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Orthofix Medical Inc (NASDAQ:OFIX)
Q1 2020 Earnings Call
May 8, 2020, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and welcome to the Orthofix First Quarter 2020 Earnings Results Conference Call. [Operator Instructions].

I would now like to turn the conference over to your host, Mr. Mark Quick, Senior Director of Business Development and Investor Relations.

Mark Quick -- Investor Relations

Thank you, operator, and good morning, everyone. Welcome to the Orthofix First Quarter 2020 Earnings Call. Joining me on the call today are President and Chief Executive Officer, Jon Serbousek; and Chief Financial Officer, Doug Rice. I'll start with our safe harbor statements and then pass it over to Jon. During this call, we'll be making forward-looking statements that involve risks and uncertainties. All statements other than those of historical facts are forward-looking statements, including any earnings guidance we provide and any statements about our plans, beliefs, strategies, expectations, goals or objectives. Investors are cautioned not to place undue reliance on such forward-looking statements as there is no assurance that the matters contained in such statements will occur. The forward-looking statements we make on today's call are based on our beliefs and expectations as of today, May 8, 2020. We do not undertake any obligation to revise or update such forward-looking statements.

Some factors that could cause actual results to be materially different from the forward-looking statements made by us on the call include the risks disclosed under the heading Risk Factors in our Form 10-K for the year ended December 31, 2019, and our Form 10-Q, expected to be filed later today, as well as additional SEC filings we make in the future. If you need copies of these documents, please contact my office at Orthofix in Louisville, Texas. In addition, on today's call, we will refer to various non-GAAP financial measures. We believe that in order to properly understand our short-term and long-term financial trends, investors may wish to review these matters as a supplement to financial measures determined in accordance with U.S. GAAP. Please refer to today's press release announcing our first quarter 2020 results for reconciliations of these non-GAAP financial measures to our U.S. GAAP financial results.

At this point, I'll turn the call over to Jon.

Jon Serbousek -- Director, President, and Chief Executive Officer

Thanks, Mark, and good morning, everyone. I appreciate you joining us on today's call. On today's call, I'll start by discussing the impact that COVID-19 is having on our business, after which, provide an update on first quarter performance. I will then review the progress we have made within our strategic initiatives before handing the call over to Doug, who will provide financial updates. At the end of the call, I'll provide our perspective on the business going forward before opening the line for questions. Beginning with the COVID-19 update, as we work through this pandemic, our first priority is the health and safety of our employees and their families as well as our sales partners, surgeons, patients and customers. I'd like to start by saying, on behalf of everyone at Orthofix, how thankful we are for the tireless work being done by our clinician partners in the global healthcare community to address this crisis. I'd also like to thank each and every one of our employees who have executed incredibly well in the face of uncertainty and adversity. The adaptability, creativity, resourcefulness and dedication we have shown as an organization is special.

It speaks volumes to the quality of the people at Orthofix and how dedicated they are to improving the lives of patients around the world. I would also like to thank our investors for their continued support as we navigate uncharted market dynamics. As noted in our April press release, we are experiencing a material impact to our business. Governmental directives and recommendations from surgical societies and healthcare organizations to delay certain surgeries to conserve resources for COVID care are having a material impact on surgery broadly, including elective surgeries, which make up the majority of our case volumes around the world. We believe that given our sales momentum and trajectory in the January and February and into mid-March, we were on track to exceed our revenue expectations for the quarter of the year as a number of our initiatives put into place during late 2019 and early 2020 began to take hold. Although our trajectory was temporarily interrupted, we have continued to strengthen our organization. We have taken a number of proactive steps during this period of uncertainty to implement business continuity plans and ensure the continued financial strength of the company.

From an operations perspective, we've continued to operate safely and efficiently, while doing so under the guidance of the WHO, the CDC as well as applicable federal, state and local directives. For many employees, we have shifted to 100% home work. We have continued worked remotely with limited interruptions. We prepared and maintained our sales force to cover any emergency procedure as requested by our surgeon community and with key focus on personal safety. Within our three manufacturing facilities, Verona, Italy; Lewisville, Texas; and Sunnyvale, California, we are maintaining operations. In each of those facilities, we're being creative with the staffing and the physical setup of the production floors to allow for an effective output without sacrificing safety or quality and importantly, following governmental directives. We've also took proactive actions to ensure our ability to source materials was unaffected. Early on during the global escalation of COVID, we reviewed each portion of our supply chain to make sure that we mitigate any potential supply risk.

