Xtant Medical Holdings Inc (XTNT) 2011 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen. Thank you for standing by. Welcome to the Bacterin International Holdings Inc. fourth quarter and year-end 2011 conference call. During today's presentation all parties will be in a listen-only mode, and following the presentation the conference will be opened for questions. (Operator Instructions).

I would now like to turn the conference over to Guy Cook, Chief Executive Officer of Bacterin International Holdings. Please go ahead.

Thank you, Douglas, and good afternoon everyone. Thank you for joining us today to discuss our fourth quarter and year ended 2011 results. We issued a press release this afternoon announcing our earnings results.

We increased our revenue sequentially, quarter over quarter, and year over year -- 21%, 72%, and 96% respectively, which shows accelerating progress. In the fourth quarter we achieved important data and acquired additional product to sell into existing call points. We are growing revenue rapidly with strong gross margins and established, leverageable infrastructure that positions Bacterin to have excellent topline growth and future profitability.

Now, before we go much further, I would like to turn the call over to our CFO, John Gandolfo, who will walk us through a summary of the quarter and year's financial results. When he is finished, I will return to review our operational progress and how the first quarter has being 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 fourth quarter of 2011, as Guy mentioned, revenues for the quarter were up 72% to a record $9.1 million from $5.3 million in the same year-ago quarter, and up 21% from $7.5 million in the third quarter of 2011.

For the full year 2011, revenues totaled a record $30.1 million, up 96% versus $15.4 million in the same period of 2010. The increase in revenue was primarily attributed to the Company's continued market penetration, driven by unique product benefits for both the patient and medical care provider, combined with the continued expansion of the Company's direct sales force.

Gross profit margin for the quarter was 44% as compared to 83% in the previous quarter and 82% in the year-ago quarter. Excluding adjustments mentioned in today's release which I'll discuss in a moment, fourth quarter 2011 gross margin would have been 61% of sales. The decrease in Quarter 4 2011 gross margin, excluding adjustments compared to prior quarters, is due to an increase in sales price discount on $1.4 million stocking order sale made during the quarter.

Gross profit margin for the year was 70% compared to 78% in 2010. Excluding the cost of sales adjustments, our full year 2011 gross margin would have been 75% of sales. Going forward, we believe gross margins will be 70% to 75% of revenues due to the increased allocation of our corporate overhead to cost of sales. Correspondingly, G&A expenses will be lower due to the increased allocation.

Operating expenses for the quarter totaled $6.7 million as compared to $7.8 million in the previous quarter and $7.1 million in the fourth quarter of 2010. Operating expenses for the year totaled $27.5 million compared to $20.7 million in the previous year, due to largely to increased sales, salaries and commission costs on our increased revenues.

Operating loss for the quarter was [$2.17 million] compared to $1.6 million in the previous quarter. Excluding the nonrecurring cost of sales adjustments, operating loss for the quarter would have been $1.5 million. The lower than anticipated decrease in our operating loss was due to an increase of $1 million in our allowance for doubtful accounts relating to a 2011 stocking order sale. The operating loss in the fourth quarter of 2011 of $2.7 million decreased by 21% compared to an operating loss of $3.4 million in the fourth quarter of 2010.

Net loss was $4.4 million or $0.11 per basic share for the quarter, and this compares to a net loss of $3.2 million or $0.08 per basic share in the previous quarter, and a net loss in the fourth quarter of 2010 of $6.7 million or $0.18 per basic share. The fourth quarter 2011 net loss included an increase in our non-cash warrant derivative liability of $1.1 million. Net loss was $3 million or $0.08 per basic share for the year, and this compares to a net loss of $19.5 million or $0.61 per basic share in 2010.

Now the cost of sales in the fourth quarter of 2011 included the following adjustments -- a nonrecurring increase in fourth quarter cost of sales of $795,000 for the write-off of a related party receivable from West Coast Tissue Services, one of our donor agencies. In December of 2011 we signed a four-year extension with West Coast Tissue, and in exchange for the extension and a related right of first refusal on donors over that period, we agreed to write off the receivable. And we included the $795,000 write-off in cost of sales and the fourth quarter of 2011.

