Q2 2020 Surgalign Holdings Inc Earnings Call
We will conduct a question and answer session and instructions will follow at that time.
I would now like to turn the conference call over to John singer Chief Financial and operating Officer. Please go ahead.
Thank you operator, good morning, and thank you for joining the surgery and holding Inc. second quarter Conference call. Joining me today on the call is Terry rich, our newly minted President and Chief Executive Officer.
Before we start let me make the following disclosure the earnings and other matters, we will be discussing on this conference call will involve statements that are forward. Looking these statements are based on our managements current expectations. They are subject to various risks and uncertainties associated with our lines of business and what the economic environment in general.
Actual results may vary from our statements concerning our expectations about future events that are made during this call. We make no guarantees as the accuracy of these statements. Accordingly, we urge you to consider all information about the company and not to place undue reliance on these forward looking statements.
During the call. We'll also present certain financial information on a non-GAAP basis management believes that non-GAAP financial measures taken in conjunction with U.S. GAAP financial measures provide useful information for both management and investors by excluding certain non cash in other expenses that are not indicative of our core operate.
The results.
Management uses non-GAAP measures to compare our performance relative to forecast and strategic plan the benchmark our performance externally against competitors in for certain compensation decisions reconciliations between U.S. GAAP and non-GAAP results are presented in the tables accompanying our earnings lease release, which can be found in the investor.
Relations section of our website.
Now I'll turn it over the call to Terry. Please go ahead.
Thanks, John Good morning, everyone. There's been a flurry of activity over the past month within the company, including but not limited to the completion of the sale the OEM business.
The transition of leadership.
A new name logo and ticker our goal today to provide an overview of surge line spine technologies. The name of the operating company My perspective on the business as well as a high level overview of our strategy moving forward.
Following that will provide an update on her recent performance before opening the line for questions.
Before digging into the details I wanted to take a minute to introduce myself and provide an overview of surge line. As this is our first call as an independent company.
As many of you are aware I joined the company roughly eight months ago. This the head of global spine. The portion of the business that then became surge line.
Having led this portion of the business and seeing the progress made during this period I'm incredibly excited about the opportunity that exists for surge line as a pure play spine company.
One of the advantages of joining the company prior to stepping into the role of CEO is that I was able to actively assess the business and be part of building the foundation for the future.
Turning to an overview of surge line, we're a global pure play spine company.
Our spine focus agility and financial resources allow us to advance spine care to improve patient outcomes.
We have a broad portfolio with an experienced collaborative network of reps in step with the surgeons and patients we serve.
We will continue to validate our innovation with clinical research and continue to be a trusted resource to our surgeon partners.
Following the sale the OEM business, we felt is essential to rebrand the company in a manner that fit with our long term strategy and our focus as a global spine company.
The name surge line is based on the combination of two concepts.
Our focus on supporting and aligning with the surgeons, we serve to improve patient outcomes.
We are positioning to become the spine company surgeons look to for what is more than possible for their patients.
The incredibly important notion of alignment.
Lyman or the spine to maximize health mobility and freedom for patients.
From a product portfolio perspective, we have a broad portfolio of procedure specific solutions that enable surgeons to care for patients by treating the multitude of spine conditions, requiring surgical intervention, including implants for both fixation in motion preservation access and biologics.
I'd now like to share. Some my initial observations about what I found to be promising in an exciting as well as the areas that I think we have an opportunity to improve.
Starting with the good.
Following the closing of the OEM transaction, the spine business has totally overhauled balance sheet clearing out the debt and preferred and adding approximately 50 million in cash provides a substantial amount of freedom to pursue strategic initiatives and allocate capital to help grow this business over the long term.
We offer multiple differentiated products supported by an organizational commitment to clinical data to support and validate patient outcomes.
We've cultivated a large and diverse distributor network that supports our approach to innovation and new product development supported by best in class customer service team.
We have developed a global footprint supporting both product distribution and procedural innovation.
We have a solid national accounts presence, providing GPO and IDN access and I'm, especially proud of the talent and experience of the new leadership team and spine talent, we have assembled throughout the organization.
Shifting to areas, where we can have the biggest impact going forward.
To date, we have limited organize professional education sales training, we have the opportunity to build a best in class professional education and sales training program led by industry, leading care wells and developed by team has done this before.
Theres room to integrate our sales organization to broaden product access across our distribution partners.
And we will develop a procedural approach to innovation that incorporates enabling technologies to improve patient outcomes.
