Xtant Medical Holdings Inc (XTNT) 2012 Q2 法說會逐字稿

Good afternoon, and thank you for participating in today's conference call to discuss Bacterin's second quarter financial results for the period ended June 30, 2012. My name is John Gandolfo; I'm the Chief Financial Officer of Bacterin, and with me today is Guy Cook, our Chief Executive Officer and Founder.

Following Guy's remarks as well as my own we will open up the call for your questions. Before the conclusion of today's call I'll provide the necessary precautions regarding forward-looking statements made by 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 at the investor section of our website at www.Bacterin.com. Now I would like to turn the call over to our Chief Executive Officer, Guy Cook.

Thanks, John; good afternoon, everyone. Thank you for joining us today to discuss our second quarter 2012 results. We issued a press release this afternoon announcing our earnings results. Revenue for the quarter was $8.2 million compared to $7.8 million in the previous quarter, an increase of 9% compared to $7.5 million in the second quarter of 2011.

Excluding a $1.2 million stocking order sale included in our second quarter 2011 revenue figure, second quarter 2012 revenues increased 30% over second quarter 2011.

Revenue for the first half of 2012 achieved 45% of our annual guidance. We have substantially increased our available inventory in March and April as well as increasing our processing capabilities, which we expect to have a positive impact on revenue in the third quarter 2012 and from there on.

Inventory increased 42% by the end of the quarter from $9.4 million at the end of 2011 to $13.3 million. As of June 30, 2012 we had approximately $1.3 million of inventory at cost on consignment at hospital accounts, which translates to approximately $7.1 million of inventory of retail buy.

Inventory is now readily available to our sales force and by the end of the second quarter we had 768 active facilities. We are optimizing our processing facility to meet the demand for our products including hMatrix, which we believe will be positively impacted under new reimbursement codes.

Margins of 72% remain solid within the guidance range of 70% to 75%. At June 30, 2012 we had approximately $1.2 million of cash and net account receivables of approximately $6.6 million. Before we go much further I would like to turn the call over to our CFO, John, who will step us through a summary of the quarter and year's financial results. When he is finished I will return to give a more detailed operational update and a look ahead. John?

Thanks, Guy. Now turning to our results in the second quarter of 2012. As Guy mentioned, revenue for the quarter was $8.2 million compared to $7.8 million in the previous quarter and an increase of 9% compared to $7.5 million in the second quarter of 2011.

Second quarter 2011 sales included a stocking order sale to the distributor of approximately $1.2 million and excluding this sale quarterly revenues increased approximately 30% over the prior year. The year-over-year increase was largely the result of increased sales generated from the Company's direct sales force and independent distributors compared to the second quarter of 2011.

Gross profit margin for the quarter was 72% as compared to 76% in the previous quarter and 77% in the year ago quarter reflecting the addition of the second production shift in 2012 as well as increased allocation of G&A expenses due to the increased production.

Operating expenses for the quarter totaled $6.2 million as compared to $7.2 million in the previous quarter and $6.1 million in the second quarter of 2011. Operating loss for the quarter was $347,000 compared to $1.3 million in the previous quarter and $280,000 in the second quarter of 2011.

Net income was approximately $731,000, or $0.02 per basic share for the quarter, and this compares to a net loss of $1.1 million or $0.03 per basic share in the previous quarter and a net loss in the second quarter of 2011 of approximately $405,000 or a penny per share.

EBITDA for the quarter totaled a positive $8,000 and this compares to an EBITDA loss of approximately $540,000 for the previous quarter and EBITDA of $35,000 in the second quarter of 2011. Please see the definition and important discussion about our use of EBITDA, a non-GAAP term, in today's earnings release which is now available in the investor section of our website.

Now turning to the balance sheet, cash and cash equivalents and net accounts receivable was $7.8 million at June 30 and this compared to a total of $7.8 million at December 31, 2011. We also have future access to approximately $3 million on our non-dilutive revolving AR credit facility which closed in April of this year. The formula for drawing these funds is based upon 80% of our eligible accounts receivable balance.

This completes my summary report on our results. For a more detailed and complete analysis of our results for the second quarter 2012 I'd like to direct everyone to our Form 10-K which was filed with the SEC in March 2012 as well as the Company's Form 10-Q which will be filed later this week and which will be available on www.SEC.gov as well as via our website.

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

Thank you, John. We recently won our third GPO contract, a three-year agreement with Novation, a leading healthcare supply chain expertise and contracting company to provide OsteoSponge, OsteoSelect, DBM Putty, OsteoWrap, OsteoLock, BacFast, hMatrix, Sports Medicine Allografts and traditional allografts to the GPO's nationwide network of hospitals and medical practices.

