Xtant Medical Holdings Inc (XTNT) 2015 Q4 法說會逐字稿

Greetings, and welcome to the Xtant Medical's fourth-quarter 2015 results conference call. At this time, all participants are in a listen-only mode. A brief 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, Rich Cockrell, President of The Cockrell Group. Thank you. You may begin.

Thank you, Christine. Good morning, and thank you for joining us today for the Xtant Medical Holdings fourth-quarter 2015 and full-year 2015 results conference call. With me on the call today are Dan Goldberger, Xtant's Chief Executive Officer; and John Gandolfo, Chief Financial Officer.

Yesterday afternoon, my Company was pleased to issue a press release announcing record fourth-quarter 2015 financial results. Today's call is being webcast and will also include a slide presentation, which has been posted to the Company's website.

Following remarks by management, the call will be open to your questions, and we will expect the duration of the call will 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 expected future performance. These forward-looking statements reflect Xtant's current perspective on existing trends and information, which can be identified by such words as expect, 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 included in those notes in the risk factors section of the Company's most recent annual report on Form 10-K.

In addition, any unaudited or pro forma financial information is preliminary and does not purport to project the future financial position or operating results of the Company. Actual results may differ materially.

For the benefit of those of you who may be listening to the replay, this call was held and recorded on Wednesday, March 16, 2016, at approximately 10 AM Eastern time. Since then, the Company may have made additional announcements related to the topics discussed herein. Please reference the Company's most recent press releases and current filings with the SEC. Xtant declines any obligation to update these forward-looking statements except as required by applicable law.

With that, I would like to turn the call over to Dan. Go ahead, Dan.

Thank you, Rich, and thank you all for joining us today so we can discuss another record-breaking quarter.

You will recall that we combined publicly traded Bacterin with privately held X-spine Systems last summer. That transaction was closed on July 31, 2015. We changed the name of the combined Company to Xtant Medical Holdings, Inc. and moved up to the New York Stock Exchange under the XTNT ticker soon after that.

Today, the Company is led by myself as CEO; David Kirschman, M.D., as Executive Vice President and Chief Scientific Officer; and our CFO, John Gandolfo. We currently have 3 locations. Most of our hardware fixation products come from our plant outside Dayton, Ohio. And we have a state-of-the-art tissue processing facility outside Bozeman, Montana. We also have administrative offices outside Denver, Colorado, that house certain finance and marketing functions.

Last night, we announced another record-breaking quarter, with combined Company sales of $22.3 million and 14% year-on-year growth. We have now demonstrated two consecutive quarters of mid-teens revenue growth since the combination was closed while integrating businesses of similar size. I am thrilled that the hard work and cooperation demonstrated by our team of dedicated employees has generated outstanding results in such a short time.

Full-year 2015 revenue was $86.5 million on a pro forma combined basis and $81.4 million if you back out X-spine's legacy OEM business. That represents a very healthy 14.8% year-on-year growth on a pro forma combined Company comparison. As you'll see when we discuss guidance, I fully expect that we can maintain our mid-teens growth through 2016.

We have largely completed the integration of our two businesses. When John explains the financial statement later in the presentation, you will see that we have set the stage for materially streamlined operations in 2016 and beyond.

Xtant today offers a full catalog of spine products for orthopedic and neurosurgeons. We emphasize our proprietary, differentiated products that are supported by peer-reviewed and published clinical data. But we also offer more conventional products to meet all of our physician customer needs. We have a robust product pipeline, led by Dr. Kirschman.

We have a large and growing distribution channel in the United States calling on surgeons, hospital staff and the various purchasing organizations. Now that the integration process is largely complete, we are looking forward to continued mid-teens revenue growth, 67% or greater gross margins and expanding EBITDA.

Slide 7 shows our total addressable market opportunity in the United States, approaching $9 billion. We offer a variety of soft-tissue products for the sports medicine category. But the vast majority of our business is in spine, where we offer a full suite of products.

Slide 8 summarizes the major products in our catalog, aligned with the kinds of procedures they are suited for. As you can see, we offer solutions that span the sacroiliac joint to the occipital lobe.

An important element of our strategy is our focus on proprietary products that are supported by clinical data. The graphic on slide 9 shows that about one-third of our revenue is derived from conventional plates, screws, putties and fillers. But two-thirds of our business comes from unique, differentiated products like OsteoSponge, Axle and Irix. We continue to be very excited about our newer products like 3Demin and Silex that are driving unprecedented growth.