Particularly from geographic perspective, we quickly made sure to order sufficient raw materials to meet the needs of our customers through the end of 2020. While this wasn't a huge investment, we felt it prudent to secure our supply chain early on. While many elective procedures have been either canceled or delayed, there are a variety of procedures, for which we supply products, such as acute spine, limb preservation and trauma cases that continue to be performed. The company has executed operationally to satisfy immediate and near-term products and procedure support, but also planning for the pent-up demand that could lead to higher procedure volumes later in the year. We are taking advantage of this low in procedure volumes to accelerate and expand virtual product trainings for surgeons, sales reps and sales distributors. We have delivered all levels of product trainings, including even the didactic portion of the FDA-required M6 training to far larger groups and has ever been possible prior to the COVID-19. As everyone has looked for silver linings in this crisis, we believe this has been ours. Thanks to an excellent work of our product and professional education teams during the month of March and April, we held over 80 virtual training programs, trained over 3,000 sales representatives and distributors and more than 1,000 healthcare professionals on our products. Additionally, as we train our sales channel, we are focusing on driving synergies by training on multiple product lines. We are taking full advantage of this time.

As we think about bringing employees back to our various global offices, we've assembled a task force to determine the optimal way to do so. They will focus on how we will safely reenter our facilities and how our sales force will reenter hospitals and ASCs. We will do this in accordance with guidance from the WHO, the CDC and all governmental and hospital requirements to make sure that we are keeping our teams safe. On a fiduciary perspective, we are focused on closely managing expenses during this period of uncertainty to ensure the highest levels of financial flexibility going forward. We have implemented a number of cost saving initiatives including a temporary 8-week salary reductions for salaried U.S. employees on an escalating scale with the largest impact at the Executive and Board of Director level, as well as the suspension of the 401(k) matching contributions for two quarters. Importantly, we are doing this to help maintain the strength of our balance sheet in the near term without impacting the quality of our products that we deliver or sacrificing the scope and scale of our commercial organization. During this period, we decided to keep our commercial team intact, ensuring that we're able to take advantage of the opportunity that exists once the world reopens and the pent-up demand in the market rebounds.

Additionally, we have taken steps to ensure our access to necessary capital for continuity. Doug will provide more color on this in a moment, but we drew down $100 million from our existing credit facility in April to ensure availability of cash to fund operations and strategic initiatives in the event of a prolonged slowdown of elective procedures. We also utilized a number of benefits under the CARES Act including the CMS, accelerated and advanced payment program and the payroll tax deferral for U.S.-based employees. Clearly, we have seen a significant impact on our business late in the first quarter and into the second quarter, we are confident we will come out of this experience as a stronger team, ready to support a ramp-up in the volume of procedures, as we expect, once the world has turned the corner on the management of COVID-19. Shifting to our first quarter performance. Our first quarter performance reflects the accelerating impact of COVID-19 and the global impact it is caused. Total revenue was down 3.9% on a reported basis and 3.4% on a constant currency basis compared to the prior year quarter. The year-over-year decline was largely driven by a significant decline in procedure volumes during the month of March, as previously stated.

Moving to our product categories and starting with Bone Growth Therapy sales. Sales were down 3.9% versus prior year. Operationally, this business has pivoted through the changing environment by implementing virtual patient trainings and remote fittings. As we look ahead, we continue to see the service side of this business as a great differentiator for us. Additionally, as we realigned our business to maximize sales synergies, we are starting to focus on our cross-selling efforts with Physio-Stim through the extremities distribution channel. Moving on to Spinal Implants. Sales were up 0.5% in constant currency over the prior year. This category is made up of our core spine fixation and motion preservation products, which, by and large, are utilized within elective procedures. These procedures were impacted in March and continue to be in the current quarter, as a result of the global impact COVID has had on hospital-based elective procedure volumes. Motion Preservation sales grew 84.9% in constant currency over the prior year as we have had a tremendous start in 2020 with the M6 disc. In the U.S., sales in the quarter were $2.9 million and the negative revenue impact of M6 due to COVID was less than our other product lines. We continue to be excited about the early adoption, even with the disruption from COVID. We've had tremendous success utilizing virtual training tools to address the demand we are seeing for M6 artificial disc by enabling remote learning initiatives for medical providers and hosting virtual surgeon training events.

