Xtant Medical Holdings Inc (XTNT) 2017 Q4 法說會逐字稿

Greetings, and welcome to the Xtant Medical Fourth Quarter and Year-end Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Miss Laura Kendall, Deputy Restructuring Officer. Thank you. You may begin.

Thank you. Good morning, and thank you for joining Xtant Medical's Fourth Quarter and Full Year 2017 Earnings Call. Yesterday afternoon, Xtant issued a press release announcing fourth quarter and full year 2017 financial results and also filed its Form 10-K for the year ended December 31, 2017.

My name is Laura Kendall, and I am serving Xtant Medical as Deputy Restructuring Officer and Principal Accounting Officer. Joining me today for the conference call will be Carl O'Connell, Chief Executive Officer for Xtant.

(Operator Instructions) Today's call's 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.

If I could, for a moment, just repeat some of the important cautions regarding forward-looking statements. 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 for future performance and involve risk and uncertainties, including those noted in the Risk Factors section of our most recent annual report on Form 10-K that was filed yesterday.

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 Tuesday, April 3, at approximately 9 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.

For today's call, I'm going to begin with a brief review of the company's financial performance for the fourth quarter and year ended December 31, 2017. I will also discuss the restructuring transactions that were executed last month and then will turn the call over to Carl to discuss Xtant's business performance.

In 2017, the company undertook a review of its operations with the objective of improving profitability and liquidity, identifying areas to strengthen sales, improve gross margin, gain operational efficiency, enable cost containment and better manage our assets. We expect this review and resulting improvements to continue into 2018.

Consolidated total revenue for the 3 months ended December 31, 2017, was $19.3 million compared to $24.5 million of revenue for the same period of 2017 (sic) [2016].

For the 12 months ended December 31, 2017, revenue was $82.5 million, compared to $89.4 million for the 12 months ended December 31, 2016. The decline in year-over-year sales is primarily result of evaluating the contribution margin from our sales distribution channels and transitional -- transitioning away from unprofitable distributor relationships to improve profitability going forward.

In addition, the highly competitive environment surrounding fixation products and no new hardware product introductions in 2017 adversely affected revenue.

Good sales momentum in Biologics sales offset these declines, and Carl O'Connell will expand on these factors later in the call.

Consolidated gross profit for the fourth quarter of 2017 was $10.3 million, or 53.2% of revenue compared to gross profit of $17.5 million, or 71.6% of revenue for the same period of 2016. For full year 2017, consolidated gross profit was $50.1 million, or 60.6% of revenue, compared to $62.3 million, or 69.2% of revenue in 2016.

During the fourth quarter and full year 2017, additional reserves and impairment charges were taken, related to excess inventory and inventory in surgical instruments on consignment that may be missing or not returned to the company, or related to litigation with a former distributor. These charges totaled $2.5 million in the fourth quarter and $5 million for the full year 2017, lowering gross margin as a percent of sales by 12.7% and 6% in 2017.

A shift in sales mix is favoring Biologics which carry a lower margin than fixation products, caused remaining decrease in gross margin.

Fourth quarter 2017 operating expenses were $34.6 million compared to $18.7 million in the fourth quarter of 2016.

For the year 2017, our operating expenses were $87.9 million compared to $69.8 million in 2016. Increase in operating expenses was largely due to a onetime fourth quarter impairment charge of $17.6 million related to intangible assets acquired in 2015 X-spine acquisition. There was $4.7 million of onetime expenses incurred as a result of the ongoing turnaround and restructuring of the company and $1.9 million of separation-related expenses.

Operating expenses were also lower due to continuing cost containment in efforts to improve efficiency throughout the company. The company defines EBITDA, as earnings before interest, taxes, depreciation and amortization and other income expense such as gain or loss on sale of assets. Adjusted EBITDA is EBITDA less nonrecurring expenses and noncash stock-based compensation.

Adjusted EBITDA for the fourth quarter of 2017 was a loss of $1.1 million, compared to a fourth quarter 2016 adjusted EBITDA gain of $727,000.

Full year 2017 adjusted EBITDA was a loss of $1.9 million compared to 2016's adjusted EBITDA gain of $1.6 million. The lower adjusted EBITDA is the result of lower sales volume and the impact of inventory reserves, taken in the fourth quarter of $1.9 million, and for the full year $2.7 million.

With respect to our liquidity, as of December 31, 2017, we had $2.9 million of cash and cash equivalents, $12.7 million of net accounts receivable and $22.2 million of inventory. In addition, the company had about $2.2 million available under its credit agreement. As previously noted in press releases and SEC filings, which can be found on company's website, Xtant successfully completed the recapitalization of the company, lowering its debt and accrued interest by approximately $76 million through a conversion of all convertible debt and related interest to common stock.

This transaction has returned stockholders equity to a positive position. In addition, the company completed a private placement of common stock for $4.8 million in net proceeds, enhancing the company's liquidity position.

Xtant has successfully maintained its position on the New York Stock Exchange American, and shareholders also selected a new Board of Directors in February, composed of both independent directors with significant industry experience, and representatives of OrbiMed, who now own approximately 70% of Xtant's outstanding common stock.