We're building on the tremendous foundation that has been established over several years with the addition of a highly talented and experienced leaders and implementing a targeted growth strategy.
As it as it is early in my tenure as CEO surge line I want to share my thoughts on our high level growth strategy of build innovate and acquire.
Starting with the first pillar of our strategy build.
We are focused on building and optimizing a global spine organization based on procedural innovation to improve patient outcomes included under the umbrella build is the consolidation of our supply chain, improving our technology capabilities optimizing our commercial structure by integrating.
Novel products into the legacy channel.
Filling key roles in the organization both screens personnel in certain focus areas.
From a personnel perspective, we have recently made a number of key spine experienced hires including a chief commercial officer, Scott Doral, and executive Vice President of research and clinical Affairs, Brian Cornwall, and we are actively recruiting and executive Vice president of marketing and R&D, which will.
Effectively complete the Buildout of our senior leadership team.
Beyond the spine experience, we have added to the leadership team, we've already attracted and hired top spine talent in sales marketing and R&D.
This is a testament to how we are being received in the marketplace and for our vision of what we can build.
In addition to recent leadership changes the company's board of directors has undergone a transition following the completion of the sale the OEM business.
Upon the redemption of water streets preferred shares on July 24th two members over the board from Water Street, Curtis Southwest and Chris Sweeney have resigned from the board.
We thank them for their leadership and valuable guidance during their time on the board.
With Mr. Selfless resignation from his role as chairman of the Board Stuart Simpson was appointed as a new chairman of the board and Mark Stifler has assumed the position.
Dependent director.
Following these changes the company's board of directors now consists of eight members.
The second pillar of our strategy is innovate.
Where we are focused on organically developing new high value clinically validated solutions that will enhance the standard of care.
While we continue to invest in specific products. We're also moving towards developing more procedure based approaches and supportive improve patient outcomes and 2020 m. beyond we're aiming to introduce double digit new products that incorporate product line extensions expansion of the biologics portfolio application of new material.
In manufacturing capabilities.
The third pillar of our strategy is acquire.
While we are excited about the innovation coming from within the company. We will also look for inorganic enabling technologies and capabilities to bolster our portfolio and drive better patient outcomes, thereby accelerating our growth trajectory.
We are investing and technologies that support procedure based approaches, which we believe can drive improvements in the standard of care.
While it's too early to provide specifics on exactly what type of assets. We are looking to acquire will be diligent disciplined and thoughtful as we.
Pursued deals that drive differentiation and scale.
It is still early days for surge line, we have assembled a high performing highly experienced team that will be successful in executing our strategy.
We will continue to refine the specifics of the strategy in the coming months and intend to provide more color later in the year.
In the meantime, we'll be working diligently to operate through coated while putting the pieces in place to allow us to achieve our goal of driving profitable double digit growth.
Turning to an update on the second quarter.
As we outlined on our first call in June Cobot had a material impact on our business during the during the quarter.
We put in place several initiatives guided by a focus on prioritizing employee safety managing inventory levels in our global supply chain.
We continue to monitor the situation globally to ensure that we can support procedures during the pandemic in a safe and effective manner.
Shifting to our second quarter performance for the second quarter 2020 revenue declined 34% to $54.2 million spine revenue declined 37% to $20.5 million.
After a strong start to the year, we began seeing the impact of co bid in the international business in early March and domestically in the second half a month.
The second quarter began quite weak with steep declines in procedures across the globe somewhere between 60% to 70%.
We did see a more rapid return in May and June than we initially anticipated.
In May revenue declined approximately 36% compared to prior year and in June we were only down 13% compared to June 19, with overall domestic spine revenue being approximately flat with prior year.
Despite the recent increase in cobot 19 cases being experienced in four of our top five markets. We saw continued strong demand in July finishing slightly ahead of prior year.
We continue to monitor procedural trends through discussions across industry and believes that it is difficult to predict the ongoing impact of coven 19 on the company's operations and financial results.
However, we continue to execute against our strategy and make sure that we continue to serve our physician customers and their patients.
A lot has changed over the course of the last month.
While it may seem like a sudden transformation. The organization has been diligently planning for this transition for months. The team is engaged and energized and we're very excited about the opportunity that lies ahead.
The spine business under our tie was built into a strong franchise over the years and taken to the next level under communities leadership.
We look to leverage that foundation to build search line spine technologies into a leader in the spine industry.
This will not be without its challenges, particularly as we continue to navigate co bid and the new normal in surgical care.
However, I believe that we have the right people and right long term strategy to execute and delivered to our customers and patients globally.