For spine, we have filled our VP of sales position, who is now well on his way to building out his sales management team. We've had a renewed sense of enthusiasm from our channel and our customers, have narrowed our product focus and are investing in working capital in those areas. All of these activities have started to show progress. Specifically, we have added some new distributors in late 2019 and early 2020 and have had started their onboarding process. In Biologics, we saw an 11.3% decline over prior year. Going into the quarter, we expected some headwinds given the continuation of our realignment efforts. While we did experience some of those, mid-single-digit pricing declines and COVID were the primary drivers of this decline. We expect continued headwinds in 2020. Long term, we see an opportunity to build out this portfolio and sell-through both stronger spine and extremities channels. Moving on to extremities. Sales were down 0.6% versus the prior year in constant currency. On a trailing 12-month basis, growth was 2.8% in constant currency. While a portion of this business segment consists of nonelective specialty trauma procedures, a larger portion is comprised of deformity correction procedures, which are elective and have been postponed. Our team based in Verona, Italy, was first hit by this global pandemic.

Not only did they stay healthy and continue to produce and deliver products for patient care, they have provided valuable experience and insight regarding how to navigate these dynamic times. In late March, we announced the closing of the FITBONE acquisition. While we don't expect a material impact from this product within extremities in the near term, it has meaningfully expanded what we can offer in this segment going forward. We are now the only company that has an internal and external deformity care system. We have increasing adoption of products for Charcot foot, and we have a number of specialty external fixation trauma procedures with a variety of advantages over the internal fixation. Irrespective of COVID-19, we are making great progress within our strategic initiatives and priorities that we outlined in our prior earnings call. I will take a moment to go through those and provide some highlights. In line with our first initiative focused on structure and leadership, I'm happy to say that we have successfully filled all of our key senior leadership roles in our spine and motion preservation business with seasoned and extremely talented leaders. Our leaders are collaborating well across the business and product lines and identifying revenue leverage opportunities. As well as the extremities business, I believe this business has tremendous opportunity to accelerate its growth and felt it made sense to reset the leadership of the business.

We are currently looking to hire a new Global President of Extremities to take advantage of untapped opportunities in that business, particularly in the U.S. Moving to our second initiative, operational execution. As with all companies, this is always a work-in-progress, but I'm pleased with the steps being taken by our new Global Head of Operations. He and the teams under him quickly and successfully secured our supply chain at the onset of this crisis and ensured our continuing operations and supply product needed by physicians and patients for nonelective procedures. Our third initiative, product innovation and differentiation, saw progress in the first quarter with the closing of FITBONE acquisition. Our portfolio, pipeline, process and cadence review for key organic and inorganic opportunities is under way, and we look forward to sharing details as they develop in the future. We're going to be laser-focused on both developing and acquiring high-value products and procedure solutions that solve unmet needs that exist in the spine and extremities markets. Our fourth and final strategic initiative is our commercial channel development. We had some early wins with distributor additions in the first quarter and have others under active review. Over the next 24 months, our plan is to focus on adding or developing long-term strategic distribution partners. These partners will share our vision and sell multiple Orthofix product lines to realize inherent synergies across our portfolio, while creating high-quality, sustained growth. We believe we are well on our way to realizing this vision and that the strategy we have put in place will yield our desired results.

With that, I will now hand over the call to Doug for further commentary around the quarter's financial performance. Doug?

Doug Rice -- Chief Financial Officer

Thanks, Jon. I'll now provide additional details into our net sales and earnings results and then discuss some of our other financial measures, including certain liquidity matters. As Jon noted, total net sales for the quarter were $104.8 million, down 3.9% on a reported basis and 3.4% on a constant currency basis when compared to the first quarter of 2019. There is a material impact beginning in March on our business as a result of COVID, which caused a significant revenue headwind at the end of the quarter. Gross margin in the first quarter 2020 was 77.7% compared to 78.3% in the prior year period. The primary drivers of this decrease were lower fixed cost absorption and deleverage due to lower revenue from the COVID impact. Based on our historical sales mix, please keep in mind that approximately one-three of our historical cost of goods sold are fixed costs. Accordingly, in the short term, we expect to see lower gross margins associated with the lower revenues. Sales and marketing expenses were 51.8% of net sales in the first quarter of 2020, an increase of 2.6% compared to the first quarter of 2019. This increase was primarily a result of a loss of leverage from lower revenue in the quarter that resulted from COVID-19 as well as increased training and education costs related to the launch of M6 in the U.S.