We also added a fourth national GPO contract with Premier Healthcare Alliance, one of the nation's largest group purchasing organizations serving over 2,600 hospitals and more than 84,000 other healthcare sites that represent over $43 billion in annual purchasing power. Both Novation and Premier became effective July 1, 2012 and we are beginning to see significant inbound interest in our products from these GPO affiliates as well as maturing interest from our MedAssets and ROi relationships.

We continue to hire aggressively to meet the need of these new clients through our expanded GPO presence. The Company has added 18 new sales representatives and one additional regional vice president of sales in the first half of 2012 for a total of 76 employees dedicated to the sales functions. This includes sales reps, customer service reps, regional VPs, executive VPs and a national sales manager.

Our direct sales force, which incrementally increased by 13 direct reps in 2012, continues to drive the balance of our revenues in favor of direct. Approximately one-third of our revenues are derived from direct sales; one-third are derived from independent distributors and one-third moved to the hybrid wherein the direct representative works in combination with a local distributor to help drive adoption.

We expect to hire approximately 10 direct representatives before the end of the year and expect to hire another 40 additional representatives in 2013, with 20 of those in January and 24 in July of 2013. We've improved our hiring, sales training and promotional review methods to accelerate efficiency across the sales infrastructure and expect the maturing sales force to add significantly to revenues in 2012 and 2013.

We have drastically reduced turnover from previous years and continue to invest heavily in our sales managers' and representatives' training and knowledge. Coming out of the back order status, adjusting away from low [market] and stocking orders and shifting toward additional markets for hMatrix to pursue, Bacterin is poised to have a stronger second half of 2012 and create a firm foundation for continued growth in 2013.

We secured an accounts receivable credit facility with Midcap Financial and Silicon Valley Bank for up to $5 million through January 1, 2015 based upon a predetermined formula for borrowings of up to 80% of Bacterin's eligible accounts receivable as defined in the credit and security agreement. With this additional working capital provided by this AR revolver we terminated the Lincoln Park Capital equity line.

We also are confident we have overcome our short term production issues as we continue to sign up new accounts, continue to build our patent and product pipeline and building these new accounts into meaningful recurring sales should begin to bear fruit in the second half of this year.

We continue to have excellent clinical results in our products with over 120,000 implants today and no adverse events. I'd like to give an update on our products and expected revenue breakdown.

For OsteoSponge, our flagship product, in April a peer review article in Orthopedic Research and Reviews determined OsteoSponge exhibits ideal properties for bone regeneration, similar to those in autograft or the patient's own bone with the distinct advantage of an autograft in that there is no risk of complications at the harvest site or donor pain postoperatively as well as [getting up the] time in the procedure. We expect OsteoSponge to account for 55% of sales in 2012 and 51% of sales in 2013.

For OsteoSelect DBM Putty recent studies conducted at the Hospital for Special Surgery have shown the putty proved equivalent to autologous bone graft in the posterolateral inter-transverse rabbit model. The data is being used to gain additional indications to OsteoSelect DBM Putty for cranial maxillofacial, CMF, spine and spine (inaudible) and is expected to help continue to drive sales through the remainder of 2012 and 2013.

Based on the positive results a paper was submitted to the Eastern Orthopedic Association where it received a best paper award. This also means it is automatically accepted for presentation at the American Academy of Orthopedic Surgeons in 2013. We expect the Hospital for Special Surgery to independently publish the results as well. We expect OsteoSelect DBM Putty to be 18% to 20% of revenues both in 2012 and 2013.

For hMatrix with ease of implantation and fast revascularization rates it is gaining the attention of clinicians in the treatment of breast reconstruction, diabetic foot ulcers and hernia repair. We've made improvements with respect to the product size of hMatrix which is already beginning to yield higher sales and we expect will continue to do so in the next two quarters.

Following that we expect to get a boost in uptake in diabetic foot ulcer indications with the expected addition of the necessary [Q Code] which we received in May and becoming effective January 1, 2013. We expect hMatrix to be approximately 5% to 10% of total revenues both in 2012 and 2013.

For OsteoSponge SC, we are pleased to report the Company has begun a 75 patient registry. We have received IRB approval in five of the six sites and the first patient was enrolled in July. We have treated more than 250 patients with OsteoSponge SC product and we continue to see excellent clinical results.

We are expecting three more independently published papers regarding the OsteoSponge SC product in the near future. The paper, "Reconstruction of Complex Osteochondral Lesions of the Talus with Cylindrical Sponge Allograft and Particulate Juvenile Cartilage Graft -- Provisional Results with a Short Term Follow Up" has been accepted by foot and ankle specialists.