With that I'd like to turn the call over to John to provide review second quarter financial performance John.
Thank you Terry a lot to cover in the financial section given the impact of Coven 19, FCC investigation and related costs during the second quarter to file a restated financial statements transaction related costs in support of the sale of the OEM business on July Twentyth in the impacted that bridge financing completed during the quarter to support the cash.
Needs of all of that bought factors.
The sale of the Rts Holdings Inc. OEM business closed on July 22020, Accordingly, the reported consolidated financial results for the second quarter include results for both the OEM and spine segments of the business. However will provide additional detail on spine performance and the related standalone cost structure as we go.
Through the results.
Global revenue for the quarter ended June Thirtyth, 2020 was 54.2 million compared to $81.6 million for the prior year period OEM revenue was 33.7 million compared to 49 million. This second quarter 2020 global spine revenue was 20.5 million compared to 32 point.
6 million in the prior year period, the decline versus prior years driven entirely by the impact of Cobot 19, as outlined earlier interiors commentary about procedural trends.
We're quite pleased by our revenue performance in June and July although not at the levels. We anticipated when we started the year, we've seen a stronger return of procedures than we anticipated at the outset of cobot 19 pandemic. However, there continues to be some uncertainty of go of ongoing pace of recovery in the impact on procedures.
Through the ended the year our goal is to be exiting the year at a run rate similar to where we were in December of 2019, but we continue to evaluate the covert 19 impact on our operations and financial results and believe it is too early to resume providing specific financial guidance at this time.
Gross profit for the second quarter, 2020 was 23.1 million compared to 46.1 million. The prior year period, approximately two thirds of the declining gross profit is driven by the decline in revenue and approximately one third is due to the impact of unabsorbed overhead due to the reduction of activity.
In our manufacturing facilities in response to the Cobot 19 pandemic spying gross profit for the second quarter 2020 was estimated to be 13.6 million or 66% of revenue compared to 23.8 million or 73% of revenue in the prior year second quarter, we anticipate grow.
Gross margins should be between 70% to 75% in the second half of the year.
Marketing general and administrative expenses for the second quarter of 2020, or 37.1 million compared to 41.4 41.1 million in the prior year period. The second quarter 2020 expense includes 7.8 million of nonrecurring restatement and related costs.
It's primarily for accounting support audit and legal fees.
Spine marketing general and administrative expenses were estimated to be approximately 17.1 million compared to 27.8 million in the prior year period.
Decline and Mdna is driven by a reduction in distribution marketing in commissions correlating to the reduction in revenue in the furlough of most of our sales resources. During the second quarter 2020, we began bringing the sales organization back during June in July in project that surge line marketing.
General and administrative expenses will be between 25 in 28 million during each of the last two quarters of the year.
R&D expense for the second quarter, 2020 was 3.3 million compared to 3.9 million in the prior year period spine R&D was 1.2 million compared to 2.4 million in the prior period. Prior period, we estimate surgeon lines R&D will increase to will increase to.
To 3 million during each of the last two quarters at the year.
During the second quarter of 2020, we incurred approximately 4.9 million of nonrecurring costs related primarily to legal and accounting fees to support the cost of the sale of the OEM business. In addition, we incurred approximately 13.5 million of costs related to the bridge financing we incurred to support the business.
And the cobot 19 shutdown in the incremental restatement and transaction costs outlined to Bob.
Adjusted EBITDA for the second quarter 2020 was a 5.3 million dollar loss compared with 9.4 million in the prior year period.
The decline in EBITDA was primarily driven by the reduction in revenue and gross profit, partially offset by a reduction in mdna spending through the furlough actions and the related reduction and executive compensation, we estimate that the spine EBITDA for the second quarter of 2020 was at 3.3 point 9 million down.
It was.
Finally, there've been several questions regarding our cash position after closing the sale of the OEM business on July 20, it but the cash purchase price was $444 million from which we paid approximately 16.7 million and transaction related fees 77.1 million to sat although our.
ABS revolver in 155.4 million to settle the term loan in bridge financing with Aeris capital. This left us with 190.9 million in cash close we settle the preferred for 66.5 million late last week and anticipate we will have an estimated tax payment.
Of approximately 70 million due to our friends at the IRS in mid September this will leave us with a little over $50 million in cash, which we believe is sufficient to fund the organic growth strategy of search search will.
Operator, I'd like to open the call for questions.
Ladies and gentlemen, if you have a question at this time, please press star and the number one.
On your Touchtone telephone.
