Surgalign Holdings, Inc. Announces Fourth Quarter and Full Year 2021 Results

DEERFIELD, Ill., March 15, 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 reported operating results for the fourth quarter and full year 2021.

Recent Highlights:

• Total global spine revenue of $21.8 million, compared to $26.2 million in the fourth quarter of 2020
• Net loss from continuing operations of $88.8 million, inclusive of a $72.1 million loss related to the Inteneural Networks, Inc. (INN) acquisition, or net loss of $0.64 share in the fourth quarter of 2021
• Adjusted EBITDA loss of $12.9 million, compared to a loss of $7.7 million in the fourth quarter of 2020
• Cash and cash equivalents at December 31, 2021 was $51.3 million
• In December 2021, the Company expanded is digital health capabilities through the acquisition of a significant equity interest in INN
• In January 2022, received FDA 510(k) clearance for HOLO Portal^TM System, the world’s first AI-driven AR guidance system for spine surgery
• In March 2022, the Company appointed David Lyle as Chief Financial Officer

“We are very proud of what we were able to accomplish during 2021 and early in 2022, despite the ongoing headwinds we are experiencing. I want to thank all of our employees for their hard work and perseverance to deliver for our customers while at the same time developing HOLO, which we believe is a quantum leap in the way surgical procedures are performed and ultimately the way patients are cared for throughout the care continuum,” said Terry Rich, President and Chief Executive Officer of Surgalign Holdings. “Fourth quarter performance was in line with our expectations, but continued to be heavily impacted by macro issues, including COVID-related procedural restrictions and hospital staffing shortages, both of which persisted during the first two months of 2022.”

Mr. Rich continued, “As we look to 2022, we are squarely focused on putting the pieces in place to allow us to drive the long-term adoption of HOLO. With a milestone FDA clearance in hand, our near term focus is on early commercial efforts to get HOLO into the hands of surgeons across the U.S. as part of our limited market release. We remain incredibly excited about the opportunity that exists for HOLO within the initial spine surgery market, but also for the broader opportunity for the platform as we move into additional procedural areas and incremental parts of the care continuum outside of the operating room.”

Fourth Quarter 2021

Global revenue for the quarter ended December 31, 2021, was $21.8 million compared to $26.2 million for the prior year period. The decrease in revenue is primarily due to decreased demand as a result of COVID-19 related headwinds in the fourth quarter.

Gross profit for the fourth quarter of 2021 was $12.3 million or 56.5% of revenue compared to $12.8 million or 48.8% of revenue in the fourth quarter of 2020.

General and administrative expenses for the fourth quarter of 2021 were $25.4 million compared to $27.3 million in the fourth quarter of 2020.

R&D expense for the fourth quarter of 2021 was $4.9 million compared to $2.2 million in the fourth quarter of 2020.

Net loss from continuing operations for the fourth quarter of 2021 was $88.8 million, inclusive of a $72.1 million loss related to the acquisition of INN, compared to a net loss of $118.1 million for the fourth quarter of 2020, inclusive of a $93.5 million loss related to the acquisition of Holo.

Adjusted earnings before interest, taxes, depreciation and amortization (Adjusted EBITDA), for the fourth quarter of 2021 was a loss of $12.9 million compared to a loss of $7.7 million for the fourth quarter of 2020.

As of December 31, 2021, cash and cash equivalents were approximately $51.3 million. Subsequent to the end of the fourth quarter, the Company completed an underwritten public offering of its common stock, raising gross proceeds of approximately $17.8 million.

Fiscal 2022 Business Outlook

The Company anticipates full year revenue in the range of $83 to $87 million.

FDA 510(k) Clearance of HOLO Portal System

On January 18, 2022, the Company announced 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^TM 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.

Acquisition of Equity Interest in Inteneural Networks, Inc.

In December 2021, the Company acquired an equity interest in INN, and its proprietary AI technology for autonomously segmenting and identifying neural structures in medical images and helping identify possible pathological states. The Company will also have the ability to acquire the remainder of INN’s outstanding equity interests upon the achievement of certain regulatory, developmental, and revenue-based commercial milestones. In June of 2021, the Company and INN entered into a strategic collaboration agreement during which time the Company evaluated INN’s technology for future integration within the Company’s digital platform.

INN is developing technology that harnesses ML and AI to autonomously and accurately identify and segment neural structures in medical images and integrate specific reference information regarding possible pathological states to physicians caring for patients. This technology could have future applications in neurosurgery as well as the potential to address a wide variety of potential disorders, including dementia, autism, tumors, aneurysm, stroke, and neurovascular structures using magnetic resonance imaging and computed tomography platforms.

Appointment of David Lyle as Chief Financial Officer

On March 7, 2022, the Company announced the appointment of David Lyle as its Chief Financial Officer. Mr. Lyle brings more than two decades of financial leadership experience with the technology sector and has a proven track record of successfully scaling high growth technology companies, having served in leadership roles in both public and private organizations.

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), using conference ID 13724073. 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 to drive transformation across the surgical landscape. Uniquely aligned and resourced to advance the standard of care, the company is building technologies physicians and other health providers will look to for what is truly possible for their patients. Surgalign is focused on developing 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) risks relating to 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 its strategic initiatives, particularly with respect to its digital surgery strategy; (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”) and Inteneural Networks (“INN”) acquisitions, including the failure of Holosurgical’s and INN’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 and INN’s operations with those of the Company, including: retention of key 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 acquisitions; (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 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

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 and twelve months ended December 31, 2021 and 2020. 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.

2021 Change in fair value of warrant liability – Other income related to the revaluation of our warrant liability.

2021 and 2020 Loss/(Gain) on acquisition contingency – The 2021 gain on acquisition contingency relates to an adjustment to our estimate of obligation for future milestone payments on the Holo Surgical acquisition. The loss on acquisition contingency for 2020 relates to an adjustment to our estimate of the obligation for future milestone payments on the Holo acquisition.

2021 Supplier prepayment write-off – Cost related to the write-off of prepaid royalty payments that the Company assessed would not be met in future years

2021 Bargain purchase gain – Gain related to our acquisition of Prompt Prototypes, LLC.

2021 Other Operating Income – Gain related to the Company’s inventory settlement with OEM.

2021 and 2020 Asset impairment and abandonments – These costs relate to asset impairment and abandonments of certain long-term assets within the asset group.

2021 and 2020 Transaction and integration expenses – These costs relate to issuance costs for the registered direct offering and professional fees associated with the acquisition of Holo Surgical, Prompt Prototypes, LLC, purchase of Paradigm and as well as the disposal of OEM Businesses in 2020.

2021 and 2020 Asset acquisition expenses – The asset acquisition expenses related to the INN acquisition in 2021, and the Holo Surgical Acquisition in 2020

2021 and 2020 Inventory purchase price adjustment – These costs relate to the purchase price effects of acquired Paradigm inventory that was sold during the years ended December 31, 2021, and 2020.

2021 and 2020 Severance and restructuring costs – 2021 costs relate to the reduction of our organizational structure, primarily driven by simplification of our Marquette, MI location. 2020 costs relate to the reduction of our organizational structure, primarily driven by simplification of our international operating infrastructure, specifically our distribution model.

2020 Inventory write-off – These costs relate to the write-off of inventory related to the transition from an integrated manufacturing company to a distributed model.

2020 Restatement and related costs – These costs relate to consulting and legal fees and settlement expenses incurred as a result of the restatement, regulatory and related activities in 2020.

2020 Tax effect on new tax legislation – This adjustment represents charges relating to the Tax Legislation which was enacted on December 22, 2017.

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.