Our marketing team continues to produce case studies including long-term, now up to two years, follow-up on some of the earliest treated patients. We believe this represents a massive opportunity for Bacterin shareholders as more independent and clinical results become available. We expect OsteoSponge SC to account for 2% to 4% of revenues in 2012 and 2013.

For our soft tissue sports med products we have begun an aggressive campaign to drive revenues. We have improved training across our sales infrastructure, reduced or eliminated slow-moving products, improved the marketing materials, created the ability to allow for same day return of product, if needed, through micro-distribution centers and, finally, increased international distribution for this product.

We believe the changes we have made will help drive revenues in this product category which has traditionally been a large portion of our slow-moving inventory. We expect sales to be 7% of 2012 revenues and 5% of 2013 revenues.

Across all product lines we remain proactive and innovative in addressing our surgeon needs and requests. The Company added six additional product (inaudible) to address foot and ankle, sports med and breast reconstruction markets. We believe these new additions will add substantially to the uptake of our product platforms. We are also aggressively defending and building our intellectual property.

The Company has filed five new patents in the first half of 2012 and continues to pursue five patent applications protecting its four products specifically the patent elastomeric article having a broad-spectrum anti-microbial agent and method of making which is a composition of matter patent that is being pursued in the US and 11 additional countries. This secures our IP relationship with our development partner RyMed Medical for needleless connectors.

As for our annual guidance, we continue to expect a stronger second half of 2012 and reiterate revenue of $35 million to $40 million for the year. We have added a second production shift and have begun expanding the number of clean rooms we devote to high demand products to a total of 13. We have been optimizing processing for our high demand products and continue ramping up our number of incoming donors.

We believe we have a sufficient number of donors from our procurement partners to eventually support more than $100 million of annual revenue for our biologics platform. We continue to believe the expansion of processing capacity is warranted due to the large addressable markets, new relationships with our GPO partners, the demand from our current clients and acquisition of new and larger accounts.

We believe that our first-half constraints were a short-term issue which we have resolved and the future long-term opportunity for Bacterin products in multi-billion-dollar addressable markets remains very strong. Now I think we are ready to open the call for your questions. Patricia?

(Operator Instructions). Matt O'Brien, William Blair.

Guy, I was just hoping now that we are pretty much off of backlog with -- from a manufacturing perspective, if you could give us a sense for the growth that you've seen in some of your accounts that are a bit older, maybe 12 months or more, or amongst your sales reps that have been around for a while just in terms of the growth that they are seeing in their accounts, some of the more mature reps versus some of the younger reps.

Yes, I think probably the first thing is we are being pretty successful with the new reps as well I think. We did an analysis of reps that were hired in the beginning of the year and they are averaging after six months of employment around $25,000 a month. So they are getting up to breakeven fairly quickly. The more mature reps continue to grow -- continue to expand.

I know we certainly have some stars in that category, but it generally just continues to mature. As we have a lot of accounts that are evaluating the product it can be a long sales cycles when a surgeon wants to see efficacy 90 days out post-op and then they will expand to more aggressive indications.

But in general across the board we are happy with where the -- both the new reps are at and the existing reps. Our turnover is drastically lower than it has been in the past. And so, we are more confident that general maturing of the sales force will help continue to drive the top line.

Okay and then last quarter you had a bolus of new accounts that came on board. I am assuming that they are in that 30 to 60 day -- excuse me, 60 to 90 day trialing period at this point. Can you give us any kind of update on how things are going with some of those accounts?

And then is your expectation that they will materially ramp their utilization potentially Q4 and then into 2013 you could see a bigger spike in utilization?

Yes, we think so. Often it is surgeon specific as to what those uptake rates might be. But we have been successful in gaining some larger accounts and we would expect to see the same sort of sales uptake as we do in the rest of the country.

And then, John, just so I am clear on this, I think you said you had $3 million left on the credit facility, you have about (technical difficulty) in cash, it's about $4.2 million in available cash to fund operations, is that correct? Can you give us (multiple speakers)?

That is correct.

Can you give us (multiple speakers)?

Plus the accounts receivable.

Sure, but can you also give us the cash burn rate in the quarter?

Yes well, the operating burn for the quarter -- give me one second if you would. I apologize. It was about $200,000, Matt (technical difficulty).

Okay. Given that there are more reps now on board should we expect it to increase slightly towards the back half of the year even though revenues are improving or how should we think about that metric?

No, I think that if we are successful in achieving the guidance that we outlined, which we believe we will be -- we should be EBITDA positive in the third quarter as well as the fourth quarter. And by the time you get to the fourth quarter with the lag between the sales and the cash coming in from the AR, we do not expect the burn to be increasing at all.

