial intelligence, or AI, platform will apply to other medical specialties and types of surgical procedures, opening up a much larger global market opportunity. It is our belief that AI can be applied across a variety of anatomy to drive improvements in healthcare, with the end goal to improve patient outcomes.”

First Quarter Comparisons

Total revenue for the first quarter ended March 31, 2022, was $20.6 million as compared to $23.3 million in the first quarter ended March 31, 2021. The decrease in revenue was primarily related to the ongoing impact of COVID-19, which continued to impact surgical procedures performed.

The Company reported gross margins of 68.9% and 73.2% for the three months ended March 31, 2022 and 2021 respectively, with the decline related to lower revenue for the comparable periods, as well as product rationalization initiatives.

On a non-GAAP basis, the Company reported gross margin of 70.9% as compared to gross margin of 75.5% in the first quarter of 2021.

Total operating expenses for the first quarter of 2022 were $23.1 million as compared to $31.5 million in the comparable year-ago period, a decline of $8.4 million or 26.6%. The year-over-year improvement in operating expenses was primarily driven by a $8.5 million decrease in the Holo milestone valuation and a $0.8 million decline in general and administrative expenses. This was offset by a $1.6 million increase in research and development expenses, primarily related to the continued development of the HOLO™ platform and obtaining regulatory approval.

On a non-GAAP basis, total operating expenses for the first quarter of 2022 were $28.4 million as compared to $27.9 million in the comparable year-ago period. Excluded from Q1 non-GAAP operating expense was approximately $0.9 million in asset impairment charges related to the impairment of instruments during the quarter, $0.9 million in transaction and integration expenses related to issuance costs associated to the newly issued warrants, non-cash stock-based compensation of $1.4 million and a gain of $8.5 million due to adjustments to the fair value of the Holo milestones.

The Company reported an operating loss of $8.9 million in the first quarter of 2022 as compared to an operating loss of $14.4 million in the first quarter of 2021. Net income from continuing operations for the first quarter of 2022 was $0.0 million as compared to a net loss from continuing operations of $15.2 million for the first quarter of 2021.

Adjusted earnings before interest, taxes, depreciation and amortization (Adjusted EBITDA), for the first quarter of 2022 was a loss of $13.3 million as compared to an Adjusted EBITDA loss of $9.8 million for the first quarter of 2021.

As of March 31, 2022, cash and cash equivalents were approximately $44.7 million. This compares to $51.3 million reported as of December 31, 2021. During the first quarter of 2022, the Company completed an underwritten public offering of its common stock, raising gross proceeds of approximately $17.7 million.

Fiscal 2022 Business Outlook

The Company now expects full year revenue in the range of $86 to $90 million, which represents a $3.0 increase from its previously issued guidance of $83 to $87 million. The increased guidance is based on improving market conditions and a stronger outlook for the Company’s products and solutions.

FDA 510(k) Clearance of HOLO Portal System

On January 18, 2022, the Company announced that it had received clearance of its HOLO Portal surgical guidance system for use within lumbar spine procedures. The HOLO Portal system is the world’s first artificial intelligence (AI)-driven augmented reality (AR) guidance system for spine, and the first clinical application of the Company’s HOLO™ AI digital health platform.

The HOLO Portal system combines machine learning-based image guidance technology with AR, automated spine segmentation (i.e., anatomy recognition), and automated surgical planning utilizing proprietary AI software. Intraoperative images are autonomously processed by the AI system to create a patient-specific plan that is presented to the surgeon using the AR display.

First HOLO Portal Cases

On May 5, 2022, the Company announced that its HOLO Portal surgical guidance system had officially entered clinical use, with the first surgical procedure completed. The surgery was performed at Indiana Spine Hospital in Carmel, Indiana by Dr. Mario Brkaric, a board-certified orthopedic surgeon.

Conference Call

Surgalign will host a conference call and audio webcast at 4:30 p.m. ET today. The conference call can be accessed by dialing (866) 604-1616 (U.S.) or (201) 689-8043 (International). The webcast can be accessed through the investor section of Surgalign’s website at surgalign.com/investors/. A replay of the conference call will be available on Surgalign’s website for one month following the call.

