Xtant Medical Holdings Inc (XTNT) 2018 Q1 法說會逐字稿

Greetings, and welcome to the Xtant Medical First Quarter 2018 Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Laura Kendall, Principal Accounting Officer. Thank you. Ms. Kendall, you may begin.

Thank you. Good morning. Thank you for joining Xtant Medical's First Quarter 2018 Earnings Call. Yesterday, Xtant issued a press release announcing first quarter 2018 financial results. My name is Laura Kendall, and I'm 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 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, intend and other words of similar meaning. Any such forward-looking statements are not guarantees of 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.

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, May 9, 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.

Now I'd like to turn the call over to Carl.

Thank you, Laura, and thank you, everyone, for joining Xtant Medical's First Quarter 2018 Conference Call. We've maintained the momentum created in 2017 with the continued focus on restructuring activities to transform the company for long-term profitability. Our first quarter revenue declined in comparison to 2017. This was primarily due to lower fixation revenue, mostly as a result of making progressive changes to our sales channel throughout 2017 and into the first quarter, terminating some of the problem distribution relationships and reducing high commission rates and nonprofitable contracts.

We will continue this positive shift away from these channels, enabling the company to stabilize end user pricing as well as drive better margins and profitable growth opportunities long term.

We anticipate a decline in our fixation revenue, as this market is highly competitive, with increasing reimbursement pressures and demand for innovation and clinical justification. We continue to evaluate this space and the best opportunities to license and develop unique solutions.

We expect growth for the remainder of the year in Biologics, which will be driven through increased performance management and our top distributor partners and increased national account penetration of integrated delivery network accounts. Our focus for growth in 2018 would be in our flagship product, OsteoSponge, in addition to OsteoSelect and OsteoSelect PLUS DBM product lines as well as our DBM fiber technology.

With this product mix leading the 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 of customers to our viable cell allograft, OsteoVive, a product we launched in mid-2016. We anticipate the momentum and interest in our Biologics portfolio will continue throughout the year.

We remain focused on 3 transformational initiatives: operational excellence and inventory utilization, sales channel optimization and strategic positioning for market leadership. These programs were designed to support full integration of Bacterin and X-spine into Xtant Medical and to develop a foundation for sustainable growth and EBITDA performance going forward.

We've implemented a companywide high-performance management system, or HPMS, which will put us in a position to manage and focus to outperform 2017. The application of the HPMS will allow us to design and improve asset and inventory management, resulting in significant improvements to free cash. Our goal is to reduce existing nonproductive inventory and surgical instrument levels in the field. Additionally, we expect to optimize the fulfillment of future inventory and instrument needs without negatively impacting delivery or experience for the customer.

In 2017, we're able to free approximately $2 million through reduction of inventory, mostly driven by implementation of stronger forecasting processes and adopted integrated business planning and daily activities. We continue to see benefits from the transfer of fixation operations to Montana. We completed this transition ahead of schedule, without missing a single surgical case. The total cost savings derived from this restructuring activity is anticipated to be $2 million annually. And we saw the benefit of these cost savings beginning in the first quarter.

General and administrative expenses during the quarter were $3 million, down $1.1 million or 27% over the prior year. This is directly related to the cost reduction initiatives we implemented in 2017, including the Dayton consolidation, which increases our ability to operate effectively at a lower cost structure in 2018.

With regard to our secondary of focus, sales optimization, we will also use our HPMS process to drive improved execution in this area. We look to find opportunities for improving our channel and distributor partnerships, moving from high commission and unprofitable business to engage with new and existing channel partners to improve the quality of service and products offered to the end user. This will ensure that we're delivering the right products to the right hospital at the right time, exceeding our customers' expectations.

We continue to see benefits for our national accounts team. We're under contract with more than 10 purchasing organizations, executed over 15 new independent delivery networks and health system agreements and have renegotiated or renewed more than 70 other health system agreements. The added value that we can provide as a supplier has emerged as a core competency of our organization, and we will continue to improve in this area. We're committed to improving our hybrid channel performance and partnering with our high-performing distributors moving forward, securing our ability to provide world-class service to our contracted partners.

We're excited about our international opportunity, which we plan to capitalize on this year. During the first quarter, we signed an agreement with Healthcare International Partners, or HIP. Our partners, Luis Abudo and Maggie Morales of HIP, will continue to build our success in Latin America, driving our OUS business will be a key focus for this year and into the future.

Now I'd like to turn the call over to Laura for a detailed review of our financial results. Laura?

Thank you, Carl. Consolidated total revenue for the 3 months ended March 31 was $17.9 million compared to $22.1 million for the same period last year. As noted by Carl, the year-over-year decline was due to a shift in our sales channel, our efforts to move away from some reseller and higher-than-acceptable commission rate distributor relationships and competitive factors affecting the sell-through of our fixation product.

Gross margin for the first quarter was 68.2% compared to 67.5% during the first quarter of 2017. The improvement was mainly due to cost containment initiatives and improvements in end user pricing for modifying and exiting certain reseller relationships.

First quarter 2018 operating expenses were 77.4% of revenue, down $3.6 million compared to the quarter ended March 31, 2017. The improvement was mostly attributable to the execution of our channel strategy initiative as we move away from higher commission relationships and unprofitable revenue. The cost-saving initiatives Carl discussed also contributed throughout the quarter.

The net loss for the quarter was $5.3 million compared to a net loss of $5.8 million last year. The company defined adjusted EBITDA as net income loss from operations before depreciation, amortization, nonrecurring expenses and noncash stock-based compensation.

Non-GAAP adjusted EBITDA for the first quarter of 2018 was approximately $1.1 million compared to a loss of approximately $100,000 for the same period of 2017.

As of March 31, 2018, we have $6.2 million of cash and cash equivalents, $10.3 million of net receivables and $22.5 million of inventory. As previously noted in press releases and SEC filings, which can be found on the 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, which returned stockholders' equity to a positive position.

In addition, the company completed a private placement of common stock for $6.8 million, enhancing the company's liquidity position.

As a final step of the restructuring, we recently announced that April 27, 2018, was the record date for a rights offering of shares of common stock. At the commencement of the rights offering, each holder of common stock will receive 0.09 nontransferable subscription rights for each share of common stock held on April 27, 2018. Each subscription right will entitle the holder to purchase one share of the company's common stock for $7.20 in cash.

In addition, holders will have oversubscription right, pursuant to which they may be able to purchase additional shares at the subscription price to the extent that not all subscription rights are exercised. The company expects subscription materials will be mailed out on or about May 18, 2018, to holders of the company's common stock on April 27, 2018. And the rights offering will close on or about June 18, 2018.

Now I'd like to hand the call back to Carl for closing remarks.

Thank you, Laura. We are excited to have completed our restructuring agreement with Orbimed this February. The 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.

Our new board, which was put in place as part of the previously mentioned restructuring, has spent their first 90 days working hard to help us determine the best path forward for the company's positioning in the marketplace and strategic opportunities.

While they're focused on ensuring the successful completion of the restructuring, they will continue to work to help us develop our strategic positioning throughout the year. While we've made significant strides as an organization, I believe we have great opportunities ahead and looking forward to executing on these initiatives.

Before closing, I would like to thank our stockholders 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 hand the call over to questions.

(Operator Instructions) There are no questions being registered at this time, Mr. O'Connell.

Thank you. On behalf of the company, I would like to thank you for your continued support of Xtant Medical. Have a great day.