At year-end we increased our inventory reserve on quarantined inventory by $200,000 for tissue that received back from customers in connection with a voluntary market withdrawal of products during 2011. The FDA is reviewing whether or not we will be able to release the product while we established a reserve in order to be conservative.

We had a nonrecurring write-off of $200,000 of scrap metal inventory of CMF medical device inventory during the quarter. In addition we performed a detailed review of our corporate overhead being allocated to our cost of sales, and during the quarter we made an adjustment to decrease our G&A expenses by $360,000, and increased cost of sales by that same amount due to the increase in production during the period.

Fourth quarter 2011 EBITDA loss totaled $1.6 million. Excluding the nonrecurring write-off of the West Coast Tissue accounts receivable as well as the increase in inventory reserves and write-offs, we would have had negative EBITDA of $354,000 for the quarter. And this figure compares to an EBITDA loss of $316,000 for the prior quarter.

The fourth quarter EBITDA figure was negatively impacted by the increase in the allowance for doubtful accounts on the stocking order sale. Please see the definition and an important discussion about our 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, we reported cash and cash equivalents and net accounts receivable of $7.8 million at December 31, 2011. This compares to $3.8 million at December 31, 2010. We believe our working capital position and potential cash available from our equity credit line is adequate to allow us to execute our growth strategy as we go forward.

During the first quarter of 2012, we did draw down approximately $3.9 million on our equity credit line with Lincoln Park Capital. And although this was unplanned, we thought that was necessary due to the delay of receipt of payment related to the large stocking order sale, as well as an increase in the purchases that we were making of donor inventory. In addition we had a two-week delay in customer invoicing associated with the installation of a new accounting system early in January of this year.

This completes my summary report on our results. For a more detailed and complete analysis of our results for the fourth quarter of 2011, I would like to direct everyone to our Form 10-K which will be filed with the SEC prior to March 30, 2012, and will be available at www.SEC.gov and via our website.

And I'll be happy to answer any questions you may have during the Q&A session. Now, I would like to turn the call over to Guy Cook, our President and CEO.

Thank you, John. As reflected in our nearly doubling of revenue in 2011 from one year ago, we have made a lot of progress across our entire business.

Focusing on the fourth quarter, we reported results of a two-year study for OsteoSponge. For anyone unfamiliar on the call today, OsteoSponge, used in conjunction with the patient's own bone marrow aspirate, is a highly effective osteoinductive and osteoconductive bone scaffold that aids in spinal fusion. The study was conducted in collaboration with researchers at the Salt Lake Orthopedic Clinic Spine Surgery of Salt Lake City.

The two-year, post-operative clinical data showed OsteoSponge to be equivalent to rhBMP-2 in achieving an interbody fusion based upon radiographic assessment, CT scans and quality-of-life outcome. Additionally, patients receiving the OsteoSponge graft reported statistically significant less leg pain at one year relative to the rhBMP-2 group.

Since OsteoSponge has been released, surgeons have used our implants more than 100,000 times, and this latest study further validates OsteoSponge's effectiveness in spinal fusion surgery. Surgeons noted our product's unique handling properties, ability to irrigate the site without graft migration, and quick insertion of the OsteoSponge scaffold into an interbody cage.

In November of 2011, we signed an exclusive agreement with Jeil Medical Corporation for distribution in the US and Canada of Jeil's LeForte system. The LeForte System is composed of orthopedic implants used in cranio-maxillofacial procedures including trauma and reconstruction, and it complements Bacterin's existing expertise and product offerings in the tissue grafting arena. We are planning a full product release during the second quarter of 2012.

The introduction of these products will expand Bacterin's capabilities to include surgical procedures in the facial arena, such as cranial and maxillofacial trauma, orthognathic surgery of the mid-face and mandible, mandibular reconstruction, reconstruction of the chin, and fracture fixation. We intend to develop a second generation of the LeForte System to include our proprietary antimicrobial coating technology.

From the fourth quarter we took many steps to achieve sustainable high growth and future profitability. We secured a $15 million credit facility that included an initial drawdown of $7 million with MidCap Financial and Silicon Valley Bank. Approximately $3 million was raised in a private placement offering, and we entered into an equity purchase agreement for up to $31 million with Lincoln Park Capital Fund.

The company acquired the assets of Robinson MedSurg LLC, a medical device distribution company focused primarily on maxillofacial and craniofacial surgery devices. New executive management talent and management reorganization helped drive the company's most active processing quarter in its history.

