Xtant Medical Holdings Inc (XTNT) 2014 Q1 法說會逐字稿

Greetings, and welcome to the Bacterin's 2014 first-quarter results conference call. At this time, all of the participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Rich Cockrell. Thank you, Mr. Cockrell. You may begin.

Thank you. And good morning to all of you, and thanks again for joining us for Bacterin's first-quarter 2014 financial results call. On the call today, of course, are Dan Goldberger, Bacterin's President and Chief Executive Officer; and John Gandolfo, Chief Financial Officer.

Yesterday afternoon, the Company issued a press release announcing first-quarter 2014 financial results, within which the Company reported revenues of approximately $8.9 million, which was ahead of First Call consensus estimates of $8.7 million. Today's call is being made available via the Investor Relations section of the Company's website at investor.bacterin.com. Following remarks by management, we'll open the call up to your questions, and we expect the duration of the call to be approximately one hour.

Now, during the course of this call, management may make certain forward-looking statements regarding future events and the Company's future performance. These forward-looking statements reflect Bacterin's current perspective on existing trends, and information can be identified by such words as plan, will, may, anticipate, believe, should, intends, and other words of similar meaning. Any such forward-looking statements are not guarantees of future performance, and involve certain risks and uncertainties, including those noted in the Risk Factors section of the Company's Annual Report on Form 10-K and the Company's Quarterly Reports on Form 10-Q. Actual results may differ materially from those projected in these forward-looking statements.

For the benefit of those of you who may be listening to the replay, this call was held and recorded on May 7th at approximately 10 a.m. Eastern Time. Since then, the Company may have made additional announcements related to the topics discussed. Please reference the Company's most recent press releases and current filings with the SEC. Bacterin declines any obligation to update these forward-looking statements as -- except as required by applicable security law.

With that, I'd like to turn the call over to Dan. Thank you.

Thank you, Rich. And good morning, everybody. Thanks for joining us today to discuss our first-quarter 2014 results. I will begin by providing highlights on the quarter, and John will conclude with a more detailed review of our financial results.

The first quarter of 2014 marks the second straight quarter of sequential and year-over-year growth in revenues for Bacterin. Since I joined Bacterin, we've focused on rightsizing the sales function, identification of best practices, and a careful review of our geographical presence. Now that those difficult tasks have been completed and we have a productive foundation, we are investing in new resources that will drive additional revenue growth in the future. I want to thank our sales and marketing teams for their amazing efforts; two quarters in a row of significant growth are a great achievement.

Core biologics revenue increased more than 20% year-over-year and 7.7% sequentially, with a sales force substantially smaller than this time last year. Last week, we announced that Melanie Head has taken the position of VP of Sales at Bacterin. Ms. Head brings a wealth of experience and a track record of sales success at Luminous, Medtronic, Draeger, Nihon Kohden, and other medical technology enterprises where she ran and grew much larger sales organizations. Melanie has special expertise with national accounts, IDNs, and government contracts, all of which are strategic initiatives of ours in coming years. We are very fortunate to have Melanie on our team and I look forward to great things.

Nick Navarro has been our Vice President of Sales for several years. Mr. Navarro has extraordinary product and channel knowledge, and he will be moving into a new role at Bacterin. I want to congratulate Nick on growing the business in the face of adversity over the past two years. The combination of Melanie's sales experience and discipline with Nick's deep knowledge of our verticals is going to be an unstoppable combination.

As of May 1, 2014, we have 39 people in our field sales organization, of which 15 have been with us for less than six months. We have successfully recruited sales staff from industry bellwethers, including Medtronic, DePuy, Lynx, Globus, Biomet, Stryker, Smith & Nephew, and others, confirming that Bacterin and its products have become exciting again. Ongoing consolidation in the orthopedic sector is making talent available, and we are continuing to recruit.

It generally takes six to nine months for a new sales executive to become fully productive, and it's nice to see that several of our new employees are already contributing to the revenue growth we reported for Q1 2014. Bacterin remains committed to its hybrid distribution model and we currently work with about 150 distributor partners on a straight commission basis. Our full-time employees work hand-in-hand with our distributors to take care of existing customers and recruit new customers. I'm also pleased to report that operations and donor services staff have seamlessly increased production to keep up with our growing sales, while keeping cost of goods sold and working capital within our expected guidelines.

OsteoSponge and OsteoSelect continue to generate most of our revenues. And those products are very well-received in orthopedic surgery and neurosurgery. We launched OsteoSTX for multilevel spine fusion at the end of February 2014, and initial clinician reaction has been exciting. Just as important, this launch marks Bacterin's return to innovation. And we have several other product configurations scheduled for late 2014 and 2015.

