Xtant Medical Holdings Inc (XTNT) 2017 Q2 法說會逐字稿

Greetings, and welcome to the Xtant Medical's Second Quarter 2017 Results Conference Call. (Operator Instructions) And as a reminder, this conference is being recorded.

I would like to turn the conference over to John Gandolfo, Chief Financial Officer. Thank you. Please go ahead.

Good morning. Thank you for joining Xtant Medical's Second Quarter 2017 Earnings Call. Joining me today will be Carl O'Connell, Chief Executive Officer for Xtant.

Yesterday afternoon, Xtant issued a press release announcing second quarter 2017 financial results. Today's call is being webcast and will be posted on the company's website for playback. We expect the duration of the call to be approximately 30 minutes.

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 and 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 risks and uncertainties, including those noted in the Risk Factors section of our 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 Thursday, August 10, 2017, at approximately 10 a.m. 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 filing with the SEC. The company 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 Carl.

Thank you, John. I will begin by highlighting some of the company's achievements this quarter and provide updates regarding our focus on achieving operating excellence in 2017. John will provide additional details regarding our quarterly results.

For legal advisement, we are not able to field questions following today's call, as we remain in negotiations with a senior debt lender to restructure the company's debt, and although we remain hopeful that these negotiations will be successful, there are no assurances they will be successful.

In addition, as previously announced, the July 15, 2017, interest payment due under the company's various convertible promissory notes were deferred by the holders of such notes until August 15, 2017.

The company is currently negotiating amendments to the Indenture dated July 31, 2015, and to the additional convertible promissory notes held by Ross Acquisition Offshore LP and OrbiMed Royalty Opportunities II, LP, to extend the date for the payment of such interest. No assurance can be given that the company will be successful in obtaining appropriate amendments by August 15, 2017, or at all, or that if the company becomes in default under the convertible promissory notes on August 15, 2017, that the holders thereof will waive such a default in subsequent amendments. We appreciate your ongoing support during the quiet period.

With that, I would like to jump into the review of the second quarter successes and our momentum into the second half of 2017.

In May, we announced a delayed draw debt financing by Orbimed of $15 million, with proceeds used to pay off an outstanding balance of $9 million under an accounts receivable credit facility with Silicon Valley Bank, and the remaining to support restructuring initiatives and to be used for general working capital purposes.

In conjunction with the financing commitment, we entered into an amendment with Aurora Management Partners, engaging David Baker and Wayne Taner to serve as restructuring officers and direct the company's financial and operating restructuring efforts. Their focus has been on improving the day-to-day financial operations of the organization, and they have been successful -- successfully implementing improved process, supporting a successful trajectory for profitability of the organization. We look forward to continuing our relationship with David and Wayne and the Aurora Management team as we move into a new phase of our business.

Last night, we issued a press release announcing $21.4 million in revenue for the second quarter, which was flat in comparison to the second quarter of 2016. Despite flat revenue growth this last quarter, we are pleased with our progress given the amount of sales force and operational restructuring activities we have implemented thus far. We anticipate a minor disruption to our revenue stream, which we expect will stabilize as we exit this quarter. For comparison purposes, we had one less selling day in the quarter in comparison to the second quarter of 2016. That would have led to an increase of 1.5% over the prior year if looking at our average revenue per day for the second quarter of 2017.

Our EBITDA performance for the quarter was a loss of approximately $2.1 million compared to a gain of $252,973 for the same period last year. Our EBITDA loss is mostly due to a lower gross margin for the quarter and increased sales and marketing expenses. The lower gross margin was due to the reduction of fixed -- fixation revenue and corresponding lower gross margin on these revenues, as well as charges for excessive wear and tear on fixation instruments on the write-off of biologics finished goods inventory, which we expect to expire in the near future.

The increase sales and market expenses were due to more revenue being derived from distributors who have higher contracted commission rates. One of our major areas of focus for the second half of 2017 will be on maximizing the company's gross profit and reducing our cost of selling and be more in line with industry standards, so we can have a solid platform to grow in 2016 and beyond. As stated on earlier earnings calls, my leadership team will continue to actualize merger synergies and further integration efforts for the company, such as combining our quality and regulatory functions to operate under one corporate entity at the Xtant level. Additional activities such as merging our customer care and invoicing functions and consolidating our ERP system into a unified platform have also taken place. These efficiencies, with a focus on repurposing, have also helped to optimize operational functions and drive overall annual cost savings of approximately $4.2 million. The expense for headcount reduction of approximately $850,000, which was mostly paid out in the first half of the year, are projected to be complete by the end of Q3. These activities will ultimately contribute to our EBITDA and bolster financial performance in the second half of 2017 and beyond.

