Xtant Medical Holdings Inc (XTNT) 2011 Q2 法說會逐字稿

Good afternoon and thank you for participating in today's conference call. This is Bacterin's second-quarter financial results for the period ended June 30, 2011. With us today are Guy Cook, the Company's Founder and Chief Executive Officer; and John Gandolfo, Bacterin's Chief Financial Officer.

Following the remarks, we will open up the call for your questions. And before the conclusion of today's call, I'll provide the necessary precautions regarding forward-looking statements made by the management during this call. I would like to remind everyone that the replay of this call will be available for one month starting later this evening. A webcast replay will also be available via the link provided in today's press release, as well as the Investor Section of the Company's website at www.bacterin.com.

Now, I'd like to turn the call over to the Chief Executive Officer of Bacterin, Guy Cook. Please go ahead, sir.

Thank you, Camille, and good afternoon, everyone. Thank you for joining us today to discuss our second-quarter 2011 results.

We issued a press release this afternoon announcing our financial results for the second quarter. Our record results in the second quarter of 2011 mark our seventh consecutive quarter of record revenue growth and first EBITDA positive quarter in the Company's history.

We attribute this to our successful execution on continued operational efficiency, a more comprehensive product portfolio, and expanding market presence in networks, hospitals, and medical providers. We also realized organic growth from our biological and medical products.

As we focus more on our higher-margin direct salesforce and transactions with entities that can sell our products domestically and abroad, these results reflect the gains we expect to realize across all of our verticals, as we continue to leverage operational improvements as well as remain opportunistic in our acquisition efforts.

Now before we go much further, I'd like to turn the call over to our CFO, John Gandolfo, who will walk us through a summary of the quarter and the year's financial results. When he's finished, we will return to review our operational progress, M&A activities, and how the third quarter has been shaping up. Then we will open the call up to your questions. John?

Thank you, Guy. And thanks, everyone, for joining us today.

Now turning to our results in the second quarter of 2011, as Guy mentioned, revenues for the quarter increased 25% sequentially to a record $7.5 million, as compared to $6 million in the previous quarter, and revenues were up 135%, compared to $3.2 million in the second quarter of 2010.

For the first half of 2011, revenues totaled a record $13.5 million, up 128% versus $5.9 million in the same period in 2010. The increase in revenue is primarily attributable to continued broader use of the Company's medical products, anti-microbial coatings, and device implants, as well as our implementation of a direct salesforce driving this greater adoption rate. In addition, as part of our ongoing strategy during the second quarter, we executed a stocking purchase order with a US-based distributor to sell our products internationally.

Gross profit margin for the quarter was 76.8%. This compares to 83.5% in the previous quarter and 83.8% in the year-ago quarter. For the first half of 2011, gross profit margin was 79.8%, as compared to gross profit margin of 81.1% in the same year-ago period.

The lower margins were primarily due to larger discount pricing for the stocking purchase order with the US-based distributor, who will sell our products internationally, and this was partially offset by increased manufacturing efficiencies. Despite the lower margins, we fell within our previously given guidelines of gross margins between 75% and 80%.

Operating expenses for the quarter totaled $6 million, as compared to $6.9 million in the first quarter of 2011, and $4 million in the second quarter of 2010. For the first half of 2011, operating expenses totaled $13 million, as compared to total operating expenses of $7.1 million in the same year-ago period. It is important to note that as a percentage of revenues, selling and marketing expenses decreased to 58% in the second quarter of 2011 from 71% in the first quarter of 2011.

Selling and marketing expenses were approximately $4.3 million for both periods, with higher revenues driving the improvement in these margins. We expect sales and marketing expenses as a percentage of revenues to improve further as we focus more on the higher-margin direct sales model. As our direct salesforce reaches year two of their employment, commission rates will decrease per our commission program to drive lower sales and marketing expense as a percentage of revenues.

Our direct salesforce also carries a lower commission rate compared to independent distributors and we expect an increase in portion of our sales will come from our direct salesforce, which will naturally drive profitability. In addition to the extent we continue to be successful in receiving stocking purchase orders from institutions and health organizations, our sales and marketing expense as a percentage of revenues will continue to decrease.

