Xtant Medical Holdings, Inc.
Q3 2018 Earnings Call Transcript

Published: 15 Nov 2018

[Operator:]

Greetings and welcome to the Xtant Medical Third Quarter 2018 Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Ms. Kathie Lenzen. Please go ahead.

[Kathie Lenzen:]

Good afternoon. Thank you for joining. Xtant Medical’s third quarter 2018 earnings call. My name is Kathie Lenzen and I'm the Chief Financial Officer of Xtant Medical. Joining me today for the conference call will be Michael Mainelli, Interim Chief Executive Officer for Xtant. Today's call is being webcast and will be posted on the Company's website for playback. 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 with 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 reconciliations, which appears in the tables of our press release and are otherwise available on our website. Note further that our Form 8-K 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, November 14, at approximately 4

[Michael Mainelli:]

Thank you, Kathie, and thank you everyone for joining Xtant Medical’s third quarter 2018 conference call. First, a quick update on sales and operating loss, Kathie will go into more detail later. Sales for the quarter were $17.3 million compared with sales of $19.8 million in the third quarter of 2017. Net loss for the quarter was $3.2 million compared with a net loss of $8.5 million in the third quarter of 2017. Since taking the job a few weeks ago, I've spent my time getting to know the company at a deeper level from the inside. It has only strengthened my belief that Xtant has considerable potential. We have great products, strong business partners, and dedicated and talented employees. We are pleased that we're starting to see some benefits of the facility consolidation efforts in our profitability. At the same time, we believe our sales results are below our potential. Moving forward, our focus will be on executing the most impactful activities to a) increase sales and b) continue to improve efficiency. Performance improvement starts with strong executive talent and we are fortunate to have new leaders in two critical roles. Kevin Brandt joined the company in July as our Chief Commercial Officer; and Kathie Lenzen joined us in August as our Chief Financial Officer. Both executives are proven, accomplished medical device leaders and I'm exciting to be working with them and the other leaders on our team. As I mentioned, we’re not particularly pleased with our sales. We are now working on plans that are expected to improve sales through a combination of new product development, marketing programs, and more effective channel management. It's early in my tenure and I'm not in a position at this point to share specifics other than to say we expect all three of these ingredients to be part of our plans going forward. I look forward to providing updates on our progress in the coming quarters. And with that, let me turn it back over to Kathie for more details about the quarter. Kathie?

[Kathie Lenzen:]

Thank you, Michael. As Michael mentioned, total revenue for the third quarter of 2018 was $17.3 million compared to $19.8 million for the same period of 2017. This decline occurred primarily due to company initiated, discontinued distributor arrangements and challenges in channel management. Gross margin for the third quarter of 2018 was 66.7% compared to 57.5% during the third quarter of 2017. The 920 basis point improvement was due to the favorable impact of cost reduction initiatives from the consolidation of the Ohio facility into the Montana facility at the beginning of 2018. Gross margin in the third quarter of 2017 was affected by inventory reserves and impairment of surgical instrument asset value charges that did not reoccur in 2018. Third quarter of 2018 operating expenses was 75% of revenue compared to 81.1% or a decline of $3.1 million compared to the quarter ended September 30, 2017. This improvement is primarily attributable to lower commission expense as well as cost reductions related to our facility consolidation. The net loss from operations for the third quarter of 2018 was $3.2 million, or $0.24 per share, compared to a loss of $8.5 million or $5.62 per share for the same period in the prior year. Primarily the result of reduced operating expenses and lower interest expense following our recent data amendments and in the case of the per share decrease increased shares outstanding during the current year period. The company defines non-GAAP adjusted EBITDA as net income or loss from operations before depreciation, amortization, non-recurring expenses and non-cash stock based compensation. Non-GAAP adjusted EBITDA for the third quarter of 2018 was $1.5 million compared to $1.4 million for the same period of 2017. For the first nine months of 2018, our non-GAAP adjusted EBITDA was $3.4 million compared to a loss of $800,000 for the same period in 2017. This strong improvement again is attributable to the progress we're making in restructuring the business, including the previously mentioned facility consolidation. As of September 30, 2018, we had $5.1 million of cash and cash equivalents, $9.9 million of net accounts receivable, and $22.2 million of inventory. The company also has $2.2 million available under its credit facility. On September 17, 2018, we executed amendments to our amended and restated credit agreement including reducing interest payable under the credit facility among other provisions. These amendments reduced interest payable to zero for the nine month period April 2018 to December 2018 and reduce the interest rate for the January 2019 period forward from 15% plus the LIBOR rate to 10% plus the LIBOR rate with a 2.3 LIBOR rate 4. Under GAAP accounting interest expense is recognized at the effective rate of 13.5% for the remaining period of the term debt beginning the third quarter 2018. We also issued warrants for the purchase of 1.2 million shares of Xtant common stock with an exercise price of $0.01 per share and an expiration date of August 1, 2028 to Orbimed Royalty Opportunities to LP and ROS acquisition Offshore LP, which held a significant portion of our converted indebtedness, continue to hold all of our currently outstanding debt and own approximately 70% of our outstanding common stock. Now, I'd like to hand the call back to the operator for questions.