The company is planning to conduct the common stock rights offering to its shareholders in 2018, as noted in the various SEC filings and press releases, and that will further enhance the company's liquidity position.

With that, I'd like to turn the call over to Carl O'Connell to go over some of the business highlights and strategy. Carl?

Thank you, Laura, and thank you, everyone, for joining Xtant Medical's Fourth Quarter and Fiscal 2017 Conference Call. We've managed a lot of change over the past 12 months, and I look forward to highlighting some of our successes, which I feel will be growth drivers as we move forward and we'll highlight some key areas of focus for Xtant Medical through 2018.

Our 2017 revenue declined in comparison to 2016. This is primarily due to a lower fixation revenue in the second half of the year, mostly as a result of making progressive changes towards sales channel throughout the year, terminating some unprofitable distributor relationships and reducing high-commission rates of nonprofitable contracts.

The positive shift away from these channels will help the company stabilize end-user pricing as well as drive better margins and profitable growth opportunities long term. (inaudible) to this decline as to the highly competitive hardware fixation markets, with increasing the reimbursement pressure on the demand for innovation and clinical justification, which we plan to address in the coming quarters.

Conversely, distribution of our Biologics portfolio was very successful in 2017, achieving above-market revenue growth. This growth was driven by penetrating new accounts with our OsteoSelect and OsteoSelect PLUS DBM product lines.

Increased demand to our 3Demin fiber technology, supported by continued demand by our flagship product line, OsteoSponge. This product mix leading our Biologics revenue DBM category, we continue to be one of the largest players in the U.S. bone-replacement market. We also saw robust growth driven by conversion.

(technical difficulty)

Carl, you may begin.

Hello.

Carl, your line is live. Go ahead.

Thank you. Conversely, distribution of our Biologics portfolio was very successful in 2017, achieving above-market revenue growth. This growth was driven by penetrating new accounts with the OsteoSelect and OsteoSelect PLUS DBM product lines. Increased demand for our 3Demin fiber technology supported by continued demand by our flagship product line, OsteoSponge. This product mix leading our Biologics revenue DBM category, we continue to be one of the largest players in U.S. bone-replacement market. We also saw a robust growth driven by conversion of customers to our viable cell allograft, OsteoVive, a product we launched mid-2016. We anticipate the momentum and interest in our Biologics portfolio will continue in 2018.

Throughout the year, we touched upon progress the company was making with regards to 3 transformational initiatives, operational excellence in inventory utilization, strategic positioning for market leadership, and sales channel optimization. These programs were designed to support full integration of Bacterin and X-spine into Xtant Medical, provide a stable foundation to support sustainable market growth and focus on EBITDA performance.

Inventory and instrument optimization project was designed to free cash by reducing existing inventory instrument levels and optimizing future inventory and instrument needs without negatively impacting delivery to the customer. Because of this project, we are able to free approximately $2 million through reduction of inventory, mostly driven by implementation of stronger forecasting processes and adopting integrated business planning in daily activities.

In October 2017, we announced our decision to close the Dayton facility and transfer the fixation operations to our location in Montana, in an effort to reduce cost by optimizing efficiencies of the single fulfillment location for our customers. And approximately utilize -- and publicly utilize no infrastructure.

The total cost savings derived from the restructuring activity is anticipated to be $2 million annually.

I'm very pleased with the performance of Greg Juda, our General Manager of Operations at the Montana facility, as he served as the leader of this project.

It was successfully completed ahead of schedule, and because of the collective efforts of the Xtant team, we were able to complete it without missing a surgical case. The news allows us to complete our strategy for June operational excellence by fully integrating departments and simplifying processes on our Xtant, and driving towards a consolidated and profitable business.

2017 marked the first year of sales leadership under Chris Valois, as Vice President of sales and marketing. A significant focus of Chris was implementing a sales structure for the organization that would be able to serve as a foundation for future revenue growth and accountability to the company's goals.

Along with his team, we identified opportunities for improving our channel and distributor partnerships, moving from high commission and unprofitable business to engage with channel partners to improve the quality, service and products offered to the end user.

The expanded focus of this initiative will drive profitable business through our sales channel, while creating deeper relationships with our hospital customers and our surgeons. This will also assist us in ensuring that we are delivering products that are improving the lives of patients and exceeding the customers' expectations.

Under the leadership of Amy Radtke, our national accounts team continues to excel. We're under contract with more than 10 group purchasing organizations, executing over 15 new IDN health system agreements, and renegotiated or renewed more than 70 other health-system agreements through 2017. Our approach to contractual access demonstrated the adequate value that we can provide as a supplier, has emerged as a core competency of our organization. We're committed to improving our hybrid-channel performance and partnering with high-performing distributors moving forward, securing our ability to provide world-class service to our contracted partners.

While we do see a year-over-year decline, we are excited about our international opportunity, as we plan to capitalize on in 2018. The decline in revenue was attributed to sales recognized in 2016, when our international partners purchased instrument sets that were previously on consignment. The other contributor was modifications to the regulations in Germany, resulting in Xtant's exit in that market.