About Surgalign Holdings, Inc.

Surgalign Holdings, Inc. is a global medical technology company committed to the promise of digital health and is building out its digital surgery platform to drive transformation across the surgical landscape. Uniquely aligned and resourced to advance the standard of care, the company is building technologies surgeons will look to for what is truly possible for their patients. Surgalign is focused on bringing surgeons solutions that predictably deliver superior clinical and economic outcomes. Surgalign markets products throughout the United States and in more than 50 countries worldwide through an expanding network of top independent distributors. Surgalign is headquartered in Deerfield, IL, with commercial, innovation and design centers in San Diego, CA, Warsaw and Poznan, Poland and Wurmlingen, Germany. Learn more at www.surgalign.com and connect on LinkedIn and Twitter.

Forward Looking Statement

This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management’s current expectations, estimates and projections about our industry, our management’s beliefs and certain assumptions made by our management. Words such as “anticipates,” “expects,” “intends,” “plans,” “believes,” “seeks,” “estimates,” variations of such words and similar expressions are intended to identify such forward-looking statements. The forward-looking statements are not guarantees of future performance and are based on certain assumptions including general economic conditions, as well as those within the Company’s industry, and numerous other factors and risks identified in the Company’s most recent Form 10-K and other filings with the SEC. Our actual results may differ materially from the anticipated results reflected in these forward-looking statements. Important factors that could cause actual results to differ materially from the anticipated results reflected in these forward-looking statements include risks and uncertainties relating to the following: (i) the risk of existing or potential litigation or regulatory action arising from the previously announced SEC and internal investigations and their findings; (ii) the identification of control deficiencies, including material weaknesses in internal control over financial reporting and the impact of the same; (iii) potential reputational damage that the Company has or may suffer as a result of the findings of the SEC and internal investigations and related litigation; (iv) general worldwide economic conditions and related uncertainties; (v) the continued impact of the COVID-19 novel coronavirus pandemic and the Company’s attempts at mitigation, particularly in international markets served by the Company; (vi) the failure by the Company to identify, develop and successfully implement immediate action plans and longer-term strategic initiatives; (vii) the reliability of our supply chain; (viii) our ability to meet obligations, including purchase minimums, under our vendor and other agreements; (ix) the duration of decreased demand for our products; (x) whether or when the demand for procedures involving our products will increase; (xi) the Company’s access to adequate operating cash flow, trade credit, borrowed funds and equity capital to fund its operations and pay its obligations as they become due, and the terms on which external financing may be available, including the impact of adverse trends or disruption in the global credit and equity markets; (xii) our financial position and results, total revenue, product revenue, gross margin, and operations; (xiii) failure to realize, or unexpected costs in seeking to realize, the expected benefits of the Holo Surgical, Inc. (“Holosurgical”) acquisition, including the failure of Holosurgical’s products and services to be satisfactorily developed or achieve applicable regulatory approvals or as a result of the failure to commercialize and distribute its products; (xiv) the failure to effectively integrate Holosurgical’s operations with those of the Company, including: retention of key Holosurgical personnel; the effect on relationships with customers, suppliers, and other third parties; and the diversion of management time and attention to the integration; (xv) the number of shares and amount of cash that will be required in connection with any post-closing milestone payments, including as a result of changes in the trading price of the Company’s common stock and their effect on the amount of cash needed by the Company to fund any post-closing milestone payments in connection with the acquisition; (xvi) the effect of the recent resignation of our auditor and our ability to successfully onboard a new auditor; (xvii) the continuation of recent quality issues with respect to our global supply chain; (xviii) the effects of the recent resignations from our Board of Directors and executive leadership team, including our ability to find qualified candidates to fill those vacancies; (xix) the effect and timing of changes in laws or in governmental regulations; and (xx) other risks described in our public filings with the SEC. These factors should be considered carefully, and undue reliance should not be placed on the forward-looking statements. Each forward-looking statement in this communication speaks only as of the date of the particular statement. Copies of the Company’s SEC filings may be obtained by contacting the Company or the SEC or by visiting Surgalign’s website at www.surgalign.com or the SEC’s website at www.sec.gov. We undertake no obligation to update these forward-looking statements except as may be required by law.

