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Good day, ladies and gentlemen, and welcome to Surgalign Holdings 2023 First Quarter Results Conference Call and Webcast. [Operator Instructions]
At this time, it is my pleasure to turn the floor over to your host, David Lyle, Chief Financial Officer of Surgalign.
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. I will then review our first quarter financial results and we will then open up the call for questions. Additionally, Chris Thunander, 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, Surgalign'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 Surgalign's SEC filings. This conference call contains time-sensitive information that is accurate only as of the date of this live broadcast, May 11, 2023. Surgalign 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. I'll now turn the call over to Terry.
Thanks, Dave, and good afternoon. We continue to make progress on the restructuring program, and our outlook has not changed. Product rationalization programs have intensified and will continue throughout both the second and third quarters, and we've been managing distribution carefully to ensure we meet our customers' needs. Along with product rationalization, we rightsized and realigned many areas of our business, and we're operating more efficiently, which has enabled us to better manage resources. I'm very proud of our execution on this front, and the team has done a remarkable job. As for the market, conditions remain unchanged since my comments 6 weeks ago in our earnings call. For the most part, we've seen the market stabilize, similar to what many have been reporting.
Domestically, hospitals are still experiencing some staffing shortages and procedural delays but it hasn't been all that impact on the hardware side of our business. With respect to HOLO Portal, we're still seeing a long sales cycle, but discussions with many of the accounts in our pipeline are progressing well and several are in the final stages of contract negotiations. I'm pleased to report that we currently have two new sites in the onboarding process for our upgraded system with cases scheduled in the coming quarter. We remain focused on commercialization with a goal to expand our reach and drive adoption. The new system upgrades unveiled in March are designed to drive efficiencies and set up and workflow and support a broader range of instruments and procedures.
On our last call, we discussed the launch of HOLO AI Insights for spine imaging, which was a late Q1 event and the prospects of opening up new markets for Surgalign. HOLO AI Insights is another offering in our portfolio. It's for research use only and uses AI to analyze and translate medical imaging into aggregated quantifiable data. We partnered with San Diego Spine Foundation as part of our initial launch and subsequently formed new alliances, one with Dr. Pierce Nunley and the Spine Institute of Louisiana; and the other with Dr.
Alexander Vaccaro, one of the top rank spine experts in the world. These are in valuable relationships, and we couldn't be happier to be working with such prestigious surgeons in the area of spinal research. Our strategy is to align with the best of the best and gain insights into how AI can be applied in research and ultimately, how it can be leveraged in the clinical decision-making process.
I'd like to pull one reference from Dr. Vaccaro from our most recent announcement "Surgalign, in my opinion, is one of the most exciting, given the groundbreaking work they are doing with artificial intelligence." The relationships we have in place all important alliances and we feel we have a strong foundation to build from.
Just last week, we announced the continued evolution of HOLO AI Insights with a new research-based solution for use in neurovascular research. This latest addition to our AI portfolio can analyze large sets of cranial MRA images, automatically identify 16 different structures and aggregates the data into configurable graphical and file formats. We kicked off the launch with a collaboration with Dr. Brian Jankowitz, a neurosurgery specialist with extensive experience in neurocritical care disorders. This is only the beginning. And as I've mentioned previously, we believe that HOLO AI Insights can be leveraged for precision medicine and apply to many different applications and population health, clinical research and in the future, patient care. Expect to see more news from Surgalign regarding our HOLO Portal commercializations and new technology upgrades.
We are working to expand alliances within the medical community for HOLO AI Insights for research use, both spine imaging and neurovascular research with plans to replace a clinical product for AI assessment of lumbar spine MRI images in 2024.
I'll turn the call over to Dave now to cover our financial results and outlook. Dave?
Thank you, Terry. We reported Q1 2023 revenue of $16.7 million, ahead of our prior expectations. Breaking it down into key components of our restructuring and taking out Coflex and CoFix, which we sold on February 28, and our U.S. hardware business grew by approximately $745,000 or 6.7% on a sequential basis, which was offset by a decline in international revenue of $667,000.
In addition, we captured approximately $1.6 million in revenue from obsoleted products, which continued to contribute revenue in April and so far in May. As a side note, our Coflex products generated about $2 million in revenue in Q1 for the months of January and February, until it was sold. Non-GAAP gross margin in Q1 was 69.5% on the higher end of our previous guidance range and down slightly sequentially compared to Q4.
