Xtant Medical Holdings, Inc.
Q2 2018 Earnings Call Transcript

Published: 11 Aug 2018

[Laura Kendall:]

Good morning. Thank you for joining Xtant Medical Second Quarter 2018 Earnings Call. My name is Laura Kendall, and I am serving Xtant Medical as Deputy Restructuring Officer and Principle Accounting Officer. Joining me today for the conference call will be Carl O'Connell, Chief Executive Officer for Xtant. At this time, all participants will be in listen-only mode and a brief question-and-answer session will follow the formal presentation. Today's call is being webcast and will be posted on the Company's Web site 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 risks and uncertainties, including those noted in the Risk Factors section of our most recent annual report on Form 10-K. Actual results may differ materially. Our earnings release and today's discussion include certain non-GAAP financial measures. Please refer to the non-GAAP to GAAP reconciliation, which appears in the tables of our press release and are otherwise available on our Web site. Note further that our Form 8K filed with our earnings release provides a detailed narrative that describes our use of such measures. For the benefit of those of you who may be listening to the replay, this call was held and recorded on Wednesday, August 8, at approximately 09 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 filings 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 Carl O'Connell.

[Carl O'Connell:]

Thank you, Laura. And thank you everyone for joining Xtant Medical's second quarter 2018 conference call. For today's call, I’ll walk you through a summary of revenue performance for the second quarter 2018. I will also cover our progress in key areas of the business that we’ve been focused on this year and some recent events before turning the call over to Laura Kendall who will walk through our financial performance, which was highlighted in our press release issued yesterday afternoon. We will then open the call for questions. So let's get started. Our revenue for the second quarter 2018 was $18.7 million with gross margins of 66.6%. Our adjusted EBITDA was $0.8 million for the second quarter of positive EBITDA performance. The decrease in revenue occurred in our fixation product lines, mostly due to competitive factors and the strategic focus on reducing unprofitable sales channel arrangements, while improving gross margin and EBITDA. This strategic decision was implemented at the beginning of the third quarter last year as we continued positively to many other areas of the business, including higher gross margin and lower operating expenses, particularly commission expense. We have a number of long-term distributors who increased their focus on our hardware portfolio over the past year, as well as new distributors have initiated distribution of our core portfolio. We continue to be very pleased with the performance of our Biologics portfolio. Our flagship biologic scaffolds, excluding OsteoSponge, OsteoSelect DBM Putty and 3Demin fiber continue to see favorable market support at the customer level and the integrated delivery network or IDM level. OsteoVive, our viable cell allograft also has achieved growth year-over-year and has been a nice addition to the portfolio. Moving forward to the next year, we will assess our portfolio in combination with a better understanding of our customer needs and importantly, look to create unique value in our sales channels. From a national accounts perspective, we continue to strengthen our position with contractual access to healthcare providers. In the second quarter, we improved the terms and conditions of GPL agreements, better aligning with our revised financial targets and successfully renegotiated IDN agreements for preferred positioning. We were recently awarded a tri-source agreement for Biologics with a large IDN and executed another agreement for volume commitments in the DBM category. Negotiating product positioning commitment within our IDN relationships is a strategy, and we plan to continue to adopt to better align with the needs of our partners and again increase market share within those systems. In April, we announced an agreement with Health International Partners for distribution focus in Latin America markets. This team led by Lisa Budo and Maggie Perez bring over 60 years of experience in global expansion in the healthcare space. We’re excited to have their expertise as an extension of the Xtant sales team, and look forward to expanded focus in these market opportunities. We achieved growth in several OUS markets, including Australia, South Africa and South Korea, driving 9% year-over-year growth. International expansion continues to be an opportunity for the Company. We’ve previously mentioned key strategic initiatives that management is focused on executing 2018 that would serve to strengthen our foundation, while providing a structure for strategic growth in the years to come. First unique focus on executing operational excellence, specifically as it pertains to the Company's adjusted EBITDA performance. Through the first half of the year, we've been able to achieve almost $2 million in positive adjusted EBITDA. It was mostly driven by consolidation of operations of our Belgrade, Montana campus and our ability to optimize efficiencies by adjusting the headcount to be appropriate with combined functions. This move eliminated duplication of efforts by consolidating operating functions, allowing us to provide a more cohesive, centralized service point for distribution partners and customers. We’ve been highly focused on optimizing our sales and distribution channels. This has entailed a refined approach to our distribution model, including commission rates that are more in line with industry standards and aligning of sales for the contractual access. This is part of our commitment to improving our sales channel focus for proactive and deliberate execution. I personally spent time this quarter in meeting with our distribution partners, listening to their perceptions regarding areas where we excel, as well as feedback on segments of the business where we need to improve. I take this opportunity to meet with our distribution stakeholders seriously, and we’re working on implementing suggested modifications. I’d like to take this time to formally welcome Kevin Brandt to the Xtant Medical team. As announced in July, Mr. Brandt has joined our organization as a Chief Commercial Officer and will be responsible for sales, product and marketing strategies moving forward. He brings over 28 years of experience in the orthopedic, spine and biologic space, having built out sales team for Stryker, serving as the principle for large Stryker distributorship and brings valuable experience to our organizations and most recently as Commercial Executive for RTI Surgical, responsible for the U.S. commercial strategies. Both Kevin I look forward to spending additional time in field, getting to know more of our distribution partners and our IDN customers. We’re confident that the addition of Kevin to our executive management team will help us deliver strong results moving forward. Lastly, we have recently instituted a high-performance management system to better guide the organization and management of high priority projects intended to deliver transformational performance results. HPMS was initiated in the second quarter 2018. As we focus on asset utilization, commercial operations and continued efforts in sales and revenue optimization, implementation of these programs involve high-caliber, cross function teams within the organization to ensure execution of our corporate goals, which are designed to deliver shareholder value. We look forward to providing updates as we progress through this process. I would now like to turn the call back over to Laura for a detailed review of our financial results.