It is worth noting that about half of our historical sales and marketing costs are variable, so we would expect to see short-term deleveraging associated with the anticipated lower revenue in the near term. This deleverage will be partially offset in the second quarter by our near-term expense savings initiatives. However, the savings will be partially offset by support for our direct sales representatives. GAAP G&A expenses were 17% of net sales in the first quarter of 2020, down from 18.8% in the prior year period. This was primarily due to lower succession- and transition-related expenses and deleverage from the COVID impact. Costs on this line item will also reflect our short-term saving expense savings actions, including travel restrictions and a suspension of most hiring. Please note that our G&A is generally not variable with changes in revenue. GAAP R&D expenses in the quarter were 9.5% of net sales, up from to 8.5% in the prior year period, due primarily to investments in our MDR compliance initiatives, additional headcount and quality and regulatory and deleverage from the COVID impact. We expect the addition to the quality and regulatory team to be advantageous over the coming years as we expect to accelerate our new product launch cadence. Costs on this line item are not generally variable changes in revenue. However, we have delayed the timing of certain projects to the back half of the year. I would like to point out that we recognized the $9 million noncash gain in the quarter related to the lowered fair value of the liability related to the two remaining Spinal Kinetics revenue-based milestone payments.

Although this calculation was performed at the end of March, we expect that the fair value of the liability will increase as we get closer to the expected milestone payment dates and as the COVID impact decreases. Adjusted EBITDA decreased to $11.4 million or 10.9% of revenue, down from $15.7 million or 14.4% of revenue in the first quarter of 2019. A significant portion of this deleverage was due to the lower sales from the COVID impact as well as the planned investments in our growth. Now turning to tax. We had income GAAP tax benefit for the quarter of a negative 356% of income before income taxes as compared to income tax benefit of 118% of income before income taxes in the same period of 2019. The tax provision for this quarter was significantly benefited by the release of a noncash liability on certain historical tax positions due to the lapse of statute. In addition, we recorded a benefit for anticipated income tax impacts arising from the net operating loss provisions in the CARES Act, which was enacted in late March. We expect beneficial cash tax impacts in 2020 due to lower earnings as a result of COVID-19. For the first quarter 2020, we reported GAAP earnings of $1.32 per diluted share as compared to $0.05 per share in the first quarter 2019. After adjusting for certain items and when normalizing for tax using a non-GAAP long-term effective tax rate, adjusted EPS for the first quarter 2020 was $0.09 compared to $0.27 in the first quarter of 2019. As with adjusted EBITDA, a significant portion of this deleverage was due to the lower sales from the COVID impact and the remainder due to the planned investments in our growth.

Moving on to the balance sheet highlights. Day sales outstanding, or DSOs, were 68 days at the end of the first quarter 2020, up from 66 days at the end of the first quarter 2019. Our inventory turns at the end of the first quarter 2020 were 1.2 times, which were flat over the first quarter of 2019. Cash and cash equivalents and restricted cash at the end of the first quarter 2020 totaled $58.3 million compared to $49.2 million at the end of the previous year's first quarter. As Jon mentioned, we've implemented several initiatives to reduce expenses and preserve cash in order to maintain the strength of our balance sheet and ensure that we maintain adequate liquidity during these uncertain times. These initiatives include, temporary salary reductions for salaried U.S. employees on an escalating scale with the largest impact at the executives and Board of Directors level. The suspension of 401(k) matching contributions, the furlough of about 50 Italian manufacturing employees, the suspension of most hiring, travel and meeting curtailment, including expense reductions associated with the implementation of the virtual product trainings, that Jon mentioned earlier, and the postponement or deferral of certain projects. Additionally, we borrowed $100 million from our revolver in April. We expect our net interest expense to approximate 225 basis points to 250 basis points in the short term, depending upon LIBOR rates.