[Operator:]

Thank you. Ladies and gentlemen, at this time we'll be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question comes from Josh Goltry with Maxim Group. Please state your question.

[Josh Goltry:]

Hi. Can you discuss the performance of the biologics and the Fixation segments in the quarter? Or was most of the decline driven by the Fixation segment?

[Michael Mainelli:]

Josh, historically, we haven't split that out and provided that information and I think we're going to kind of stay with that convention at this time.

[Josh Goltry:]

Okay. In your recent amendment to your credit facility, you indicated that the interest was reduced to zero for the second half of 2018. So why did you still record the interest expense for this quarter?

[Kathie Lenzen:]

Hi, Josh. This is Kathie.

[Josh Goltry:]

Hi, Kathie.

[Kathie Lenzen:]

From a GAAP accounting perspective, how that works is you end up assigning a value to the warrants, which then is converted to an effective interest rate recognized under GAAP accounting on a go forward basis. So that 13.5% interest rate will be recognized starting in the third quarter through the end of the term note, which is in 2020.

[Josh Goltry:]

Okay, that's fair. And what specifically have you done with the high performance management system to improve your sales channels and asset utilization?

[Michael Mainelli:]

Josh, this is Mike. You're referring to maybe some of the programs that have been mentioned on previous calls.

[Josh Goltry:]

Yes,

[Michael Mainelli:]

I think we are continuing to move forward with programs aimed at improving our efficiency both in the cost management and asset management improvement areas. And as I mentioned at the start of this call, putting a little more of, perhaps, sharper focus now on planning for growth in the form of new products, marketing programs designed to assist our distributors and more broadly more effective channel measure – channel effectiveness programs.

[Josh Goltry:]

And how much is the Fixation business is there sill to exit?

[Michael Mainelli:]

Pardon me?

[Josh Goltry:]

How much of the Fixation business is there left at an exit?

[Michael Mainelli:]

What - what do you mean exit? I'm sorry. I…

[Josh Goltry:]

Well, you're weeding out the Fixation business, right?

[Michael Mainelli:]

Oh, I think…

[Josh Goltry:]

I think you're trying to focus on biologics.

[Michael Mainelli:]

No, no, I don't think that's the case at all. I – our strategy is to work with our distributors and continue to grow both product lines. They're both important to our future. They're both important to our customers.

[Josh Goltry:]

Okay, fair. And how many new accounts have you gained in this quarter?

[Michael Mainelli:]

Yeah, we generally don't offer, obviously, as I'm sure you can understand for competitive reasons, we generally don't provide that kind of information nor do our competitors by the way.

[Josh Goltry:]

Okay, guys. Thank you. I appreciate it.

[Kathie Lenzen:]

Thank you.

[Michael Mainelli:]

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

[Michael Mainelli:]

Thank you very much to those joining us on the call today and to those that will be listening later. We look forward to providing updates on our progress in the future. Again, thank you very much.

[Operator:]

Thank you. This concludes today's conference. All parties may disconnect. Have a great day.