Mike Vallie
Investor and Media Contact
IR@surgalign.com

SURGALIGN HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Operations

(Unaudited, in thousands, except share and per share data)

For the Three Months Ended

March 31

2022

2021

Revenues

$

20,605

$

23,291

Cost of goods sold

6,410

6,238

Gross profit

14,195

17,053

Operating Expenses:

General and administrative

25,317

26,161

Research and development

4,447

2,875

Gain on acquisition contingency

(8,503

)

(51

)

Asset impairment and abandonments

939

2,176

Transaction and integration expenses

916

322

Total operating expenses

23,116

31,483

Operating loss

(8,921

)

(14,430

)

Other (income) expense - net:

Other (income) expense - net

28

(4

)

Interest expense

252

Foreign exchange loss

353

545

Change in fair value of warrant liability

(9,743

)

Total other (income) expense - net

(9,110

)

541

Income (Loss) before income tax provision

189

(14,971

)

Income tax provision

162

219

Net income (loss) from operations

27

(15,190

)

Noncontrolling interests

Net income applicable to noncontrolling interests

Net income (loss) applicable to Surgalign Holdings, Inc.

27

(15,190

)

Other comprehensive income (loss)

Unrealized foreign currency translation gain

(109

)

(71

)

Total other comprehensive income (loss)

$

136

$

(15,119

)

Net income (loss) from operations per share - basic

$

0.00

$

(0.15

)

Net income (loss) per share applicable to Surgalign Holdings, Inc.- basic

$

0.00

$

(0.15

)

Net income (loss) from operations per share - diluted

$

0.00

$

(0.15

)

Net income (loss) per share applicable to Surgalign Holdings, Inc. - diluted

$

0.00

$

(0.15

)

Weighted average shares outstanding - basic

172,009,259

98,109,900

Weighted average shares outstanding - diluted

177,328,099

98,109,900


SURGALIGN HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Balance Sheets

(Unaudited, in thousands)

March 31,

December 31,

2022

2021

Assets

Cash

$

44,677

$

51,287

Accounts receivable - net

20,458

19,197

Current inventories - net

22,980

26,204

Prepaid and other assets

13,191

8,984

Total current assets

101,306

105,672

Non-current inventories - net

12,225

10,212

Property, plant and equipment - net

900

945

Other assets - net

7,114

6,970

Total assets

$

121,545

$

123,799

Liabilities and Stockholders' Equity

Accounts payable

$

12,089

$

10,204

Current portion of acquisition contingency - Holo

25,585

Accrued expenses and other current liabilities

15,813

17,769

Accrued income taxes

444

484

Total current liabilities

28,346

54,042

Notes payable - related party

10,034

9,982

Acquisition contingencies - Holo

33,425

26,343

Warrant liability

10,678

12,013

Other Long-term liabilities

3,376

3,176

Total liabilities

85,859

105,556

Mezzanine equity

10,006

10,006

Stockholders' equity:

Common stock and additional paid-in capital

597,195

579,670

Accumulated other comprehensive loss

(1,929

)

(1,820

)

Accumulated deficit

(569,586

)

(569,613

)

Total stockholders' equity

25,680

8,237

Total liabilities and stockholders' equity

$

121,545

$

123,799


SURGALIGN HOLDINGS, INC. AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows

(Unaudited, in thousands)

For the Three Months Ended
March 31,

2021

2020

Cash flows from operating activities:

Net income (loss)

$

27

$

(15,190

)

Adjustments to reconcile net income (loss) to net cash used in operating activities:

Depreciation and amortization expense

562

520

Provision for bad debts and product returns

913

1,978

Investor fee

916

Change in fair value of warrant liability

(9,743

)