If your question has been answered all you wish to remove your sell from the Q. Please press the pound.
Your first responses from Matt Hewitt Craig.
Craig Hallum Capital Group. Please go ahead.
Good morning, Thank you for taking the questions and welcome Terry.
Thanks, Matt.
A couple of questions first.
Obviously, it's nice to see the rebound.
And that's despite some of the impact that you're seeing in though I think you said four of the top five markets you participate and I'm just wondering how should we be thinking about.
The next two quarters from and you provided a little bit of guidance, but as far as the is that rebound.
Can you because of backlog that was the procedures that were deferred or are you starting or at least hearing from your customers that they are starting to see that new pipeline of patients starting to build back up.
Yes, Matt I think it's a little bit of both I think certainly there there was some backlog that theyre working through but I think the other components is we're learning to live in this new normal and patience.
We need to have their surgeries and hospitals and surgeons are.
Finding paths to accommodate.
Okay. Thank you and then as far as the sales process.
You talked a little bit about some of that the opportunities and and things that you're working on there but.
Given the current the current restrictions in some hospitals still have some others have if kind of opened up a little bit more but given some of those puts and takes.
What are you doing.
As as a firm as a company to kind of help.
Drive adoption of search alliance platform.
Yes, you're right. It is kind of regional how hospitals are reacting how surgeons are reacting and access to them. So.
So in some areas its.
I wouldn't say.
Quite businesses normal, but we do have access and take precautions and are doing labs and different things that we've we've always done to drive revenue.
But we've also started to take steps to do some things virtually in some online.
Events, and surgeon toxin and that kind of thing as well so.
We will continue to.
To.
See the response that we get to those.
And.
Add them as appropriate.
Okay, Great maybe one last one I'll hop back into queue.
Regarding.
The launch plans double digits this year and I think this year next year, how should we be thinking about the cadence I mean is that are those products ready to go this quarter and it's all maybe a couple a week or just help us understand the cadence of those launches. Thank you.
Yes so.
They will.
Come out.
I don't want to say every couple of weeks, but some of them are families of products.
You know that we will launch it did.
One time and.
We will continue to get them out through the end of the year. We did have some delays due to co bid.
But or getting those back on track and.
We will.
Get the amount appropriately over the course of the back half of the year here.
I would say, Matt that when you look at the double digit through this year as Terry indicated.
Probably two thirds of the introductions are going to be from a single product family.
That we received the CE Mark.
Earlier in the summer and have the five 10-K filed and we're building inventory, but that family will launch in the fourth quarter and really start ramping towards the end of the first fourth quarter. A couple the products were launched earlier in the year.
And then.
And then a couple of the introductions are really around.
Tools that support utilization of our products in the surgical suite.
In those those should launch also.
More into the fourth quarter, So I think for in the way that you're thinking about it is most of the impact of this year's introductions will really begin to be felt moving into next year.
That's great. Thank you.
Thank you next responses from Jim Sidoti of Sidoti and company. Please go ahead.
Hi, Good morning can you hear me.
Sure can Jim how are you doing.
Good good so.
Just wanted to get Mr. Terry.
About your.
But the size of the direct sales force in the distributors are you comfortable where youre now or is this scenario, where you think youre, we'll be expanding over the next few quarters and is that more geographic expansion or any more people in the market you already.
Yes look I think you know we're very excited.
About the distribution networks that we have.
We will always look to add talent.
As appropriate Theres certainly are still some areas.
We're we're under Pended penetrated and we'll look to continue to add support but.
Excited about the direction that.
Scott is taking us and.
So so yes, we will continue to add but we're thrilled about the organization that we have as well.
Okay. So basically you're comfortable with what you have right now and then you'll you'll tweak it as things go up but no major changes in the near term.
That's correct.
And then just longer term question.
This quarter.
Anything but typical and.
No you're already starting to see signs of recovery.
You know the spine business at about 125 million in 2019 do you see any reason in all law you would get back to those levels in 2021.
No I don't I don't think Theres any.
Any reason we can't get.
Back to those levels. Our goal is we indicated was too.
We'll be it the run rate that.
We had in 19 as we exit the year. So that would lead you to believe without the benefit of the new product introductions that we anticipate.
We should be able to get back there so.
That would be absolutely at the low end of what we were hoping to achieve as we go into next year.
Okay and then the last one for me you talked a little bit about.
Acquisition.
Is that something youre going to start to deal with right away or.
Kind of Digest, what you have over the next couple of quarters and maybe you could do those.