Okay. And then just one more if I may. Guy, you mentioned this HSS study that is ongoing; it obviously seems pretty intriguing and important for you guys. Do you have any sense for when that data may be published by the hospital?

We don't, not at this time. But we will be presenting it at academy, so we think we will have a nice following from that. I'd like to point out that it is not the study that is unique, it is the results that were unique that made it best paper.

Understood. Thank you very much.

Nathan Cali, Noble Financial.

Just one quick question on -- did you have any stocking orders in the quarter? I don't know if I heard it correctly or not.

No stocking orders in the quarter. What we referred to is that the second quarter of 2011 had a stocking order for $1.2 million but we made a decision at the end of the year not to move forward with those stocking orders. So there have been none so far in 2012.

Okay. And then just real quick, you said you added 13 reps in 2012, how many did you add in the second quarter?

Incrementally there were nine added in the second quarter, four in the first quarter.

Okay. And then -- so you increased inventory, I know there is sort of a process to do such and then get the product out the door. Are you still seeing demand as expected previously as far as your tissue sales?

I would say across the board, we are seeing high demand for the products. We are still coming out of some back order issues in Q2. And so has we continue to build, yes. I would say the GPO relationship is starting to bear fruit now. We are seeing significant inbound interest around the country. So I would say that is going to be a pretty major driver of demand as well.

Okay, thanks a lot for taking the questions, guys.

Anthony Vendetti, The Maxim Group.

Guy, can you talk a little bit more about the OsteoSponge SC trial? I know you just started enrolling patients in that. How long do you think that will take to conclude? And then, although I know it is difficult to predict, FDA approval, just a time frame, what you are expecting there for both that product and the anti-microbial product?

Well, the OsteoSponge SC is currently being sold, Anthony. This study is meant to show efficacy. So the registry is accepting approximately two to three patients per site per month so we would expect it to be full hopefully before the end of the year. But we will give an update in November as to where we are at there. And then we would start to see data come out of that registry approximately six months to nine months after that.

So we think we will be able to give you some data in the second quarter, early third quarter of next year. The anti-microbial coating technology as we are still compiling our response, we did have to go back in and do some additional animal studies to address the FDA's questions. They are compiling that. We do expect to put that submission back within the third quarter and we will wait for the response based on the data that has been submitted.

I know you are selling the OsteoSponge SC right now, but are you hoping to get additional FDA clearances or is it just showing the efficacy and not necessary to get another clearance for it?

Based on those studies we would hope to try and expand the marketing claims that we might be able to say. But at this point we think the efficacy that would be stated by four or five of the world's key opinion leaders in that space would be the greater driver to adoption.

Okay, thanks. I will hop back in the queue.

Bruce Jackson, Northland Capital Markets.

First, on inventory, I think you gave some of these numbers, but can you break that out between finished goods and work in process and raw material?

Yes, sure. So the overall increase in inventory was about $3.9 million from the end of the year. Of that amount roughly $1 million is associated with raw materials, $1 million is associated with finished goods and the balance, or close to $2 million, is work in process.

And then you said you are going to be embarking upon an expansion in the third quarter to the manufacturing facility. Can that be done without disrupting the production, the current production?

Yes, it is already underway. So we still expect the nine clean room expansions to be put into place in the September/October window. Fully utilized, fully functional probably January of next year.

Okay. And then in terms of the same-store sales, I think someone asked this earlier, but do you have a same-store sale increase with the accounts that you had in place last year? Are they using more of the product per account?

No, I don't think we captured -- we put in a new financial system this year so it wasn't available last year. I know overall, as I mentioned, if you take out the second quarter stocking order we went from about $6.2 million up to $8.2 million between the period of $6.3 million and $8.2 million.

I don't believe we have that information available on an account by account basis. Probably going forward as we start comparing 2012 to 2013 it will be available off of the new system. But unfortunately we don't have that detail.

Okay. I mean anecdotally do you have customers where they went through the trialing process and maybe only a few physicians were using the product and now they have got more of the doctors using the product?

Anecdotally we hear that quite a bit, but we tend to migrate from a champion surgeon getting us access in the hospital using the product originally, then we start to migrate towards other surgeons within that same facility. We see that generally across the country, it is a normal sales pattern for us.

Okay. Then last question on the medical devices and coatings business, when do you think we might see some lift in that particular business?

Keep in mind, we do have products that are already approved that we have taken to the FDA that are currently generating revenue and royalty income. I would say that we would expect more revenue from that product category in the second half of 2012 and into 2013.