We've also utilized a number of benefits under the CARES Act, including the CMS accelerated and advanced payment program, which has provided us with approximately $14 million. The payroll tax deferral program for U.S.-based employees will save us about $1 million of cash for each remaining quarter in 2020. Based in large part on these initiatives, our cash balances at April 30, 2020, has increased to approximately $175 million. Cash flow from operations for the first quarter 2020 was $12.5 million, up from a cash outflow of $1 million in the first quarter 2019. The strong cash flow performance was driven primarily by working capital efficiencies, including strong cash collections and a lower year-over-year bonus pan when compared to the prior year. Capital expenditures were roughly flat in the quarter at $4.9 million compared to the prior year period.

I'll now turn the call back over to Jon. Thanks, Doug. I would now like to spend a moment discussing our outlook for the remainder of the year. Due to the uncertain scope and duration of COVID-19 pandemic and the general uncertainty around the timing of the global recovery, we previously withdrew our full year 2020 financial guidance. While we have suspended guidance for the full year and we will not be providing formal guidance for the second quarter, we believe it would be helpful to provide some qualitative information as we can give a sense of our thoughts for the second quarter. In the month of April 2020, our top line performance was approximately 40% of our April 2019 results. I want to provide additional detail with respect to our product categories. Bone Growth Therapies and Biologics volumes were each approximately 35% of 2019, while Spinal Implants was roughly 50% of 2019. Spinal Implants was supported by double-digit growth in Motion Preservation. Global Extremities was approximately 40% of 2019. We would expect these results to be indicative of the impact to Q2 consolidated net sales as the current situation is too fluid to predict the timing of a rebound in elective procedures. While the slope of the broader recovery curve is focused on macro events, such as reopening of cities, states and countries, the recovery of our business will be determined by a series of hundreds of individual and local decisions. As with state and municipality directives, it falls under individual hospitals to decide to begin easing restrictions and on individual surgeons to decide to begin performing cases. In addition, patients need to feel comfortable heading to the hospital or ASC for the surgical procedure. Given all of these variables, we are not in a position to be able to provide specific guidance for the second quarter or for the full year. While we are hopeful that the broader healthcare system will generally reopen in the near term, we cannot predict the pace at which the situation will progress. Based on current public projections in our internally gathered information, we do anticipate that the second quarter will be our worst quarter of the year with sequential improvements in the third and fourth quarters as, we believe, we will see increases in procedural volumes throughout the year. However, the recovery plays out, we are operationally and commercially ready to meet the needs of our hospitals and serving customers, and we will continue to monitor the situation closely. Thanks to everyone at Orthofix and all the healthcare providers around the world working to solve this challenge. Their efforts are truly heroic. We appreciate that it's difficult to provide business precision at this moment. But please note that we're doing everything possible to maintain and grow Orthofix through these times and set ourselves up for a success once the world returns to normalcy. We believe that our people, our products and our strategy will position us to weather the storm and emerge even stronger. With that, I'd like to open up the line and take your questions.

Questions and Answers:

Operator

[Operator Instructions] Your first question comes from Raj Denhoy with Jefferies.

Raj Denhoy -- Jefferies -- Analyst

Hi, good morning. I appreciate there's a lot of fluidity on COVID, so I won't belabor sort of the outlook there. But there was a couple of things I wanted to ask about. One, you highlighted M6, again, and you saw still decent growth in the first quarter and some of the shifts you've had in your training around that. Then my question is really, when you think about what it's going to take to get surgeons to use that product, is didactic training enough? Or are you going to have to see sales reps able to go back in the hospitals to really start to get physicians onboard with that product?

Jon Serbousek -- Director, President, and Chief Executive Officer

Raj, thank you for the question. On M6, we have an obligation to not only didact, but give the hands-on training through the FDA requirements. So we will be doing hands-on training. We actually have started even remote hands-on training. Because we have training representatives dispersed throughout the country, we're able to do that regionally as well. And so we're well positioned to basically address that training for M6. As far as our desire to use the product, we're seeing a strong continued strong interest in the utilization of M6, and the surgeons actually and to highlight the interest, even in one virtual call, we had over 40 surgeons trained on the didactic on an evening call, which, in normal circumstances, you would not get 40 surgeons to come to an evening call. It would have been locally, directly or virtually.