There are many markets that proved to be strong versus year-over-year such as 20% growth in Latin American markets, South Africa with over 50% growth, and South Korea, where we saw a triple-digit growth in comparison to 2016.

We continue to see OUS business as the potential source of revenue growth with additional resources to help with driving international strategy, which will be a key focus for us in 2018 and beyond.

I'd like to turn to our initiative for 2018. We are excited to have reached a restructuring agreement with Orbimed and our shareholders and are thankful and appreciative of their continued confidence for the company, our management team and our employees. With funds and support from this endeavor, we will continue to focus on operational excellence, driving our margins for profitable growth, engaging our employees to excel even further and enhancing our sales channel optimization strategies. We'll continue to evolve our product strategy focused on the product families with current demand and the support of regenerative continual care for patients.

Lastly, with managing processes and projects moving forward, utilizing the high-performance management system as we continue to make improvements, while we made significant strides as an organization, I believe we have great opportunities ahead of us, and we're looking forward to executing on these initiatives.

Before closing, I'd like to take the time to thank our previous Board of Directors for their dedication to our shareholders, the company and our employees, but also like to formally welcome our new Board of Directors, John Bakewell, Michael Eggenberg, Michael Mainelli, Robert McNamara, Jeffrey Peters and Matthew Rizzo.

Lastly, I'd like, again, to thank our shareholders and Orbimed for their continued support, not only throughout 2017, but moving forward in 2018 and beyond.

Thank you for joining us on today's call. And with that, I'd like to turn the call over to the questions.

(Operator Instructions) Our first question comes from the line of Anthony Vendetti with Maxim Group.

So I just want to talk about the hardware business. It seems like Biologics continues to do well with above-market growth, and that was the original factor in business. The X-spine acquisition seems to continue to struggle here. Can you talk about what percent of total sales hardware is? How much it was down? And Carl, just kind of what the plan is to improve? And I saw you terminated some stockings -- reseller agreements, but anything you can do about the aging hardware product line and where do you think this starts with the inflection point for that business start to turn around?

Good question. I will have Laura answer some of the details on the numbers. And I think you pointed out correctly. Our hardware line, we're sort of looking at the natural decline as the life cycle of our hardware products sort of mature. I think also, is a factor of shift in distributor relationships, we have less reseller business. So we're not selling against ourselves. And I think going forward, we go to look at partnerships with better contributing margins and also looking at performance management with better relationship with better distributors going forward. But we look forward to looking at where we can focus on our hardware lines, and in the next few months and quarters, we hope to address that in the formal hardware strategy going forward.

Okay, great. And Laura, on the percent of sales and how much it was down?

(technical difficulty)

Anthony, are you still on the line?

Yes, I am. I am still on the line.

Yes, Anthony, we're having some problems, I guess, with the line and -- but we're ...

I have got it, Carl. Sorry.

Yes.

So Anthony, I think the company has not disclosed exact percentage of business and declines or growth within its product categories simply because it is highly competitive information, as you know. So the direction that Carl gave as to what's happening in the hardware business that we're looking at it strategically. I think we've done a great job last year of making inroads on the unprofitable portions of the hardware sector that we found were not making the contribution. And now the opportunity as to take a look at what we have and figure out a future strategy for that. So at this point, we don't disclose those percentages.

Understood. The unprofitable parts of that business is that -- has that been terminated or there are some unprofitable piece of that business that you think you can turn around?

Yes, I think -- let me answer that. We're looking very hard into the contributing margins on our commission rates. And we're looking also where there's opportunity to either restructure a lot of our agreements. But we're looking for better performance, better penetration where we have contractual access. But we're doing the deep dive into our margins and especially our commission rates and trying to meet sort of: one, obviously our goal is profitability and so we can align that with our goals going forward.

Understood. And then Laura, on some of the term loans, so -- was all the deferred interest on the term loans paid down? And if not, how much is left?

All the deferred interest on the convertible debt was paid down. The deferred interest and the term loan is still outstanding.

And how much is that left?

I don't have an exact number with me. But it's, I would say, probably in the $3 million to $4 million range of deferred interest.

Okay. And is there still a plan to restructure some of those? And if not, I know it's far out, July 2020, but how do you plan to deal with the majority well in 2020?

The maturity of the term loan?

Yes.

Or of the interest? At that point we'll address, but that's quite a ways out for us. And certainly, a lot of strategic planning will be done in between that, on both the core business as well as the capitalization of the company. So again we've entered into a very cooperative stance with OrbiMed, very supportive of us. And as you know the credit agreement is with OrbiMed as well. So I'm sure there'll be much planning going into that renewal in 2020.

Sure, okay. And then lastly, on the rights offering. The expectation is sometime in 2018, is there any general timing, as you trying to do that in the first half, second half?

Well, I would say, we are currently planning for the first half. So we want to conclude these transactions that we had queued up in the proxy. So you should see some activity surrounding that within the first half of the year.

(Operator Instructions) There are no further questions at this time. I'd like to turn the call back over to Mr. O'Connell for any closing remarks.

Thank you. On behalf of the company, I'd like to thank you for your continued support for Xtant Medical. Thank you, again, and have a nice day.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.