Net loss was $405,000 or $0.01 per basic share for the quarter. This compares to net income of $4.9 million or $0.13 per share in the previous quarter, and this included approximately $7.2 million from the decrease in non-cash warrant derivative liability in the first quarter. Net loss in the second quarter of 2010 was $2.1 million or $0.07 per basic share.

In the first half of 2011, net income was $4.5 million or $0.12 per basic share, including the decrease in non-cash warrant derivative liability of approximately $7.2 million. And this compares to a net loss of $3.7 million or $0.13 per basic share in the same period of 2010, which included an increase of approximately $95,000 in non-cash warrant derivative liability.

As we mentioned on the quarter-one call, we expected EBITDA to turn positive during 2011 and we achieved this objective in quarter two. EBITDA totaled $35,000, and while marginal, it marked our first positive EBITDA quarter.

I do encourage you to please see the definition and an important discussion about use of EBITDA, which is a non-GAAP term, in today's earnings release, which is available in the Investor Section of our website.

Now turning to the balance sheet, cash and investments at June 30, 2011 totaled $1.4 million, and this compares to $375,000 on March 31, 2011. The increase in cash during the quarter was primarily due to private placement of Company securities. In addition, as we announced last week, after the end of the quarter, we secured access to a $15 million credit facility.

The $15 million facility was established to retire existing debt obligations, provide for working capital, and allow us to be opportunistic in our M&A activity. The facility included an initial drawdown of $7 million, and resulted in net proceeds after the repayment of debt and transaction expenses of approximately $1.4 million. In addition, the transaction lowers our monthly debt service by approximately $60,000 per month through April 2012. We believe our financial needs are met for the near term [will have] any financing options available to fuel our continued growth.

This completes my summary report on our results. For more details and complete analysis of our results for the second quarter, I'd like to direct everyone to our Form 10-Q to be filed with the SEC on or before August 15 and which will be available at www.sec.gov and via our website. I'll be happy to answer additional questions you may have during the Q&A session.

And now, I would now like to turn the call over to Guy Cook, our President and CEO.

Thank you, John. During the second quarter, we made a lot of progress across the board. We further diversified our Biologics division product portfolio. Leading towards a more comprehensive product line, we introduced our third human acellular biological scaffold, hMatrix, an acellular dermal scaffold for soft tissue repair applications. We believe it's the only sterile product available on the market today.

We are initially marketing hMatrix for homologous use indications, including abdominal wall repair, breast reconstruction, and wound covering in what we estimate is an addressable market exceeding $2.5 billion annually in the United States.

In our Medical Device and Coatings division, we're in the process of conducting studies that involve enhancing our new orthopedic implant products with our sustained release anti-microbial coating technology. We plan to file a 510(k) application for market clearance with the FDA before the end of the year.

We believe this will add an additional and important differentiating intellectual property protection to our product line. In fact, we expect to be the only company in the space that can offer this combinatorial technology, which we estimate represents a $600 million addressable market.

Our Q2 results, particularly our positive EBIDTA, reflect the continued market penetration of our existing and latest medical devices and biologic products, as well as improved operating efficiencies. This was driven in part by our new relationship with ROi, a recognized leader in healthcare supply chain management for hospitals and medical practices.

ROi represents our second national GPO contract for our Biologics division, and our first for our Elutia Wound Drains. The group purchasing agreement means inclusion with ROi's network as well as pre-approval of Bacterin's product with a variety of GPOs. We also continue our move to our direct salesforce model that has driven both higher-margin revenue as well as created greater margin penetration.

By the end of the second quarter, our Biologics products were being used in 603 medical facilities, as compared to two years ago when we were in only 71 medical facilities. We've also made great strides toward improving our operational efficiency in terms of procuring donor tissues and processing capacity, including our recently completed investment in new hires and management reorganization. In fact, we've already seen results in our best processing month in July and we expect August to be even better.

We welcome our new team members and congratulate the others on their promotions. It certainly created a great deal of excitement around here and everyone is set for creating a great second half to the year.

While the stock market has certainly met with gyrations recently, we were glad to join the Russell 3000, the Russell Microcap and the Russell Global Indexes during the quarter. It represented another major milestone for Bacterin as it validates the tremendous progress we've made and raises our visibility in the investment world.