Raj Denhoy -- Jefferies -- Analyst

Understood. I know you're not going to give you had previously given some outlines for what you thought that product could do this year, but I guess all that's been taken off now because of COVID. My next few questions, I guess, one is on, I guess, the bone growth stimulation FDA panel meeting that was supposed to take place in April. I appreciate that's been postponed now. But has there been any updates? Or have you heard anything about how that was tracking? Any update you can give there?

Jon Serbousek -- Director, President, and Chief Executive Officer

No, it was tracking toward an April panel meeting, and that has been indefinitely suspended at this point in time. So we're in a great position, we believe, in that regard. Because of the highlights we've provided in the past as far as the strength of our sales channel, contracts, the customer service and the order to cash and compliance programs as we feel will strengthen us going forward regardless of what the determination of a reclass might put forward to us. But in the end, we do not know when that panel would go forward or if it will at all.

Raj Denhoy -- Jefferies -- Analyst

Understood. And just my last question, Jon, you mentioned in your prepared remarks about looking for new leadership in extremities. And I'm curious what your thinking is there? It's been an area where there is a significant amount of opportunity, I think, but you guys haven't done a lot there yet. And so I'm curious what you envision? What do you think the opportunity set is for you in extremities? And what are you trying to accomplish by changing leadership?

Jon Serbousek -- Director, President, and Chief Executive Officer

Well, we have an interesting program there as far as with product that has diversity of not only external fixation but also internal fixation, and it works also in the foot and ankle space as well as pediatrics. And we wanted somebody that had a more diverse view on the commercial front. And so we're looking to basically bring in somebody that has a view of driving commercial acceptance and access inside geographic regions, specifically in the U.S. as well.

Raj Denhoy -- Jefferies -- Analyst

But in terms of the opportunity in terms of broadening perhaps the footprint view in extremities, right, do you go broadly into small joints? Do you think about other areas you could potentially go into? Is it really more about commercializing what you currently have?

Jon Serbousek -- Director, President, and Chief Executive Officer

Well, it's not like commercialize what we have currently. But based on our acquisition of FITBONE, it's about expanding in those particular areas. FITBONE use provides a very unique access to get into the deformity business and the limb correction business that we didn't have in the past. And specifically in the U.S., it's a high demand for internal limb deformity correction. And so we'll still expand within the scopes of pediatrics and foot and ankle as well as look for new opportunities to explore in that space. That are synergistic and we can lever our existing technologies.

Raj Denhoy -- Jefferies -- Analyst

Okay, thank you.

Jon Serbousek -- Director, President, and Chief Executive Officer

Thank you.

Operator

Your next question comes from Jeffrey Cohen with Ladenburg Thalmann.

Jeffrey Cohen -- Ladenburg Thalmann -- Analyst

Hi, John. Doug, how are you.

Doug Rice -- Chief Financial Officer

Well, Jeffrey how are you. You're fine.

Jeffrey Cohen -- Ladenburg Thalmann -- Analyst

So firstly, could you go back to what you were discussing for April from the first two segments, Biologics and Bone Growth, I caught the implants and the extremities portion, as far as outlook and kind of viewpoint at this time for April?

Doug Rice -- Chief Financial Officer

Well, we provided for the month of April as far as our percentage of revenue versus prior 2019. And for BGT, it was 35%; and Biologics, it's 35%; and Spinal Implants was 50%, Spinal Implants, including both fixation and motion. And lastly, the extremities at 40% of 2019 levels. It combines totally, it combines for a 40% versus 2019.

Jeffrey Cohen -- Ladenburg Thalmann -- Analyst

Got it. And can you give us any additional color on what you found over the past couple of weeks on May? And could you also provide us some additional color as far as by geography or by continent, what you've been seeing over the past couple of weeks?

Doug Rice -- Chief Financial Officer

Let's start on geography. This is really difficult because different regions are starting and they're starting at different ramp level. So we are currently monitoring it from our sales channel. And typically, in the southern part of the U.S., things were more open, and that's been publicly stated. And it's consistent with our view as well. As far as the first couple of weeks of May, it's too early to tell in that regard. We just closed our April books, and we provide that information for you. So that's really where what our lens is based on right now.

Jeffrey Cohen -- Ladenburg Thalmann -- Analyst

Okay. Got it. And getting back to a couple of Raj's questions on M6. Could you give us a sense of how many physicians were implanting, call it, in early March? And since that time, how many more have been trained?