The third human acellular biologic scaffold, hMatrix, an acellular dermal scaffold, was launched which Bacterin plans to initially market for homologous use indications including abdominal wall repair, breast reconstruction and wound covering -- an addressable market the Company estimates exceeds $2.5 billion annually in the US. We signed a national group purchasing organization contract for Bacterin Biologics and first floor Elutia Wound Drains with ROi, a recognized leader in healthcare supply chain management for hospitals and medical practices.

We materially increased the number of medical facilities in which our products are used and doubled capacity through installation of new equipment. We increased donor supply to support our anticipated growth through 2012 and beyond.

We increased our hospital accounts to 616 facilities in Q4, an increase of 27% over the 484 facilities in the fourth quarter of 2010.

We also joined Russell 3000, Russell Microcap, and Russell Global Indexes and achieved NYSE Amex listing status.

In the first quarter of 2012 as a public Company, we participated in multiple investment conferences as well as industry conferences including presenting at the American Academy of Orthopedic Surgeons 2012 Annual Meeting in San Francisco, California. AOS is a great stage to get in front of orthopedic surgeons who are the users of the OsteoSponge. And we were pleased to present our equivalency data, rhBMP-2, to a highly targeted audience.

We continued our research and development activities in introducing four products over the past 12 months that now represent approximately 15% of our total revenue, a percentage that can move materially higher going forward. With our base of innovative new products, the R&D function is focused on developing iterations that make product handling and usage easier for our surgeons.

In 2012 we expect to introduce our products in different shapes and prefilled in syringes. We also have a number of new biologics in development, but we will refrain from being any more specific at this point for competitive reasons.

One key ongoing project is our OsteoSponge SC product and our pursuit to obtain an FDA-approved indication as a cartilage regeneration scaffold. We expect surgeons to use this product in certain patients to help regenerate cartilage in an effort to delay the impact of osteoarthritis in knee and hip joints. The primary endpoints of the trial are pain and function in the joint.

Enrollment began in late 2011 and we expect it to take approximately 2 years to complete. We expect to publish the preliminary results of this trial in mid-2012 at 6 months, with additional interim data roughly 6 months later.

Right now we have approximately 56 representatives in the sales organization. The number of representatives is roughly double the number of what we had in the first quarter of 2009, and we expect to increase this group by another 15 to 20 representatives during 2012 with approximately 10 that have already been hired so far this year.

We maintain approximately 150 distributors worldwide that sell a variety of our products, and are comfortable with the size of our distributor network. And we do not anticipate adding more this year. We primarily use distributors to sell our products internationally, which represent a low portion of our total revenue.

Given the strong growth we have achieved domestically, our focus is primarily on capturing share in this large market. International growth plans are secondary at this point, but we anticipate spending more time on this opportunity in the coming years, a partnership or joint venture being the most likely route to increase our presence.

The key driver of our revenue growth in 2012 will once again be the Osteo line of products supported by the acceleration of hMatrix, medical devices and royalty revenues. This year we will continue to leverage our higher-margin business model and sales force to execute on further market penetration within our expanding networks of hospitals and medical providers. With our [interim] two-year study results, strengthened infrastructure, broadened donor supply, and comprehensive product portfolio, we remain comfortable with our previously stated expectation of $53 million to $56 million in revenue for 2012.

Overall Q4 and the full year 2011 demonstrated that we are solidly on track in the execution of our strategy with the continuing development of our procurement agency relationships, broad product development, broad product portfolio and market presence, with this all leading to increasing revenues and profitability over the quarters to come. Now, I think we are ready to open up the call for your questions. Douglas, please provide the appropriate instructions.

(Operator Instructions). Caroline Corner with MLV & Co.

Thanks for the update and for taking my question. First of all, did you break out the royalty revenues at all for the quarter?

No, we have not.

Okay. (multiple speakers)

It is an immaterial amount for the quarter.

And then going forward, can you give any guidance towards tissue cell revenue versus the royalty revenue?

I think we expect the tissue sales to be probably 96% to 97% of the revenues as we look through 2012.