Let me say a few words about our distribution channel that calls on orthopedic surgeons and neurosurgeons. We are committed to our hybrid structure, numbering 365 field sales assets as of February 2016. We have 51 full-time employees engaged in sales management, national accounts and direct sales in certain cities. We have 227 independent agents that get paid straight commission, which is reported on a 1099. And they operate in most cities. And we also have 87 reseller entities around the country.

All of our employees, and an increasing number of our agents and resellers, are exclusively selling Xtant product lines. I expect that we'll hold steady at about 360 field sales assets for the next few quarters as we work through the intensive training required by our portfolio selling initiative.

In October 2015, we combined the sales channels of the two companies and launched our portfolio selling program. Legacy X-spine agents are learning the biologics catalog and vice versa. National accounts is adding the combined catalog to existing customer contracts and purchasing groups. We have implemented a rigorous, multi-step product and procedure training curriculum for our internal staff and our field sales assets.

Portfolio selling can potentially increase our average revenue per procedure, which may generate more revenue for the Company and larger commissions for our sales agents. Portfolio selling can also make us a more attractive partner to the hospital purchasing bureaucracy as they attempt to reduce the number of vendors they work with and drive compliance in their systems.

About 3.5% of our revenue in Q4 2015 came from portfolio selling. Management's goal is to achieve 10% to 12% of revenue from portfolio selling as we exit 2016.

Slide 11 shows the steady growth in the number of hospitals that purchase products from Xtant, driven by our investment in field sales assets and the national accounts function. So far in 2016, 51 hospitals participated in portfolio sales, up from 17 in Q4 of 2015.

Turning to our product pipeline, slide 12 shows the three entirely new products that we announced in the second half of 2015. OsteoSelect PLUS demineralized bone putty, the ARANAX cervical plating system, and the Atrix-C structural allograph -- the implant. Each of these product families represents a substantial total addressable market opportunity for the Company. All three new products go to our existing sales channels and are in the early stages of a controlled launch.

We will deploy additional consigned inventory and instrumentation sets later this year, which will drive revenue growth. We have developed a very exciting product pipeline which will energize growth for many years to come. I expect three to five new-product announcements over the course of 2016.

We are also making ongoing investments into our supply chain and working capital to support our revenue growth. We have built seven new clean rooms at our Montana tissue processing facility that will be commissioned in the third quarter of 2016 and will ultimately double our allograph capacity. We continue to invest in implant inventory and instrumentation sets to support our hardware customers as well.

Let me turn our discussion to revenue guidance. Our long-term strategy at Xtant is to leverage our hybrid distribution channel to grow higher-margin sales to end-users, specifically hospital customers. When I joined Bacterin three years ago, we successfully transitioned that business away from OEM sales at transfer prices to mid-teens growth of our end-user business.

X-spine has a large OEM customer that was responsible for revenue of $6.751 million in 2014 and $5.093 million in 2015. We are currently working with that customer to determine the best way to transition their business in 2016 and 2017. Until we finalize those discussions, and out of an abundance of caution, we have decided to revise 2016 revenue guidance by $6 million to a range of $94 million to $99 million.

As you can see from slide 15, this adjusted guidance represents 15% to 20% growth in our core end-user hospital business. It can be difficult to manage the timing of a change in strategy towards a substantial OEM customer, and I believe it's appropriate to take this more conservative view of our plans for 2016.

Let me reiterate that our long-term strategy continues to be based on end-user sales, not OEM business. We are now implementing that strategy for the long-term success at Xtant.

I will turn the presentation over to John for a more detailed discussion of our financial statements.

Thank you, Dan. Before I get started, I want to remind everyone that we are comparing actual fourth-quarter 2015 results to pro forma results of prior periods, as if the Bacterin subsidiary and X-spine subsidiary were combined for these prior periods.

Total fourth-quarter 2015 revenue increased to $22.3 million from pro forma $19.5 million in the prior year, an increase of 14.1% between the two periods. Fourth-quarter 2015 gross profit was approximately $14.9 million, compared to pro forma $13 million for the comparable prior-year period, an increase of 14.9%. Fourth-quarter 2015 gross margin increased to 67% from 66.5% in the fourth quarter of 2014.

On a pro forma basis, full-year 2015 revenue increased 11.4%, going from $77.7 million in 2014 to $86.5 million in 2015. Pro forma 2015 gross profit increased 10.5% to $56.6 million from $51.2 million for the full year 2014.