As we continue to focus on operational efficiencies, we do expect significant change and transition for this year within our organization. We're being mindful to minimize and mitigate disruption for our employees, partners and vendors, enabling us to continue our transformation towards a more successful and profitable company, which will deliver greater shareholder value for years to come. It's important to mention our employees are one of our most valuable assets our organization has, and we will continue to invest in programs for them, and nurture a culture that rewards initiative and great performance. To that end, our management team has implemented an employee satisfaction program and will measure the performance and success of these programs going forward. Through this transition process and implementation of changes for continuous improvement, we've had numerous achievements that will aid us in building momentum moving to the third and fourth quarters 2017. We're focusing on strengthening key foundational elements of the business in an effort to position the company to achieve operational success. The 3 main initiatives previously emphasized are: improving our asset utilization, improving our strategic mission and vision to position for market leadership and optimizing our sales channels.

Within asset utilization, we've made major strides over the last year, especially in supply chain management within our fixation business. Our teams, led by recently promoted VP of Operations and Hardware R&D, Anthony DeFalco, and our Director of Commercial Operations, Shea Vincent, are well ahead of their cost-saving goals in inventory reduction and kit utilization and optimization. We continue to build our portfolio. In May, we announced a licensing agreement with Sites Medical for utilization for their best-in-class porous titanium scaffold. As these products are currently in development, we will speak about the opportunity this partnership presents later in the year. This is a strategic initiative designed to strengthen our position in regenerative care by placing focus on technologies that will further integrate our hardware and biologics portfolios. Another example of this strategy is the additional FDA clearance we announced yesterday, for a Calix-C product line extension. Not only does this new clearance include larger footprints for addressing the need for more patients in need of surgical fusions, it also includes the indication for use with allografts such as our proprietary OsteoSponge scaffold, 3Demin, or with OsteoVive. In improving our leadership position in regenerative care, we again achieved record growth with our OsteoVive viable cell allograft product, with 92% growth over the first quarter of this year, generating approximately $478,000 in revenue. This is a line that we introduced through an [apple] launch in June 2016, and we anticipate this growth trend will continue. We've also recognized continued upward trends with our 3Demin family of demineralized cortical fiber technology, with year-over-year growth of 48% to $1.5 million in Q2 of this year.

Overall, Biologics revenue increased 21% year-over-year, reaching $12.5 million this quarter. This growth has mostly been driven by legacy hardware distributors pulling through more biologics in alignment with our portfolio selling initiatives. In a review of the performance of our top 10 distributors, the average growth achieved per agency was 31% year-over-year. 17% of our distributor network is focused on distributing our hardware and biologics lines and are responsible for generating over 50% of our revenue in the first half of the year.

Our sales team under the leadership of Chris Valois continues to cascade this level of success across our distributor network. For sales optimization programs internationally, we've achieved 17% growth year-over-year, driven mostly by our European and Latin American distributor partners. We expect our international revenue to continue on a growth trajectory throughout the remainder of the year.

For our U.S. sales optimization program, we continue to make great improvements and move towards a performance-driven organization. We've added 3 seasoned sales executives, each with extensive and successful experience in spine and orthopedic sales, and have managed both independent and direct sales channels. Further to sales management improvements, we are strengthening the existing distribution channel to distribute and focus on additional elements of the product portfolio, while targeting accounts under contractual access. And building upon the efforts in the first half of the year to establish a sustainable sales foundation, we'll be looking to add a team of regenerative care specialists as direct sales employees to service new accounts in large metropolitan locations with contractual opportunity. This will be part of a hybrid sales model designed to provide additional support to our distribution channel, especially as we look to launch new products in the regenerative technology market.

Additionally, in this effort, we announced the expansion of our national accounts team on our last earnings call. They have aggressively pursued contract opportunities with integrated delivery networks and health systems, resulting in an additional 16 new contracts in the second quarter for both hardware and biologics, opening up an additional 250 facilities for potential incremental revenue growth. I continue to believe that we have the best national accounts team in the industry. I'm excited about the contractual position of the company, which will serve to support our future U.S. sales strategies.

I would now like to turn the call over to John to discuss the financial performance of the second quarter. John?