Bacterin continues to invest in clinical support for our products, as demonstrated by Dr. Brigido's publication in March in Orthopedics; Dr. Juda's March publication in the Journal of Craniofacial Surgery; and Dr. Girasole's publication last November in the International Journal of Spine Surgery. Look for a steady stream of scientific publications through the end of 2014.

The combination of excellent training, new products, and new clinical support gives our field sales team the tools to generate incremental sales from our existing customers and to recruit new customers and new facilities. As was announced in the fourth quarter update, we borrowed an additional $4 million from an OrbiMed affiliates in March. We are managing operating expenses so that Bacterin should be EBITDA-positive at about $9.6 million in quarterly sales, with overall cash breakeven at approximately $10.5 million in quarterly sales.

John will discuss our operating expenses in more detail. And I am pleased with the discipline we have demonstrated thus far. The sales productivity we reported in Q4 2013 and Q1 2014, combined with the additional sales count -- sales headcount I outlined earlier, should put us beyond breakeven revenue levels as we exit 2014 and move into 2015.

I'll turn the call over to John now to discuss our financial results.

Thanks, Dan. I'd like to remind our listeners to refer to the first-quarter 2014 earnings press release issued yesterday, and also our Form 10-Q for the first quarter, which will be filed in the very near future. First-quarter 2014 revenue was approximately $8.9 million, an increase of 3.4% compared to approximately $8.6 million for the same period during 2013. Core recurring biologics revenue, which excludes one-time distributor stock and order transactions, increased 21.3% to approximately $8.7 million. Sequentially, first-quarter 2014 core recurring biologics revenues increased 7.7% from the fourth quarter of 2013.

Gross profit for the first-quarter 2014 was $5.5 million or 61.7% of revenues, and this compares to $5.5 million or 63.8% of revenues for the first quarter of 2013. This figure is within the Company's previously stated range of an expected gross margin of 61% to 63% for 2014. First-quarter 2014 sales and marketing expenses increased 6.8% to $4.1 million as compared to $3.8 million during the same period in 2013.

For the quarter, sales and marketing as a percentage of revenues increased slightly to 45.5% as compared to 44.1% in the first quarter of 2013. More importantly, sales and marketing as a percentage of revenue declined from 48% in the fourth-quarter 2013. As our revenue base continues to grow, sales and marketing as a percentage of revenues is expected to continue to decrease sequentially.

In the first quarter, General and Administrative expenses decreased approximately 11% to $2.3 million compared to $2.6 million reported for the same period last year. Reductions in General and Administrative expenses made at the beginning of the second quarter last year contributed to the lower G&A figure in the first quarter of 2014. The Company reported first-quarter 2014 research and development expenses of approximately $255,000, and this compares to $285,000 reported in the first quarter of 2013.

The first quarter of 2014 loss from operation was approximately $1.2 million. And this is consistent with the $1.2 million loss reported for the first quarter of 2013. Other expense, which includes interest expense, increasing the Company's non-cash warrant derivative liability, and miscellaneous expenses, increased approximately $2.5 million to $2.9 million in the quarter. This was due largely to a $2.1 million increase in the non-cash warrant derivative liability associated with the Company's higher stock price at March 31, 2014.

The Company defines Earnings Before Interest, Taxes, Depreciation and Amortization, or EBITDA, as net income loss from operations before depreciation, amortization, and non-cash stock-based compensation expense. EBITDA for the first quarter was a loss of approximately $715,000 and this compares to a loss for the first quarter of 2013 of $730,000. Sequentially, the EBITDA loss improved from a fourth quarter 2013 EBITDA loss of $1.2 million -- this number excluding the one-time inventory reserve adjustment we made in the fourth quarter of last year.

Cash, cash equivalents and net accounts receivable were $10.3 million as of March 31, 2014. And this compares to $7.8 million at December 31. And in March 2014, as Dan mentioned, the Company borrowed an additional $4 million from an affiliate of OrbiMed Advisors.

At this time, I will turn the call back to Dan for additional comments.

Thank you, John. Our management team and Board are committed to Bacterin's growth as a leading biologics company within the regenerative medicine space. We have a very comprehensive and competitive portfolio of regenerative medicine products.

Demineralized Bone Matrix generated more than $400 million in US sales last year, and is expected to grow at 4% to 5% per year. Bacterin holds approximately 6.5% market share behind Medtronic, DePuy, and Integra. The market for acellular dermis for plastic and reconstructive surgery and advanced wound care is another $500 million sales opportunity for our hMatrix product line. These are very large addressable market opportunities.