Slide 17 outlines selected profit-and-loss statement information on the Company on a pro forma basis. We have already reviewed the revenue and gross profit information, so I'd like to turn the focus on the EBITDA figure, which is the best measurement of the Company's operating performance.

For the fourth quarter of 2015, EBITDA was a loss of $350,000, compared to a pro forma gain of $403,000 in the fourth quarter of 2014 due to higher sales and marketing expense and G&A expenses in the fourth quarter of 2015. For the full year of 2015 on a pro forma basis, the Company was EBITDA breakeven, and this compares 2014 EBITDA gain of $3.9 million. This is due largely to increased staffing at both companies which occurred prior to the closing of the acquisition.

Slide 18 shows the balance sheet comparison between December 31, 2015, and December 31, 2014. At December 31, 2015, current assets includes approximately $15.4 million of net accounts receivable and $22.7 million of inventory. Total liabilities include $68 million of convertible debt and $42 million of senior secured debt, which was incurred to fund the X-spine acquisition, which closed in July 2015.

The Company reported positive shareholders' equity of $8.9 million at December 31, 2015, resulting from the recording of a $17.5 million deferred tax benefit at the end of the year.

Non-GAAP profitability is defined as EBITDA less total cash-based interest expense. As we have previously mentioned, non-GAAP profitability breakeven occurs at quarterly revenues of $25.5 million. On an incremental basis after breakeven, the Company expects incremental profit margins of approximately 45%.

This point is highlighted on slide number 20. As this slide shows, for each $1 million of additional revenues after breakeven is achieved, approximately $450,000 of operating profit will drop to the bottom line. And this occurs because of the 25% cost of goods sold and 30% commissions on those incremental revenues.

For 2016, the Company is updating its guidance to a total revenue range of $94 million to $99 million, which would compare to actual 2015 pro forma revenue of $86.5 million. This represents an increase of between 8.6% and 14.4%. 2016 revenue, excluding OEM revenues, which is the Company's primary sales and marketing focus, would be in the range of $93.8 million and $98.5 million, which represents an increase between 15.1% and 21%.

Based upon achieving the revenue guidance, 2016 EBITDA is expected to be between positive $4.3 million and $6.3 million. 2016 non-GAAP profitability, based upon this EBITDA, would be in the range of negative $3.2 million and negative $1.2 million for all of 2016.

Now I'd like to turn the presentation back over to Dan for a summary.

Thank you, John. Xtant has a tremendous future ahead of us now that the hard work of integrating Bacterin and X-spine is largely complete. There are multiple growth drivers at work here. In the short run, we will leverage the portfolio selling opportunity among our existing field sales agents and customer base. We are also going to invest additional working capital to deploy more consigned inventory and instrumentation kits. These two activities will lead to accelerating revenue growth later in 2016 as we enter 2017.

Longer-term, we are going to continue to invest in our product and technology platform under David's leadership. 3Demin and Silex are already contributing material revenue. And I expect great things from ARANAX, OsteoSelect PLUS and Atrix-C as we can roll out those products to the rest of the country later in the year. We are also improving our clinical and customer service so that we can continue to offer best-in-class support for our customers.

In summary, we largely completed the integration of X-spine and Bacterin, and we're moving forward as a single Company. We expect to be able to drive mid-teens revenue growth in our core end-user sales business through 2016 and into 2017. Management is focused on our non-GAAP profitability metric, and we note that incremental revenue beyond our breakeven run rate of $25.5 million per quarter has tremendous leverage on operating income.

Thank you all for your kind attention. And we will turn it over to questions right now.

(Operator Instructions) Jason Wittes, Brean Capital.

First, in terms of the cross-selling for the sales force, how long do you anticipate it is going to take for each side to be fully proficient with the other side's portfolio?

Jason, it's a lot of people to get trained. And our training schedule rolls through July of this year. And once everybody is trained, they go back in the field, and it takes them a little bit of time to fill up their funnel.

So it's going to be a steady increase. We are rolling through between eight and 12 trainees per week all the way through the year. So it really starts to gain traction in the third quarter and as we exit the year.

That said, I showed you some hospital customer numbers that are pretty encouraging for January and February of this year.

Well, yes, that was -- that's true. And actually on that front for hospitals, do you have any kind of outlook or goals in terms of the number of hospitals you can penetrate this year or, related, how many additional distributors you look to bring on this year?