Okay. Thank you. That's helpful. The gross margin going forward, thanks for breaking out all that detail for us. As we look forward, then, if I pull the G&A amount down or put it back into COGS, are we looking at gross margins going forward in mid-to-high 70%s for product sales?

I think we mentioned we expect it to be between 70% and 75%. So, if I was modeling, I would probably do 72% to 73%.

Very good. And then the hMatrix product, before when we've talked about it and in some of your comments, looked at a number for 2012 for that product and the $8 million to $10 million range. Is that still a ballpark estimate for that product? How is the initial launch going and what kind of surgeries are you seeing that one being used in right now?

That remains on track. We still expect revenues from that product to be approximately in that range.

We are seeing more interest in the breast reconstruction market than we originally anticipated. It uses a much larger graft size, so we are still in the process of stocking the appropriate hospitals and establishing the distributor base for that particular product. We still continue to have sales for dermal repair and breast reconstruction, trauma and in foot and ankle.

Okay. And then around that comment of stocking orders, the gross margin got hit this quarter because of stocking orders. Going forward as you move into new medical facilities, should we expect more of those large stocking orders? Is that something that you are going to do typically when you go into a new facility?

No, we're not. We are actually pulling back away from the stocking orders. We feel that we can establish the distributor channels ourselves as well as anyone we can partner with at this point. So, I would say in 2012 we don't have any plans to do any large stocking orders.

Okay. And then last question for me and then I will get back in queue, for the cartilage trials with the SC, you said that has recently begun enrolling. I think I missed it, but how many patients are you expecting this one to encompass?

This will have 75 patients in the trial.

Okay. And it is currently enrolling now?

Yes.

All right. Thanks very much.

Matthew O'Brien with William Blair.

Good afternoon. Thanks for taking the questions and I apologize for the background noise. I am on a cell phone. Was just curious about the stocking order in the quarter; was that fully recognize revenue in the quarter?

Yes, it met the criteria for revenue recognition during the quarter. You know, basically risk of loss, passage of title, and shipment passed to the entity during the quarter.

Okay, so excluding that order in the quarter, it looks like revenue was roughly flat versus Q3. Is that a fair characterization? And can you just talk a little bit about reorder rates among your surgeon base from maybe 6 to 9 months at this point?

Well, the third quarter also had a stocking order, although not at that size. And so I think that it probably, on a comparison basis, it was probably $6.8 million in the third quarter of revenues going up to $7.7 million quarter to quarter.

Okay, so something along the lines of around maybe 16%, 17% sequential growth excluding the stocking orders.

Correct.

Correct.

Okay. And then on the charges side, those are a bit surprising, the number in the quarter. Should we expect more in Q1, Q2? Should this be something from a tissue donor perspective that we expect on an annual basis?

Well, in terms of the adjustment that you are talking about, are you talking about the West Coast Tissue related adjustment?

Yes, so specifically, just all the adjustments in the quarter and their impact going forward. Are there going to be more of those in Q1, Q2? And then --

No.

-- on the tissue donor side in terms of the adjustments, I understand it is a four-year agreement. But you secure donors from different companies. Should we expect something along these lines maybe every one or two years?

No. Not at all. We don't expect these adjustments going forward into the first and second quarter relating to COGS.

And in terms of the donor, this relationship with this donor started out probably 4 or 5 years ago. And this was more of a receivable that built up over time that we felt, from a business standpoint, it was more important to extend the relationship and get a right of first refusal. And that is why we agreed to write off the receivable. But going forward, you will not see any type of agreement like that.

Okay, and then just getting the guidance, $53 million to $56 million for the year, that is something that you said before. What gives you the confidence in this environment that you can get to those numbers? You know, if $8 million is really the adjusted revenue number in the quarter, you know, that is assuming some pretty material sequential increases to get up to that $53 million to $56 million range.

What gives you that confidence on the OsteoSponge side, and then on the hMatrix side to go from -- not even sure what the revenue was in the quarter, but $8 million to $10 million in a pretty competitive market? What is it? Is it simply guys that have been trialing it for a while now are saying, hey, I am going to use this a lot more frequently? Or just any kind of color around your confidence in hitting those numbers would be helpful.

Sure. But there's also one thing, too, is we are expanding our production capability significantly through 2012. We expect to add an additional 9 clean rooms in our current facilities. So that will help.