Our revenue growth strategy for 2014 and 2015 is simple. Number one, a reinvigorated, focused sales effort in our core demineralized bone category to gain market share; number two, new demineralized bone products to be sold through our existing sales channels to gain market share. And number three, careful investment in our hMatrix product line to grow revenue in this new product category.

OrbiMed and our equity investors have provided Bacterin with the financial resources to execute this plan, and I am confident in the team we have assembled at Bacterin. We'd like to thank all of our stakeholders for your continuing support.

With that, I'd like to open the call to questions.

(Operator Instructions) Suraj Kalia, Northland Securities.

Dan and John, congrats again. You guys are really turning around the ship much faster than I think or we expected. Dan, let me start out with some color, and forgive me if I missed this -- the split between direct sales and distributors?

It's about two-thirds/one-third at this point.

So it's historically what it's been. Okay.

Correct, correct.

Dan, given all the momentum you'll have put in place, we have almost half the reps that we had I would say about nine months ago. And if I heard correctly, 15 sales reps have been at Bacterin less than six months.

Yes.

I don't know if I heard that correctly. Can you give us some reason why, given all these things that have yet to materialize even more and result in greater productivity, why we should not expect a sales ramp as the year progresses? I know -- I'm not asking for guidance, but some color would be great why we shouldn't see a positive trajectory from here on.

So, certainly, in our internal modeling, we are taking that cohort of new sales reps and trying to understand what the trajectory is to attain full productivity. When you look at our optimistic models, then you get a lift much earlier than I had earlier indicated.

But, frankly, I'm still new with the Company. We've just brought in a senior executive, Melanie Head, who is brand-new with the Company. And I think it's a little bit more conservative to say we are still going to have some hiccups with identification of new hires, training of new hires, and how quickly they can all ramp up to full productivity.

Okay. So, again, Dan, not asking for guidance, but when you look out, let's say, three, four, five quarters, do you all expect new -- or rather what is the new contribution from new products that you'll expect? Given that you talked about innovation, if I may expand that further, as you specifically become more comfortable with the business landscape, are you -- is -- are complementary acquisitions on the landscape?

Well, I'm not going to comment on any M&A activity at this point. Our organic or internally developed new products, I'm very excited about our pipeline. We launched OsteoSTX just 45 days ago. Small revenues from that product right now. I think it's going to take our early adopters 90 days or so to see the results of their first implantations. And once they are excited about the -- once they are in a position to talk about their early results, I think we'll see that product line start to accelerate.

So, the real contribution from new products is in 2015. And for the products that we are going to launch in the fall of this year, again, that will be more towards the second half of 2015 for substantial revenue contribution. But in the same breath, way ahead of that, being able to talk about new products gives our sales executives more reasons to be at the call-point. And whether we're talking to existing customers, whether we're talking to new physicians within existing accounts, or whether we are calling on entirely new accounts, having that new product component, having that clinical steady stream of clinical publications, gets us into conversations that historically have been much more challenging for us.

Fair enough. And one last question for John and I'll get back in queue. John, I heard the number, I think -- so it was $10.5 million or so, where you all become cash flow-positive. On a more normalized basis -- again, not asking for guidance, but -- where do you see SG&A as a percent of sales? What would you say, you know what? As a CFO, this is where I think the normalized levels should be. And what we are really trying to understand is, at what point is real leverage and what's the upside on the bottom line? Thank you for taking my questions.

Yes, no problem, Suraj. I think as we model out and we look out three to five years, we don't see large increases in G&A from what our current levels are. So, if you think about it, past the point where we are at today on an incremental basis, if you assume that the Company is going to have gross margins of 61% to 63%, you're basically saying that your cost of goods sold is going to be somewhere around 38% going forward.

We expect sales and marketing expense on an incremental basis to be somewhere in the 25% to 30% level, depending upon whether it's distributor-based or direct sales-based. Outside of that, the G&A increases that we see are going to be very small, percentagewise. Probably as we look out three to five years, we think G&A as a percentage of revenues is going to run about 10% total.

You know, right now, because net revenues are on an annualized basis at about $35 million, it's at a higher percentage. But as revenues increase, that's the number we expect G&A to be at, going forward. And on an incremental basis, you know, we expect roughly 25% to 30% pretax to come to the bottom line and pass breakeven.

Fair enough. Thanks again, guys. Congrats once more.

Thanks, Suraj.