Sometime next year.
Yes, he Jim we're going we're going to evaluate the opportunities out there and b.
Opportunistic is things present themselves so.
I think it comes down to.
You know we find.
The right technologies.
Are the right opportunities than than we would certainly.
Be opportunistic and look to move on them.
Okay. So so.
Possibly with something.
Somebody's under audit stress this year and look into so you might actually do something before the end of year.
Possibility.
Thank you.
Thank you to ask a question. Please press star one on your telephone keypad again to ask your question. Please press star one.
Responses from Brandon Hall of Cantor Fitzgerald. Please go ahead.
Hi, Thanks, taking my questions and congratulations on getting the OEM, So John and Terry Congratulations on your equipment and.
So maybe just following on from the prior question because I know, but can you just between the three please go innovation acquire can you just elaborating a little bit more in terms of where your priorities and capital allocation priorities lie among those.
And then thanks very much for the detailed ending guidance on Standalone company.
Just given what you've guided to in the second half of Twentytwenty, how should we think of that spending or cadence going into 2021.
Is this level that we should expect you to invest and bolt on going forward and 2021, all Conversely, given that you now Standalone company, all the opportunities to perhaps pay that down or.
Optimize that as we go forward. Thank you.
Yes, so a lot of questions packed in there, but let me see if I can.
Address them and then at the end of I don't we'll come back.
You look at Bill innovate and acquire I.
Obviously, our short term priority is around the build which is really from an external perspective.
That the visibility to that will be the completion of the leadership team and then the supporting organization underpinning that which you have the cost is is in general.
Embedded in the discussion that we had about the cost structure earlier from an innovate perspective.
Thats really that's R&D spending right and so again.
From a capital allocation perspective, that's essentially being caught into the cost structure that you now.
That we outlined.
And then obviously acquire.
It's Jerry indicated.
Depending upon the nature of what we're looking at and acquisition term is pretty broadly I mean that could be.
Yes licensing of technology similar to what we did in the relationship with a zero or the four link product, where we have a partnership with Oxford performance management for the material.
Or.
True acquisition of technology products, and so you obviously.
It really depends upon the nature of what we do there.
I think the cost structure that we outlined for the back half the year.
Is kind of current our current visibility.
But obviously with the new leadership team coming on and.
The continued development of our strategy, we're going to we're going to assess that as we go through a more formal operating plan process.
At the back half of this year and here as we move into next year, we'll give more specific guidance.
But thats, our best understanding of kind of how we're thinking about it today.
Great. Thank you very much.
Thank you your next responses from Dave Turkaly of JMP Securities. Please go ahead.
Hi, good morning.
Sorry, I was wondering just at a high level.
We look at what we've got left in spine here.
Can you guys.
Maybe either quantified geographically.
And the or by like product categories sort of what the mix looks like today and maybe.
The areas in those product categories that you might be most excited about.
Yes, you know, Dave I don't want to.
Dive deep in.
The product mix and begin to provide.
That level of information, but there's there's a lot of.
Products out there that we have that I'm excited about theres some of that.
Products that are getting ready.
To launch that I think.
Have tremendous opportunity.
But as we continue to pull together.
The new leadership team add to our marketing and R&D piece, I think there's a ton of opportunity.
To take advantage of enabling technologies and add them to procedural approaches that will.
Enable us to help drive better outcomes and I think we've got.
Some products in our portfolio currently.
That will add to that and.
Yes excited about where we can take the portfolio from here.
Great and maybe this is a quick follow up you mentioned.
Your distribution network I was wondering.
Would you be able to comment on sort of the number of agencies are using or maybe even sort of how many feet on the state Street, you have today or where do you see that going maybe over the next year too.
Yes.
We have you know again.
A broad and diverse group of independent agents out there.
They have been very excited.
As we have.
Completed the sale the OEM and have indicated.
Our focus on spine and we will continue to develop partnering.
We're deeply.
And so we're excited about about that but we're not going to get directly into the number of agents that we currently have.
Hi, Thank you.
That concludes the question and answer session I would now like to turn the call back over to Mr. rich for closing remarks.
Thanks again for joining us today and thank you for your interest in and supportive surge line as I stated earlier, we believe there is a tremendous potential for surge line to become a leading pure play spine company as we pursue our long term goal of driving double digit topline growth.
We're excited about what the future holds and we look forward to updating you on our progress on our next quarterly call.
Ladies and gentlemen. This concludes today's conference. Thank you for your participation and have a wonderful day you may all disconnect.
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