Thank you, Carl. Slide #8 outlines selected profit and loss statement information for the company for the 3 months and 6 months ended June 30, 2017, compared to the same information for the comparable period of the prior year. Consolidated total revenue for the 3 months ended June 30, 2017, was approximately $21.4 million compared to $21.5 million of revenue for the same period of 2016. For the 6 months ended June 30, 2017, revenue was approximately $43.5 million, a 2.5% increase compared to $42.4 million reported for the first 6 months of 2016.

Consolidated gross profit for the second quarter of 2017 was $13.5 million or 63.2% of revenue, and this compares to gross profit of $14.7 million or 68.5% of revenues for the second quarter of 2016. As Carl previously mentioned, the gross margin contraction is primarily the result of a decrease in fixation revenues and a corresponding lower gross margin on fixation products.

In addition, the company incurred a charge of approximately $304,000 for excessive wear and tear on fixation instruments and $159,000 for Biologics inventory which was about to expire.

For the 6 months ended June 30, 2017, gross profit was $29.1 million or 66.8% of revenue compared to $28.8 million or 67.9% of revenues in the prior year. The slight decrease in gross margin was attributable to the lower fixation revenue and lower fixation gross margin, the previously mentioned charges for fixation instruments and Biologics inventory, which was offset by an increase in Biologics processing supplies, which were capitalized in the inventory.

The company reported a second quarter 2017 loss from operations of $4.7 million compared to a loss from operations of $2.1 million in the second quarter of 2016. The increased operating loss was a result of the previously noted lower gross profit, an increase in sales and marketing expenses of $717,000, due largely to higher commission payments and increased G&A expenses of approximately $627,000, which includes approximately $214,000 of contributions to the company's employee benefit plan, additional insurance expense of approximately $142,000 as well as additional professional fees.

For the 6 months ended June 30, 2017, the loss from operations was $6.7 million compared to an operating loss of $4.5 million in the prior year. The increased loss from operations was due to the increased G&A expenses previously noted and an increase of $1.2 million in sales and marketing expenses associated with more revenues being derived from distributors who have higher contracted sales commission rates.

Net loss for the 3 months ended June 30, 2017 was $9.7 million compared to a net loss of $4.5 million in the second quarter of 2016. The second quarter 2017 net loss figure includes approximately $1.5 million of professional fees associated with the company's restructuring and approximately $3.3 million of quarterly interest expense.

For the 6 months ended June 30, 2017, the company reported a net loss of approximately $14.9 million compared to a net loss of $10.1 million in the prior year. The company defines EBITDA as earnings before interest taxes, depreciation and amortization, and net income loss from operations before depreciation, amortization, impairment charges, nonrecurring expenses and noncash stock-based compensation.

Consolidated EBITDA for the second quarter of 2017 was a loss of $2.1 million compared to a consolidated EBITDA gain of $253,000 for the same period during 2016. The decrease in EBITDA was largely the result of the lower quarterly gross profit and increased sales and marketing expense between the 2 periods, which we noted previously.

As Carl mentioned, the company will be placing a large effort throughout 2017 in order to get the company to maximize EBITDA and operating cash flow in future periods.

For the 6 months ended June 30, 2017, the company reported an EBITDA loss of $1.6 million compared to an EBITDA gain of $27,000 in the first 6 months of 2016.

Turning now to our balance sheet, total assets as of June 30, 2017 included approximately $1.7 million of cash and cash equivalents, $15.8 million of net accounts receivable and $24.9 million of inventory. As of today, the company has approximately $4.2 million of funds available to drawdown on its delayed draw term loan with Orbimed. As we announced previously, under the terms of the agreement, the availability of these funds are at the discretion of Orbimed. Total liabilities include approximately $70.7 million of convertible debt and $63.3 million of long-term debt due to Orbimed Advisors.

Now I would like to turn the call back over to Carl.

Thank you, John. My leadership team and I are optimistic for the remainder of 2017 and beyond. We're energized and committed to making the necessary changes in every aspect of the business to transform the company. We focus -- we will continue to focus on restructuring and those specific activities related to operational excellence, creating more efficiencies, ultimately establishing the right profitable and performance structure, allowing us to prepare for growth for 2018. We believe we are creating value for our shareholders by driving leading-edge regenerative technologies in the spine industry, while creating an increasingly profitable and sustainable revenue growth model. We'd like to thank our shareholders and our stakeholders for your continued support and look forward to providing you with an update on our restructuring efforts once discussions with Orbimed are finalized. Thank you.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. And thank you for your participation.