[Laura Kendall:]

Thank you, Carl. Consolidated total revenue for the three months ended June 30, 2018 was $18.7 million compared to $21.4 million for the same period of 2017. As Carl mentioned, year-over-year decline is due to our focused efforts to move away from distributor relationships with an acceptable contribution margin, as well as competitive factors affecting the sell through of our fixation products. Gross margin for the second quarter of 2018 was 66.6% compared to 63.2% during the second quarter of 2017. This strong improvement was due to our focused on profitable sales channel relationships with higher margins and from the benefits of restructuring the organization for efficiencies and cost reduction. Second quarter 2018 operating expenses were 78.6% of revenue compared to 92.9% or decline of $5.1 million compared to the quarter ended June 30, 2017. The improvement occurred as the Company positions itself for long-term growth through execution of our channel strategy, moving on from select high commission sales arrangements, cost reduction and efficiency programs to streamline our operations, including consolidation of facilities and lower restructuring expenses. The net loss from operations for the second quarter of 2018 was $5 million compared to a loss of $9.7 million for the same period in the prior year with a loss per share of $0.38 compared to a loss of $6.43 per share for the same quarter in the prior year. The Company defines non-GAAP adjusted EBITDA as net loss from operations before depreciation, amortization, non-recurring expenses and non-cash stock-based compensation. Non GAAP adjusted EBITDA for the second 2018 was approximately $800,000 compared to loss of $2.1 million for the same period of 2017. For the first half of 2018, our non-GAAP adjusted EBITDA was a positive $2 million compared to a loss of $2.3 million for the same period in 2017. This strong improvement again is attributable to refinements in our sales channels, as well as our commitment to improved operational excellence within the organization. As of June 30 2018, we have $6 million of cash and cash equivalents, $10.4 million of net accounts receivable and $22.5 million of inventory. The Company also had $2.2 million available under its credit facility. The Company has sufficient liquidity to meet anticipated cash demand during the next 12 months. Earlier in 2018 and as previously noted Xtant successfully completed the rate capitalization of the Company, lowering its debt in accrued interest by approximately $76 million through a conversion of all convertible debt, returning stockholders’ equity to a positive position. In addition, the Company completed a private placement of common stock. This restructuring event has contributed significantly to the improved financial position of the Company. Lastly, for the form 8-K and form S-8 registration statement that we recently filed with the SEC, we are pleased to announce that the Xtant stockholders have approved the 2018 equity incentive plan. This will assist the Company to bring strong leadership into the organization to work with our executive management team. Now, I’d like to hand the call back to Carl for closing remarks. Carl?