You know, there are still products that are backordered. We still have extremely high demand for our core OsteoSponge products. We are signing up new facilities, larger facilities that we expect to significantly add to the demand that we already have.

But we continue to have our existing accounts. The information that is coming back from the sales force is that -- they're still a lot of untapped demand that we have not gotten to yet because of our production limitations.

And then one last one for me, and this is all very helpful, your coding submissions -- any update there? Are we still expecting Q2 or Q3 for those?

Yes, I think Q2 or Q3 is start reasonable. We are still within the first 90-day window on the original submission.

Any unreasonable or -- not unreasonable, but just irregular questions back from the agency?

Nothing yet. We are still within the 90 days. We would expect to get a letter at the end of that 90-day period.

Okay, thank you.

Nathan Cali with Noble Financial.

Thanks for taking the questions today. Just -- can you help us understand what happened in the quarter, why you guys work towards the low end of the range on the revenue?

This is Guy. We still had some production limitations. Again, we have certain sizes that are in high demand. And so, we -- if we would've had that excess production or excess capability, we felt we would've been higher than we currently were.

And then as far as on the production side of things, will that be in order as far as what you need to get done to increase the capabilities there to provide demand? When do you expect that to be underway and completed?

We are significantly increasing our donor queues, and as those are allowed to be processed and cleared for processing, that will help us. The actual infrastructure when the clean rooms are expected to be completed are in the September/October window. And so the full benefit of that increased production capacity and donor queue would be expected later this year in Q4.

Could you give us any guidance for the first quarter of 2012, how that quarter is coming along, and what the expectations for revenue are for that quarter?

Yes, I would say January started out a little bit slower than we expected. We had some infrastructure issues with implementing some new accounting systems which slowed us a little bit -- down a little bit in January. But we did reiterate the guidance of $53 million to $56 million for the year.

And then just one question on the reps. Where do you guys stand with direct sales reps and the move towards 100 reps in 2012? Where do you guys expect to end that balance? So in other words, when will all the reps be hired to get you to 100 on your estimates?

We are still expecting to get up to 100 by the end of the year. We are trying to balance it out with the current capacity constraints that we have. But our turnover is significantly lower than it has been in the past.

We are spending more time on training. We are spending more time on training our mid-level managers to give them the appropriate tools to manage the new hires that are coming in.

We are also giving them a longer runway. They have approximately 6 months to a year. But the new hires that we have, we feel are excellent candidates. And we remain hopeful that they will achieve the goals we have for them quite quickly.

Okay. Thanks a lot for taking the questions today.

Bruce Jackson with Northland Securities.

Looking at the revenue, can you talk on the biologic side the split between the direct revenue and the distributor revenue?

I think the breakout was roughly 55% coming from distributors, 45% from the direct sales force.

Okay, and then do you still anticipate that the direct sales force is going to become a larger proportion of revenue?

Yes. I mean, certainly as we look out over the next year to two, and one of the key drivers in us gaining leverage and increasing the contribution margin from the sales is to get a higher percentage of our revenues coming from direct sales force, because that will lower our sales and marketing expenses. So, yes, we continue to expect that.

Okay, and then moving over to the sales force expansion, is that something that is going to be out little bit more back end loaded in 2012?

I think in January we have already hired roughly 10 new reps. I think that will probably be done after January more evenly throughout each quarter.

Okay, and moving over to manufacturing and -- so you are going to be expanding the clean rooms and you are also extending the procurement. How do you feel about your current procurement pipeline and manufacturing capacity in terms of your revenue guidance for the year?

In terms of the donor supply coming in?

Right.

Yes, I think that when we looked at the model, we needed roughly on average 50 donors per month in order to meet the guidance of $53 million to $56 million in revenues. We are currently already at roughly 45 to 50 per month. So, we don't see that as an issue at all with respect to 2012.

That is it for me. I'll hop back in queue.

Thank you. Ladies and gentlemen that is all the time we have for questions. I would like to turn the call back over for closing remarks.

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

As we advance through 2012, our overriding priority will continue to be delivering the best-quality medical devices and biologic products for our clients, and sustaining Bacterin's position as a provider of choice in the area 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.

Thank you, ladies and gentlemen. That does conclude our conference for today. We'd like to thank you for your participation and you may now disconnect.