Because we've got this large training bogey right now, my expectation is that we are going to remain relatively flat in terms of the number of field sales assets. And our model shows us being relatively flat in terms of the number of hospitals, although our momentum in the current quarter has exceeded my expectations.

Okay. So I guess, given that sort of cascade, this will be somewhat of a back-end-loaded year. Is that the way to think about it?

Yes.

Okay. And then, you know, you mentioned portfolio sales in your targets. I think you had said it was about 3.5% right now. And your goal is 10%, was it? I'm not -- I have got to go back to the slides (multiple speakers) --

Yes. Our goal is that the core businesses have been growing in the sort of low teens, and we expect that to continue, that momentum. And we would like to see the portfolio selling at 10 to 12 basis points on top of that as we exit the year.

Exit the year. But longer-term -- I mean, what kind of goal do you have longer-term for that?

Longer-term, I'd like to see at least a 30% increase in revenue derived just from the increased number of cross-trained sales assets.

Okay. That's very helpful. And then I recall last year you had some supply constraints on 3Demins. It looks like you've invested in some infrastructure. Is supply constraint still going to be an issue for that product this year?

Yes. For the first half of this year, yes.

And can you give us a sense on Silex? It sounds like those sales continue to accelerate. I don't know if you can provide any more color on that product. It's kind of a unique product within your portfolio.

Yes. So -- no, we are not prepared to provide any of that product line detail at this time.

Okay. I'll jump back in queue. Thanks a lot, guys.

Suraj Kalia, Northland Securities.

So, Dan, couple of questions for you and couple of questions for John. In terms of -- and forgive me if you all have already mentioned this. Dan, I remember in Q3 there was this number, 3%, thrown out in terms of cross-selling activities. Maybe I am just rephrasing Jason's question to a certain extent. Could you give us some color of how much do you think you all are -- you know, your reps are cross-selling between X-spine and organic Bacterin?

The number for Q4 2015 was a little over 3%. Let me restate that. A little over 3% of our revenue, that $22.3 million, was a legacy X-spine rep selling biologics and vice versa. In the current quarter, one of our slides shows an increase in the number of hospitals in January and February that have purchased products from both product lines.

Okay. Interesting. Okay. And in terms of your FY 2016 guidance, Dan -- or John, for that matter -- you know, I know you all haven't given the breakout between X-spine and organic Bacterin. How should we think about that? When the deal was consummated, there were certain CAGRs given for either components of the business. How do you all think now that, you know, you are almost two quarters into the launch?

The Company has -- the combined Company has 18 major product lines. And then within those product lines, there are a variety of subcategories. And we are managing the business in two ways. We are looking at product-line trends. You know, for example, Silex is a product line; Axel is a product line; OsteoSponge is a product line. And then we also look at individual sales rep performance, and we slice the data both ways.

We are specifically -- since we have integrated the sales function, and now we have integrated many of the other functions of the Company, we are not managing the business in terms of legacy Bacterin or legacy X-spine.

Got it. And I presume you all don't want to give additional color -- okay, got it -- in terms of X-spine and -- understood.

John, the gross profit -- the gross margins were slightly better than what we were expecting. Can you give us some underlying themes here, at least on the gross margin line? And how should we look at FY 2016? I know you all haven't specifically provided guidance, but I'm just curious -- you know, how should we -- is this a good benchmark, or was this an anomaly?

No, no. We think that it's a good benchmark, especially starting out for 2016. We expect gross margins of 66% to 68% type percent. As we grow revenues throughout the year 2016, we do expect those gross margins to expand, probably to the very high 60%. We don't believe that this year that they will reach 70%, but we do expect expansion.

So I think a good way to look at it is continuing in that 67% range for the first quarter and expanding as we go to the second, third and fourth quarters.

In terms of the other expenses in the Company, we expect G&A expenses to remain in line with what the actual 2015 number was. And with respect to R&D expenses, we also expect those to be slightly above where they were for last year. So the game plan in order to get to that positive EBITDA, positive non-GAAP profitability is continuing to increase the revenues as we go forward, getting margin expansion on gross margin; keeping G&A and R&D at the current level; and then having a reduced sales and marketing expense as a percentage of revenues as our revenues increase. (technical difficulty)

Got it. So, Dan, would it be -- you know, the number 25 million always comes to mind in terms of -- you know, I think it's a breakeven, at least GAAP breakeven or close thereof. Do you think that's still -- you know, just given you're -- it looks like you are looking to improve on the gross margin line. If OpEx remains relatively stable, are we pushing GAAP breakeven a little sooner than the $25 million bogey? Thank you for taking my questions.