Matthew O'Brien, Bacterin.

Thanks for taking the questions. I'm actually with William Blair, but I do like Bacterin. So (laughter).

Thank you, Matt.

I was curious, Dan, when you were talking about the core revenue growth that we saw in the quarter. If you can just help us understand some of the drivers there. Was that focus in a specific area of orthopedics? And is that -- are those some of the areas where you're going to focus going forward?

And I guess what I'm trying to get at is, you know this is a product that can be used in a lot of different cases. Should we expect you to focus more aggressively in spine or foot and ankle? And then can you help us understand where foot and ankle can go over time, given that recent data that just came out?

That's a great question, Matt. So, two-thirds of our business is in spine, and part of our revenue growth is coming from increased adoption in that core spine business. We do have some special initiatives in foot and ankle. Foot and ankle right now is a small part of our business, but we have some very vocal physician opinion leaders -- you know, Dr. Brigido; Dr. Schoenhaus and others. And so, we are looking at some initiatives going forward in foot and ankle.

Our revenue per transaction in foot and ankle is lower, but our cost -- sales cost of approaching that channel is also lower. And it's nice to have that physician support as we enter into that new market. On a trailing basis, foot and ankle is a very small part of our business.

Okay. And then of the spine business, right now, obviously, that's a huge market opportunity. Can you talk about some of the growth drivers that you seeing there? And then, early days in your tenure there, the reorder rates that you are seeing among clinicians that you've added recently?

So, at a macro level, I think the number of spine procedures is growing slowly. I think there's some uncertainty around what the Affordable Care Act does to the number of procedures that are performed in the coming years. From our perspective, because we're small, it's more about gaining some market share. And where we have a strong established distribution channel, we are able to add incremental physicians within a facility pretty efficiently. Once we capture a physician, the reorder rates have been very solid.

Okay. And then as I look at the rest of the year -- and you started to touch on it in the last questions -- but Q2 here, you have a much easier comparison than you had in Q1. And then Q3 and Q4 as well, are pretty easy comparisons. Is there any reason to think that on a year-over-year basis, we shouldn't see some level of growth in each of those three quarters? And then is there any way you can even touch maybe low double-digit growth exiting the year?

So, you know, I'm not -- we don't have the systems in place at this Company yet to really provide guidance. Now that I've got approaching six months of track record, I'm getting close to having that kind of visibility, but we're not there yet. Certainly, for the current quarter, there was a lot of turmoil in the year-ago period. So, yes, that's going to be a pretty straightforward comparison. And obviously, with the addition of the sales executive Melanie Head, additional headcount in the sales force, yes, we are looking forward to sustained revenue growth as we exit the year.

Okay. And then last one from me and that's all very helpful. There has been a -- there was a filing from a previous employee at the Company about an interest in potentially taking the Company private. I just wanted to see if you could provide any thoughts on that filing or any update there.

Certainly. So, our Chairman had an informal conversation with Guy Cook shortly after that filing. And not much has come following that conversation. There is no formal proposal for the Company or the Board to respond to at this point in time. But if the formal proposal does show up, we will take it seriously.

Fair enough. Thank you.

(Operator Instructions) John Vandermosten, Singular Research.

I just wanted to -- I just had one question really in terms of capital needs over the rest of this year, maybe the next four quarters or so. And then looking forward to when there might be a need to increase capacity, what additional capital needs you may have related to that.

So, we've got enough capital and enough cash from operations to execute our plan through the first quarter of 2015. And by execute the plan, I'm talking about the R&D programs that we have in process, the clinical programs we have in process, as well as the steady expansion of our sales channel. And in our 10-K, you saw that the auditors agreed with our assessment that we had enough capital to execute the plan. That said, our balance sheet is a little bit skinny. And we'll leave it at that.

Okay. And any thoughts on additional capital needs in coming years when -- if you happen to reach capacity and growth is very strong?

We are managing our operating expense. And management is committed to working within our means, so we don't have to raise capital to continue to grow. Certainly, once we turn the corner on being cash flow-positive or cash-neutral, we don't have to go raise capital.

Okay, thank you.

Okay. I understand there are no additional questions in the queue.

There are no more questions. I'll turn the call back over to you, Mr. Goldberger.

Okay. Well, thank you, everybody, for your kind attention. I continue to be very, very excited about what we can build here at Bacterin. And we had a very good first-quarter. So, look forward to speaking to you soon. Thank you.

Thank you. This will conclude today's teleconference. You may disconnect your lines at this point. Thank you for your participation and have a great day.