GAAP gross margin in Q1 was 63.7%. Items taken out for non-GAAP purposes were $730,000 of international inventory, which continues to be rationalized and $235,000 of inventory purchase price adjustments. As for operating expenses, Q1 non-GAAP operating expense was $23 million as compared to $24.6 million in Q4, an improvement of $1.6 million sequentially. We continue to manage our costs diligently and have removed expenses through the restructuring program with a greater impact anticipated in future periods.
Excluded from Q1 non-GAAP operating expense was a gain of approximately $1.1 million related to acquisition contingency, asset impairment and abandonment expense of approximately $550,000, severance and restructuring costs of approximately $460,000, transaction and integration expense of approximately $460,000 and $1 million in noncash stock-based compensation expense.
Adjusted EBITDA in Q1 was a loss of $10.8 million as compared to an adjusted EBITDA loss of $9.1 million in Q4. The sequential decline was driven primarily by lower revenue and gross margin somewhat offset by lower operating expense. As for the balance sheet, we had $22.4 million in cash at the end of Q1 compared to $16.3 million at year-end. The improvement in our cash position is related to the sale of our Coflex business in February, which netted $14.8 million in cash to the company.
We had guided to approximately $21 million in cash on our last call for Q1, and the improvement versus our plan was driven primarily by continued reduction in operating expenses during the period. Managing cash is critical, and we are looking at all expenses to extend our runway. With that said, we continue to explore all strategic avenues to improve our liquidity position, including additional potential divestitures, mergers and restructurings.
Operator, we're now ready to open up the call for questions.
[Operator Instructions] And our first question is from H.C. Wainwright.
This is RK from H.C. Wainwright. So starting off from the restructuring program, you divested Coflex, but you're also saying that you're still continuing to do product rationalization that will continue not only in this quarter but also next quarter, which is third quarter. So -- and I'm just trying to think how -- what sort of products are we talking about? And how does it -- when we think about year-on-year how would it impact the revenues for the second quarter or third quarter in relationship to what happened in 2021?
I think the easiest way to look at this, RK, is to kind of look at Q1 and take out Coflex and CoFix, which we generated revenue of $2 million in that Q1 number of $16.7 million. That brings you down to $14.7 million for the first quarter, and then take out an additional $1.6 million of the products that we obsoleted in Q1 that actually still generated revenue for us. Once we obsoleted those products, at some point, we expect that revenue to ramp down.
We've been very fortunate, though, that revenues continued into Q1 and now even into Q2. So it's a little harder to predict what those obsoleted products revenue contribution will be. But if you take out those numbers and say, looking out into the future, what would that look like, you're talking about a number that's down to the $13 million a quarter range, just taking Q1 as a proxy.
Okay. In terms of the HOLO Portal, Terry, you're saying that the sales cycle continues to be long. Can you add some additional commentary around it in terms of like what do you mean by long -- you note a certain number of centers that you will be able to achieve by the end of the year, what is the target now in terms of installation base for end of 2023?
Yes, sure. So RK, we didn't provide a target, but -- and part of that is because it's been long. Sales cycle for all capital out there has been very long now regardless of the model they view it all as capital. And so it has been long -- could be. We've had -- we've got a couple of accounts, we're getting hopefully close to coming on now that have been in the funnel for over a year. So it has been a long path on a lot of these. The typical capital sales cycle just broadly in the industry is anywhere from 6 to 18 months. So it's about getting the funnel full and pull them through. And -- so we've got a very full funnel now, and so we're looking to get more units placed. .
And then of the units that are already there, what is your -- what commentary are you hearing from the surgeons that are actually using the system as of now?
Yes. So look, we're getting very positive feedback about how easy the system is to use and how the enhanced visualization with the AR, and it's really enhanced because of the segmentation that we use AI to generate how much easier it makes things for them because they can identify the anatomy so quickly. So it's been very positive. And now that we're rolling out the new instruments to be able to do more types of procedures as well. I believe this will have a very positive impact also.
Our next question is from Matt Hewitt.
This is Jack on for Matt. We've heard from larger players like HCA and [Tennant], the budgets and hiring trends have begun better and therefore helping their procedure volumes. We were curious if you're seeing that trickle down on your end at all?
Yes. I'm not sure if we have any [Tennant] accounts we're working on. But yes, we do have HCA accounts, and they did move through pretty nicely there.
Okay. And then final question. Could you remind us how many sites are up and running using the HOLO platform currently?
Yes. There are 5 active and we're in process of bringing up 2 more.
This concludes today's teleconference. We thank you for your participation. You may disconnect your lines at this time, and have a great day.