[Carl O'Connell:]

Thanks Laura. For the first half of 2018, we have successfully executed several initiatives that have helped strengthen our balance sheet. We continue to establish an operations platform that is highly efficient and quality driven for customers and our patients. Under the leadership of Kevin Brandt, we will refine our commercial model, increasing margins and capitalizing on sales opportunities. Lastly, we will maintain our focus on contractual access with healthcare providers and executing on our 2018 initiatives. Operator, please open the call for questions at this time.

[Operator:]

Thank you. Ladies and gentlemen, at this time, we will begin our question-and-answer session [Operator Instructions]. Ladies and gentlemen, our first question comes from Alexander Scharf with Maxim Group. Please state your question.

[Alexander Scharf:]

Can you give us a sense of where you are in the process of reducing unprofitable sales? Is there still more business to exit? And then maybe if you could just quantify the expected benefits of this initiative, going forward?

[Carl O'Connell:]

Laura, would you like to take this one.

[Laura Kendall:]

It’s an ongoing effort. We will continue to diligently look at every distributor and healthcare provider relationship that we have, particularly with Kevin Brandt on board bringing a new prospective to work with Carl and distributor relationships and directly with healthcare providers. So we do see more opportunity, going forward. We don't have a quantification of it, but it’s been certainly evident in our tremendous gross margin improvement and reduction in expenses, primarily in sales related expenses that we saw in second quarter and then the year-to-date numbers.

[Alexander Scharf:]

And then maybe can you just talk a little bit about the restructuring expenses in the quarter about $1.2 million. What exactly are those covering? And then do you have any -- are able to share your expectations for restructuring expense on a go forward basis?

[Laura Kendall:]

The restructuring expenses, there are several components of it. Of course with our management partners it’s included in those costs there are also costs included related to the restructuring transactions, the S-8 that we recently filed for the equity plan and the shelf registration statements so that certain shareholders can move forward with selling stock or trading in the stock. So the restructuring expenses are down from what they have been in the past and we would expect that to continued to decline as we move forward as Aurora starts to transition their responsibilities over to management, particularly as Carl is starting to shape his team as you’ve seeing with Kevin coming on board.

[Alexander Scharf:]

And then my last question. Free cash flow has been pretty much breakeven in the past three quarters, and you’ve benefited from the fact that you don’t have to take cash interest at this point. But if I remember correctly, you do have to start paying cash interest in about a year. So can you maybe talk about what you can do besides for the exiting the unprofitable businesses, what else can you do to improve cash flow over the next year to be able to cover those cash interest in?

[Laura Kendall:]

There are several things that the company is working on from an operational and strategic perspective. Clearly, the top line growth Carl has to -- I directly on that along with Kevin. The continuation of the expense reductions, and I will call it more efficiency than reduction. We’re now into how to run the company appropriately at its size level and to seek out additional efficiency in the Belgrade operation. And the last part of that is asset management. There is a significant investment in surgical instruments and inventory that certainly can yield to additional cash flow as we address the management of those areas and how to achieve more efficiency, particularly on the term of surgical instruments.

[Carl O'Connell:]

Just to add color to that. I mean there is plenty of opportunity since the merger two and half years ago and just with the consolidation of really improving a lot of our efficiencies and process as Laura described during the inventory. So we still continue to see opportunities there for cost savings, but continued efficiencies going forward, we will see the benefit of that in 2019.

[Operator:]

Ladies and gentlemen, there are no further questions at this time. I'll turn it back to management for closing remarks. Thank you.

[Carl O'Connell:]

Thank you. I’d like to take this opportunity to thank our employees and distribution partners for their dedication and commitment to Xtant Medical experiencing significant changes within the organization that would not have been possible if not for their loyalty. I’d also like to thank our Board of Directors and stockholders for their continued support. Thank you all for joining us for today's conference call. Have a great day.

[Operator:]

Thank you. This concludes today's conference call, all participants can disconnect. Have a great day. Thank you.