Provision for inventory write-downs

3,044

2,754

Stock-based compensation

1,374

936

Asset impairment and abandonments

939

2,176

Gain on acquisition contingency

(8,503

)

(51

)

Other

(3

)

58

Change in assets and liabilities:

Accounts receivable

(2,235

)

(4,280

)

Inventories

(2,122

)

(5,636

)

Accounts payable

1,771

(238

)

Accrued expenses

(17,492

)

9,659

Right-of-use asset and lease liability

(2

)

Other operating assets and liabilities

11,416

(7,212

)

Net cash used in operating activities

(19,138

)

(14,526

)

Cash flows from investing activities:

Purchases of property and equipment

(1,261

)

(2,321

)

Patent and acquired intangible asset costs

(81

)

(161

)

Net cash used in provided by investing activities

(1,342

)

(2,482

)

Cash flows from financing activities:

Share offering proceeds including prefunded warrant exercised, net

17,729

36,484

Proceeds from exercise of common stock options

23

Payment of Holo Milestones - contingent consideration

(4,081

)

Payments for treasury stock

(5

)

(110

)

Net cash provided by financing activities

$

13,643

$

36,397

Effect of exchange rate changes on cash and cash equivalents

$

227

$

412

Net (decrease) increase in cash and cash equivalents

$

(6,610

)

$

19,801

Cash and cash equivalents, beginning of period

$

51,287

$

43,962

Cash and cash equivalents, end of period

$

44,677

$

63,763


Non-GAAP Financial Measures

To supplement our condensed consolidated financial statements presented on a GAAP basis, we disclose non-GAAP net income applicable to common shares and non-GAAP gross profit adjusted for certain amounts. The calculation of the tax effect on the adjustments between GAAP net loss applicable to common shares and non-GAAP net income applicable to common shares is based upon our estimated annual GAAP tax rate, adjusted to account for items excluded from GAAP net loss applicable to common shares in calculating non-GAAP net income applicable to common shares. Reconciliations of each of these non-GAAP financial measures to the corresponding GAAP measures are included in the reconciliations below.

The following are explanations of the adjustments that management excluded as part of the non-GAAP measures for the three months ended March 31, 2022 and 2021. Management removes the amount of these costs including the tax effect on the adjustments from our operating results to supplement a comparison to our past operating performance.

2022 and 2021 Non-cash stock-based compensation – These costs relate to expense amortization for all stock-based awards made to employees and directors, including restricted stock awards, restricted stock units, stock options and the employee stock purchase plan purchase rights.

2022 and 2021 Foreign exchange (gain) loss – These costs relate to the process of remeasuring international activity into the Company's functional currency.

2022 Change in fair value of warrant liability – Other income related to the revaluation of our warrant liability.

2022 and 2021 Gain on acquisition contingency – The gain on acquisition contingency relates to an adjustment to our estimate of obligation for future milestone payments on the Holo Surgical acquisition.

2022 and 2021 Asset impairment and abandonments – These costs relate to asset impairment and abandonments of certain long-term assets within the asset group.

2022 and 2021 Transaction and integration expenses – These costs relate to professional fees associated with the 2022 warrant financing and with the acquisition of Holo Surgical and other matters.

2022 and 2021 Inventory purchase price adjustment – These costs relate to the purchase price effects of acquired Paradigm inventory that was sold during the three months ended March 31, 2022 and 2021.

2021 Severance and restructuring costs – These gain and costs relate to the reduction of our organizational structure, primarily driven by simplification of our Marquette, MI location.

Material Limitations Associated with the Use of Non-GAAP Financial Measures

EBITDA, Adjusted EBITDA and Adjusted Net Income Applicable to Common Shares should not be considered in isolation, or as a replacement for GAAP measures.

Usefulness of Non-GAAP Financial Measures to Investors

The Company believes that presenting EBITDA, Adjusted EBITDA and Adjusted Net Income Applicable to Common Shares in addition to the related GAAP measures provide investors greater transparency to the information used by management in its financial decision-making.