Jon Serbousek -- Director, President, and Chief Executive Officer

So we have not provided the numbers of implanting surgeons. We have been consistently training even in the first January and February, not only virtually, but also in person. And those classes were full that we put together. And as we got into virtual training, I highlighted, it's even we've had a better response than we ever could have imagined as far as attending virtual training. And that training continues on. And even now as surgeons are going back to work, we see continued interest in doing those virtual trainings, which will continue to amplify. I couldn't be more proud of our training and education program for putting together those programs, turned from in-person to didactic or virtual training. And we didn't really miss a beat as far as our ability to attract surgeons to M6 training and train those surgeons.

Jeffrey Cohen -- Ladenburg Thalmann -- Analyst

Okay. Got it. And then lastly, for Doug, as far as some of the cost-cutting initiatives and leveraging efficiencies. Talk a little bit about the sales and marketing expense and how that may look as some of that is under your control on the leverage side and some is not, being through distribution partners.

Doug Rice -- Chief Financial Officer

Yes. Good question, Jeff. Thank you. We've been just as proactive as we can be with regards to our liquidity and capital structure. We're fortunate to be in a very strong position from a balance sheet perspective and trying to preserve that as much as we can. From a sales and marketing perspective, you saw that line item impacted by the tail off at the end of the quarter in revenue in terms of the deleverage. We also continue to invest in training and education for the M6 U.S. launch. And so in my script, I did try to provide some color around the fixed nature of some of those costs, roughly half of our historical sales and marketing has been fixed. We will get some benefit from some of the project delays and cuts in spending areas like salaries and marketing and travels and meetings and so on. So that's the way I would look at it. But our as our revenue decreases, the sales and marketing as a percentage of sales will certainly look very inflated, hopefully, on a short-term basis.

Jeffrey Cohen -- Ladenburg Thalmann -- Analyst

Okay. And as it relates to the income tax benefit for the quarter, was that all accrued during 2019?

Doug Rice -- Chief Financial Officer

It was on the balance sheet at the end of 2019, and it has to do with the closing of a statute on certain historical tax positions where we had reserved for tax contingencies, and no, it was accumulated in more than just 2019.

Jeffrey Cohen -- Ladenburg Thalmann -- Analyst

Okay. But is the tax contingencies now at 0? Or that was a partial after the tax contingencies?

Doug Rice -- Chief Financial Officer

It's all a noncash entry and benefit to our tax provision this quarter.

Jeffrey Cohen -- Ladenburg Thalmann -- Analyst

Okay. So the issue is closed?

Doug Rice -- Chief Financial Officer

Correct. Yes, with the statute expiration, we consider that particular the largest issue in our tax provision closed. We had some other things going on, right, with the CARES Act and our ability now to carry losses back. And so the tax provision has benefited with that as well. But the largest item, the benefit that we received, is now closed.

Jeffrey Cohen -- Ladenburg Thalmann -- Analyst

Okay. Great. It looks like you're taking good advantage of the hiatus to kind of improve the company's stature out there in the marketplace.

Doug Rice -- Chief Financial Officer

Thank you, Jeffrey.

Jeffrey Cohen -- Ladenburg Thalmann -- Analyst

Thank you very much.

Jon Serbousek -- Director, President, and Chief Executive Officer

Thank you.

Operator

[Operator Instructions] And your next question comes from Jim Sidoti with Sidoti & Company.

Jim Sidoti -- Sidoti & Company -- Analyst

Good morning. It's good to hear your voice. I hope you guys are all well OK.

Jon Serbousek -- Director, President, and Chief Executive Officer

Thanks, Jim. Same year.

Jim Sidoti -- Sidoti & Company -- Analyst

Tim, I appreciate it. So kind of a big picture question. Obviously, procedures are going to be pushed out in Q2, Q3. But these patients, they weren't doing this on a win. They must have been in pretty significant pain if they were scheduled to have a fusion or a spinal procedure. Don't you think that at some point in the fourth quarter or possibly 2021, these procedures come back?