With respect to 2011 guidance, we continue to expect the Company's existing product line revenue will grow at its historical pace of approximately 100% year-over-year. And we remain comfortable with our previous guidance of approximately $31 million in revenues for 2011.

Overall, Q2 demonstrates that we are solidly on track in our corporate development in terms of enhancing our operational capacity, offering a more comprehensive product portfolio, and expanding our market presence, with this all leading to increasing revenues and profitability over the quarters to come.

Also, we plan to present at the Stifel Healthcare conference in Boston September 7 to 9 and the Rodman Global Investment Conference in New York City from September 12 through the 13. And we'll also be doing additional meetings in both cities.

Now I think we're ready to open the call for your questions. Camille, please provide the appropriate instructions.

(Operator Instructions). Bruce Jackson, Morgan Joseph TriArtisan.

Thanks for taking the question. Can we get some additional information on how the product revenue breaks out between the distributors and the direct salesforce?

I believe that this quarter, it was about roughly 50% coming from distributors, and about 50% from the direct salesforce.

Okay. That's good. And then you said it was 603 facilities that you were in this quarter?

Correct.

And then was there any revenue contribution from hMatrix?

Yes. There's some, Bruce. It's modest. We are continuing to build our inventories for that product, we're continuing to get approvals, but we do expect it to be a major revenue contributor moving forward.

Okay. So most of the revenue this quarter then was from OsteoSponge?

Correct. The bone (inaudible). Correct.

Got it. Okay. That's it for me. Thank you.

Thank you, Bruce.

Suraj Kalia, Rodman & Renshaw.

Hey, Guy, it's Suraj. I'm not sure who they mentioned. But, Guy, the hMatrix, obviously, you're seeing something in the soft tissue repair market. I'm very curious in terms of the competitive dynamics -- whether it's Bard, KCI, J&J, whomever -- you guys are seeing some opportunity out there. Would love to get some of your thoughts of what you're seeing, and how should we triangulate this opportunity for Bacterin.

Sure. One of the reasons we got into the hMatrix product was that we were encouraged to do so from our current (inaudible) point from our foot and ankle surgeons. We do currently sell to the podiatrist as well as to the orthopedic foot and ankle surgeon. And they usually do treat wound -- diabetic foot ulcers and wound care in the normal course of their practice. And we believe we have approximately 100 to 150 surgeons that we can leverage getting that product into the same (inaudible) point.

We undertook the program approximately a year ago to start building it. We are starting at three excellent clinical results. The major competitor for that, we do have out there that, anecdotally, we're seeing about a 50% faster incorporation rate. We have greater suture pull strength. And like I said in our talk, that it is a sterile product, it is terminally radiated. And that's also one thing that we have over our competitors.

Okay. One other question, Guy. In terms of M&A, I know you've mentioned it in the past that's going to be a focus -- or one of the focus areas for Bacterin. I know with the Robinson MedSurg acquisition that you last did, help us understand or qualitatively understand what key segments are you looking at, without being specific? What should we be looking at over the next 12, 18 months?

Yes, the cranio-maxillofacial market that we entered by acquiring the Robinson MedSurg line of products is complementary to our current Biologics program. I believe the first sale that we had -- we've already had our first sale -- it was an additional $5,000 as part of that procedure. We feel comfortable that the Biologics can pull the metal, that our current relationships, our current approvals can allow us to ramp the metal or the hardware fairly quickly.

The things that we think make the most sense to combine with an anti-microbial technology are the extremities first. There's a much higher level of infection. With, say, a foot and ankle Steinmann pin or an external fixator, you're going to have much higher infection rates with those products as, say, opposed to like a hip or knee replacement.

So we'll be concentrating on the extremities -- that's hand, foot and ankle, trauma, cranio-maxillofacial. We do have a fair amount of interest from our spine docs. Even though the infection rate is low, it is catastrophic for the patient. So we think if we did add that to a pedicle screw or rods, then that would be clearly a differentiating product.

Yes, as you know, we did secure the $15 million acquisition line from MidCap and Silicon Valley Bank. We have not identified targets associated with that financing, so we believe we can be opportunistic with some smaller acquisitions, and we can leverage it across our salesforce.

Great. Thanks, guys.

Thank you, Suraj.

(Operator Instructions). Caroline Corner, McNicoll, Lewis & Vlak.