SURGALIGN HOLDINGS, INC. AND SUBSIDIARIES

Reconciliation of Revenues to Adjusted Gross Profit

(Unaudited, in thousands)

For the Three Months
Ended March 31,

For the Three Months
Ended March 31,

2022

2021

Revenues

$

20,605

100.0

%

$

23,291

100.0

%

Costs of processing and distribution

6,410

31.1

%

6,238

26.8

%

Gross profit, as reported

14,195

68.9

%

17,053

73.2

%

Inventory purchase price adjustment

410

2.0

%

527

2.3

%

Non-GAAP gross profit, adjusted

$

14,605

70.9

%

17,580

75.5

%

Non-GAAP gross profit percentage, adjusted

70.9

%

75.5

%


SURGALIGN HOLDINGS, INC. AND SUBSIDIARIES

Non-GAAP Operating Expenses, Adjusted

(Unaudited, in thousands)

For the Three Months Ended
March 31,

2022

2021

Operating Expenses

23,116

31,483

Non-cash stock-based compensation

1,374

915

Gain on acquisition contingency

(8,503

)

(51

)

Asset impairment and abandonments

939

2,176

Transaction and integration expenses

916

322

Severance and restructuring costs

218

Adjusted Operating Expenses

$

28,390

$

27,903

Adjusted Operating Expenses as a percent of revenues

137.8

%

119.8

%

*See explanations in Non-GAAP Financial Measures above.


SURGALIGN HOLDINGS, INC. AND SUBSIDIARIES

Reconciliation of Net (Loss) Income Applicable to Common Shares and Net (Loss) Income Per Diluted Share to Adjusted Net (Loss) Income Applicable to Common Shares and Adjusted Net (Loss) Income Per Diluted Share

(Unaudited, in thousands except per share data)

For the Three Months Ended

March 31, 2022

March 31, 2021

Net (Loss) Income Applicable to Common Shares

Amount Per
Diluted Share

Net (Loss) Income Applicable to Common Shares

Amount Per
Diluted Share

Net income (loss) from continuing operations

$

27

$

0.00

$

(15,190

)

$

(0.15

)

Change in fair value of warrant liability

(9,743

)

(0.05

)

0.00

Gain on acquisition contingency

(8,503

)

(0.05

)

(51

)

0.00

Non-cash stock-based compensation

1,374

0.01

936

0.01

Foreign exchange loss

353

0.00

545

0.01

Asset impairment and abandonments

939

0.01

2,176

0.02

Transaction and integration expenses

916

0.01

322

0.00

Inventory purchase price adjustment

410

0.00

527

0.01

Severance and restructuring costs

0.00

218

0.00

Non-GAAP net income (loss) from continuing operations

$

(14,227

)

$

(0.07

)

$

(10,517

)

$

(0.10

)

*See explanations in Non-GAAP Financial Measures above.


SURGALIGN HOLDINGS, INC. AND SUBSIDIARIES

Reconciliation of Net Loss Applicable to Commons Shares to Adjusted EBITDA

(Unaudited, in thousands)

For the Three Months Ended
March 31,

For the Three Months Ended
March 31,

2022

2021

Net income (loss) from continuing operations

$

27

$

(15,190

)

Interest expense, net

252

Provision (benefit) for income taxes

162

219

Depreciation

509

520

EBITDA

950

(14,451

)

Non-cash stock-based compensation

1,374

936

Foreign exchange loss

353

545

Inventory purchase price adjustment

410

527

Change in fair value of warrant liability

(9,743

)

Gain on acquisition contingency

(8,503

)

(51

)

Asset impairment and abandonments

939

2,176

Transaction and integration expenses

916

322

Severance and restructuring costs

218

Adjusted EBITDA

$

(13,304

)

$

(9,778

)

Adjusted EBITDA as a percent of revenues

(64.6

)%

(42.0

)%

*See explanations in Non-GAAP Financial Measures above.


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