Jon Serbousek -- Director, President, and Chief Executive Officer

Jim, thanks for the question. You hit a very important point. Spine patients are in pain. They're reaching out because they hurt, not that other areas with total joints don't hurt, but these patients hurt and oftentimes, they're having neurological impact. And so as we look at the elective side of the case, spine patients are in the middle. I mean the less electives are total joints than more electives and CMS has given some pretty good guidance on this. So we see the spine cases as those that need to be done sooner than others on the elective scale. And we the other side of that is that we know that hospitals want to get back to providing these elective cases, surgeons want to get back to providing elective cases. And we know the patients want to get pain relief. So we see that as a good indication for how those electives will come back, but it's just very difficult to talk about the timing, cadence of that. But we know there is good pressure for those to come back for the reasons I just highlighted.

Jim Sidoti -- Sidoti & Company -- Analyst

So if they do start to come back by the fourth quarter, are you in a position to ramp up capacity to meet demand?

Jon Serbousek -- Director, President, and Chief Executive Officer

Jim, we as I highlighted in my prepared remarks, we never closed our production facilities. We kept them working. We balanced our inventory, and we actually to keep people engaged and trained on the production of our products and we kept we built a little extra inventory, not remarkable from a financial standpoint, but allowed us to prepare for any type of spikes in demand that we can clearly recover from quickly. So we're in a very good position to basically manage any amount of recovery in the second, third and even fourth quarters from based on where our product position is. And also, as we highlighted, having our sales organization trained and ready to go and basically ready to service those cases as well as our preparations for getting them back into the hospitals and the ASCs safely.

Jim Sidoti -- Sidoti & Company -- Analyst

All right. And then just one more on the sales force. I know in the second half of last year, there was a lot of transitions going on, you were in the process of bringing on new salespeople. Have you been able to get the sales force to the place you want it to be at this point? Or have these disruptions caused you to let people go again?

Jon Serbousek -- Director, President, and Chief Executive Officer

Jim, I'm going to answer it this way. We're in a great place from where we are from building our management team, and we're also getting very positive attraction. People coming to our company wanted to engage us from a distribution standpoint. Are we where, where we at where we want to be at? No. I mean we have work to do. And we as I highlighted in our prepared remarks, this will go on over a number of quarters and even years as far as getting to the optimum level. But we're in a great place for where we are for management, attracting talent and basically getting some structure underneath that. And that's one of the key initiatives we had going forward. So I'm pleased with our position in that right now.

Jim Sidoti -- Sidoti & Company -- Analyst

All right. And then last one for Motion Preservation, I'm sorry, I missed what you said. How much was that up in the quarter?

Jon Serbousek -- Director, President, and Chief Executive Officer

What I highlighted in the prepared remarks is that our Spinal Implants were 50% of 2019 results. And that was buoyed by the Motion Preservation because our Spinal Implants call out is for both fixation and motion products.

Jim Sidoti -- Sidoti & Company -- Analyst

Okay. I thought you gave a number for that increase year-over-year.

Jon Serbousek -- Director, President, and Chief Executive Officer

Yes, Jim. It was $2.9 million.

Jim Sidoti -- Sidoti & Company -- Analyst

And how does that compare to last year?

Jon Serbousek -- Director, President, and Chief Executive Officer

Last year was up about $1 million, Jim, because we were just OUS. So we had gotten the approval by the FDA in the first quarter last year and just started to have our first procedures in the second quarter last year.

Doug Rice -- Chief Financial Officer

And, Jim, I think, it was an 84% increase over prior quarter.

Jim Sidoti -- Sidoti & Company -- Analyst

And that's in the U.S. or is that global?

Doug Rice -- Chief Financial Officer

That's a global number.

Jim Sidoti -- Sidoti & Company -- Analyst

Okay, all right, thank you.

Operator

[Operator Instructions] At this time, there are no further questions. I will now hand the call back for closing remarks.

Jon Serbousek -- Director, President, and Chief Executive Officer

Well, thank you, operator. We appreciate it. We appreciate everybody dialing in and listening to the prepared remarks and also the Q&A, and we look forward to a good quarter and coming back to you following that to report out. Thank you very much, and have a great day.

Operator

[Operator Closing Remarks].

Duration: 45 minutes

Call participants:

Mark Quick -- Investor Relations

Jon Serbousek -- Director, President, and Chief Executive Officer

Doug Rice -- Chief Financial Officer

Raj Denhoy -- Jefferies -- Analyst

Jeffrey Cohen -- Ladenburg Thalmann -- Analyst

Jim Sidoti -- Sidoti & Company -- Analyst

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