So we are not completely reliant upon the FDA approval of the anti-microbial coated orthopedic devices to receive income in that category. But we -- I think we will begin to start doing some of the earlier studies now to try and show efficacy. And hopefully we will have that product up and running on the market probably 90 days after approval from the FDA.

Okay, great. Thank you very much.

(Operator Instructions). Greg Garner, Singular Research.

Nice to have an EBITDA positive quarter. On the expansion plans here for the September/October time frame target, but then not fully functional until January just because for hiring people in the fourth quarter and to bring more cadaver volume in, too -- I am just wondering what is the delay factor there (multiple speakers)?

I would say the delay is demand related. We feel pretty comfortable with our production rates right now and that we are keeping up with demand. We've got good par levels and if the demand does spike up we would be able to respond to that or increase our throughput. But just general operational challenges -- new hires, getting people in place, expansion of -- more people being in the clean rooms all day.

But from an incoming donor perspective, we feel quite comfortable that we can ramp it up quite quickly if we need to. But the only reason for really the delay at this point that we would see would be demand, we don't want to put out too much inventory until the demand is there.

But the inventory increase right now I guess is in anticipation of the normal, what, 60 to 90 day test period after an initial surgeon wants to see the results and how then the marketing function moves from those premiere surgeons to the others?

Yes, I would say some example of things we are budgeting for is that when a premier account was activated, GPO account was activated, now just in the state of Indiana alone there are 45 hospitals that activated new pricing.

So we are somewhat operationally challenged to cover that from a sales perspective to go out and meet those materials managers and get the product on the shelf and getting things through the system. But like we said, we believe that it makes sense to prepare for this operationally if that large demand does start to happen.

And can you tell me about the GPO versus selling the contracts -- I mean signing up a hospital? Because at GPO, you have access there to a number of hospitals, but you still need to go in and I guess get the hospital approval and then the surgeon approval. So a couple levels after that.

So I guess it makes me wonder is the GPO, how beneficial is that -- is the GPO essentially your distribution channel so you just at least need to have their approval initially. But the real sales effort goes into the hospital approval and the surgeons, is that right?

I would say it is both right now. It has always been a two headed sale where you have to convince the hospital to let you in and then to get the surgeon to use your product. But I would say the GPO contracts have moved beyond the traditional hunting licenses that we have thought of them in the past. They are actually driving customers our way. And that is providing leads and so a lot of the interest from those organizations is now inbound rather than us trying to push it the other way.

And regarding the Osteo SC, the studies that are being done, are you hearing some surgeons indicating they want to see the results of this before they would try it? Or is this just a product that they are far less willing to try until they see some more white paper data?

There is always early adopters in any industry. And I can tell you that at least one surgeon has described it as a miracle, that he's had fantastic results. And so, we would expect as we have more definitive clinical data available you are going to get more of the mainstream adopters.

But from a very healthy standpoint, we know surgeons are pessimistic and want to only try it in a few cases and see the results first. But we think, again, the podium power of the key opinion leaders we have devoted to this product will help drive that adoption throughout that entire area.

Just a couple housekeeping items. With the market expense down is this relative to product sales, tissue sales, how we should look at it on a sustainable basis going forward?

Well, I think as a percentage of revenues the decrease is associated with two key things, it's that we have been able to reduce the commission rates compared to last year with our distributors primarily. In addition with some of the changes that we made in the sales administration area the amount of salaries on the sales management side has been reduced as well. So those are the key contributors to the decrease on a percentage.

It has always been a stated objective for the year to get the sales and marketing expense as a percentage of revenues slightly below 50% for the year. I still think that that is an attainable goal based upon what we are doing now as well as what we see over the next two quarters. So I think that we expect the absolute dollars of sales and marketing expense to increase over the second half of the year, but as a percentage of revenues we'll remain in that range of somewhere between 48% and 50% of revenues.

Thanks, I appreciate the color on that. And I missed that one comment you mentioned, Guy, about the OsteoSponge percentage of revenues expected in 2012. I believe you said 51% for 2013, but I didn't catch the 2012 number. Could you --?

2012 was 55% and 2013 is 51%.

Okay, great, thank you.

(Operator Instructions). Management, there are no questions in the queue at this time. Please continue.

Okay, at this time this concludes our question and answer session. I would like to thank Patricia, I want to thank each and all 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 products for our clients and sustaining Bacterin's position as the 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.

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, financing, products, research, testing, employment levels, [bulk] analysis, implementation, business strategy and expansion plans.

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; the ability of the Company's sales force to achieve expected results; 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 the 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 and a webcast replay will also be available in the investor 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.