Yes. So first of all, it's non-GAAP breakeven. There are still a variety of non-cash items that it's flow through the income statement. But we are focused on our definition of non-GAAP profitability and breakeven, which is really a measure of cash after debt service.

And our current guidance is $25.5 million. That's where that breakeven occurs, where we can fully cover all of our debt service and our fixed expenses. But you are correctly pointing out that there are reasons why that would happen at a lower run rate.

Thank you for taking my questions.

RK, H.C. Wainwright.

A great year in 2015. There's a lot of changes in the Firm, and I think some of them are -- or, actually, most of them are on the right -- in the right direction. For the coming year, 2016, what are the things that can happen that can even do better than the mid-teens growth rate that you are expecting? And the three new products that you launched, what are some of the things that can happen which look better than what you are expecting?

Thank you for the question, RK. There's tremendous enthusiasm and momentum in our sales channel right now. Frankly, we need to throttle that somewhat because of our working capital -- just the amount of working capital that we can deploy. But there's tremendous upside if we can invest additional cash into working capital to deploy more inventory and support that momentum.

The new products we have launched are very exciting. OsteoSelect PLUS could be as large or larger than OsteoSponge. 3Demin still has a lot of momentum behind it. The same thing with ARANAX and Silex; both of those products are still in their very early stages of being rolled out. And, as I mentioned in the script, David has some very exciting new entries that we may be able to announce here before the -- sometime in the second quarter. So all of those can be accelerators if we have the working capital to invest in them.

There's another element that we don't talk about much, which is ex-US sales; a very small percentage of the business. Currently comes from outside the US. As we roll into the second half of the year, we'll start to set the stage for some international business in 2017 and beyond.

Fantastic. And then I know John gave some color on the expense lines. But at the same time, you are also saying that you want to keep the sales force flattish over the coming year. So I'm just trying to triangulate these things in such a way that -- you know, you're expecting revenue growth. You're keeping your sales force flattish. So does that mean you are already starting to see some increase in the efficiency of the sales force, and you expect that to be growing at a higher pace than what happened by the end of 2015?

Absolutely. You know, we are optimistic. Right now we are working our way through a pretty substantial training activity. And as folks rotate through training and pick up the other half of the catalog that they aren't really selling yet, we do expect substantial efficiencies -- both -- by whatever metric, you know, we are able to --. If we do this portfolio selling properly, we ought to be able to increase the average revenue per procedure, which increases the efficiency of the sales guys, allows them to earn a bigger commissions, as well as generates more distribution efficiencies for the Company.

Thank you. That's it for me.

Sherry Grisewood, Dawson James.

I would be interested in getting a little bit more color around your statement about deploying more inventory. Has this been a material constraint in sales growth? And is there a factor -- you know, 1.2, 1.5 times current inventory level where you feel that you're actually maximizing both the sales cycle and the demand?

Hi, Sherry, and thanks for joining the call. You know, the business model is consigned inventory. So every time we open up a new hospital or we open up a new doctor within an existing hospital, we need to deploy finished goods inventory and surgical tools to that site to service that physician. And that's where the working capital increase comes in. So it scales one-to-one with revenue growth.

Okay.

If we are planning to grow at a 15% rate, then we need to plan for approximately a 15% increase in our total working capital to service those new customers.

Okay. Follow-up question: what was the single best-selling product in Q4?

OsteoSponge, which is our proprietary biologic configuration, represents 22% to 23% of our total revenues.

And do you see that percentage of sales attributable to that product staying the same over 2016? Or are you anticipating a material product mix shift?

We do not anticipate a material product mix shift. However, some of our newer products, like 3Demin and Silex, have been supply-side limited. And as we limit -- as we remove those supply constraints, I think those newer products are going to grow disproportionately fast, but from smaller numbers.

So the OsteoSponge product is going to maintain on an absolute basis the current sales levels (technical difficulty).

Okay. Thank you very much.

(Operator Instructions) Thank you. Mr. Goldberger, it appears we have no further questions at this time. I would now like to turn the floor back over to you for closing comments.

Thank you, Christine, and thank you all for your kind attention. We are looking forward to a great 2016. Have a good day.

Thank you.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.