Hi, thanks for taking my call, and congratulations on a strong quarter. Just a couple of questions and follow-up around the hMatrix product. Since you're approaching some of those markets like abdominal wall repair and breast reconstruction, and there's already those players out there that were mentioned by the other caller -- you've got Alloderm for one is out in that market -- I was just wondering how you're differentiating your product as you go to make the sale. I heard that you're targeting existing relationships, existing customers. But just as far as getting new customers, what are your selling points for that product?

Yes. I would say -- [I already mentioned] breast reconstruction are secondary and third markets. Our primary market for wound care repair is supplementary to our bone scaffold. So it allows us to really have a broader back. But the two main differentiating characteristics are that the product is sterile and that it has a greater suture pull strength, which is going to be more important for orthopedic indications moving forward.

Okay. Thank you very much for that. And then another question I have, you have some trials underway with OsteoSponge and then also one with OsteoSponge SC. And I was just wondering if you could give us an update on when we're expecting data from those trials. And as far as catalysts for the share price, when we would -- should expect to see news flow around those?

Yes. We continue to conduct multiple clinical trials for the products. For the OsteoSponge product, the two-year data comparing it head-to-head with BMP-2 has moved to peer-reviewed status; it is in front of that particular journal. Hopefully they will approve that in the near-term. I don't know if I can give appropriate insight as to when that may be, but it is moving on to peer-reviewed status.

The OsteoSponge SC, we continue to have anecdotal data that all patients are growing articular cartilage; the MRIs look good both pre- and post-op. And it is again a product used for repair -- subchondral repair. So we believe the patients are doing well.

We have some long-term data that shows the patients are doing very, very well. We will be entering those patients into a register, where we will be able to break into that data and publish it as we feel it's appropriate or we have sufficient data to convey to our surgeons.

Okay, very good. Congratulations on your progress across the portfolio.

Thank you.

(Operator Instructions). And there are no further questions at this time. I would now like to turn the call back over to Mr. Cook for closing remarks. Please go ahead, sir.

Thank you, Camille. I would like to thank each of you for joining us this evening, and I especially want to thank you for insightful questions and comments.

As we advance through 2011, our overriding priority will continue to be delivering the best quality medical devices for our clients and sustaining Bacterin's position as a provider of choice in the areas that we serve. I hope you all will continue to be interested in Bacterin as we continue to make progress, and I look forward to speaking with you again in the near future. Thank you very much. Operator?

Before we end today's presentation, I would like to take a moment to read the Company's Safe Harbor statement that provides important cautions regarding forward-looking statements.

During this call, the management and representatives of Bacterin International may have made comments that may be deemed to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 that are subject to significant risks and uncertainties.

Forward-looking statements include information concerning the Company's future results, operations, financings, products, research, testings, employment levels, market analysis, implementation, business strategy and expansion plans. Statements made during this call that were forward-looking include, but are not limited to, statements made by the speakers that the Company's expectations that the margin and sales and marketing expense as a percentage of revenue will improve as the Company focuses on its higher-margin direct sales model; that Bacterin believes its financial needs are met in the near term; Bacterim's expectation of being the only company in the space to provide the combinatorial technology of its orthopedic implant products with its sustained-release anti-microbial coating technology; the Company's expectation that its existing product line revenue will grow at its historical pace of approximately 100% year-over-year; and its guidance of approximately $31 million in revenues for 2011; the Company expects increase in revenues and profitability over the quarter to come.

As you consider forward-looking statements, you should understand that such statements are not guarantees of performance or results. They involve risks, uncertainties and assumptions that could cause actual results to differ materially from the anticipated results contained in the forward-looking statements, including the Company's ability to accomplish its goals and strategies, operational and clinical effectiveness of its products, FDA approval of its products, and general economic conditions. Additional information concerning these and other factors that may cause actual results to differ materially from those anticipated in forward-looking statements is contained in the risk factors section of the Company's annual report on Form 10-K.

In closing, I would like to remind everyone that this call will be available for replay for one month starting this afternoon approximately two hours after the completion of this call. Please refer to today's press release for dial-in replay instructions. A webcast replay will also be available via the Investors section of the Company's website at www.bacterin.com.

Thank you, ladies and gentlemen, for joining us today for our presentation. This concludes today's call. You may now disconnect.