Xtant Medical Holdings, Inc.
Q1 2016 Earnings Call Transcript

Published: 8 May 2016

[Operator:]

Greeting. And welcome to the Xtant Medical’s first quarter 2015 results conference call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce you host, Mr. John Gandolfo, CFO of Xtant Medical. Thank you. You may begin.

[John Gandolfo:]

Thank you, Donna. Good morning and thank you for joining us today for the Xtant Medical Holdings, Inc. first quarter 2016 results conference call. With me on the call today is Dan Goldberger, Xtant’s Chief Executive Officer. Yesterday afternoon, Xtant was pleased to issue a press release announcing first quarter 2016 financial results. Today's call is being webcast and will also include a slide presentation which has been posted on the company's Web site. Following remarks by management, the call will be opened up for your questions. We expect the duration of the call to be approximately one hour. 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 Thursday, May 5, 2016 at approximately 9 AM 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. With that, I would like to turn the call over to Dan.

[Daniel Goldberger:]

Thank you, John. Last night, we issued a press release announcing our first quarter 2016 results with core recurring revenue of $20.5 million, representing 6.8% year-on-year growth. We continue to transition the business away from OEM partners in favor of higher-margin sales to end users – what we call, core recurring revenues. Gross margin has expanded 2.9% to 67.2% as a result of that emphasis and improving operational efficiencies. First quarter 2016 revenue in total was $21.0 million, somewhat lower than pro forma first quarter 2015 revenues of $21.7 million and fourth quarter 2015 revenue of $22.3 million. We previously reported a record fourth quarter of 2015; and as a result, depleted much of our finished goods inventory by December 31, 2015. That lack of inventory made it difficult for us to grow the business in January and February 2016. We were able to replenish most of our finished goods inventory by the end of February, but certain products, specifically Certex and Irix-C, remained on allocation until the end of April 2016. Revenue from 3Demin and OsteoSelect are increasing nicely, but those products continue to be on allocation as we ramped up our tissue processing capabilities. Inventory allocation was a drag on growth during January and February and affected the revenue we could generate in the first quarter. We believe that as much as $2 million of additional revenue could have been achieved with fully stocked shelves. Shortages were mostly relieved in February, allowing us to set several records in March 2016. That momentum is carried over into April 2016 and we will continue to implement systems to better forecast and manage our supply chain in the future. Inventory allocation also caused us to delay the launch of more than 100 new instrumentation sets for a variety of our fixation products, which further impacts our future growth. Those sets will be released later this quarter and should be fully available for the second half of the year, setting the stage for launching sales to new facilities and physicians and accelerating growth. We continue to emphasize our distribution channel, calling on orthopedic surgeons and neurosurgeons in the United States. We are committed to our hybrid structure, numbering 356 field sales assets as of March 31, 2016, per slide number four. All of our employees and an increasing number of our agents and resellers are exclusively selling Xtant product lines. I expect that we will hold steady at about 350 field sales assets for the next few quarters as we work through the intensive training required by our portfolio selling initiative. We combined the sales channels of the two legacy companies and launched our portfolio selling program in October of 2015. Legacy X-Spine agents are learning the biologics catalog and vice versa. National accounts has added the combined catalog to many of our existing customer and purchasing group contracts. We’ve implemented a rigorous, multi-step product and procedure training for all of our internal staff and our field sales assets. We expect the majority of that training to be completed towards the end of this quarter. Portfolio selling represents a significant opportunity to increase our average revenue per procedure, which may generate increased revenues for the company and larger commissions for our sales agents. Furthermore, portfolio selling can make us a more attractive partner to hospital purchasing systems attempting to reduce the number of vendors they work with and drive compliance in their systems. I'm pleased to report that roughly 4.6% or $935,000 in 1Q 2016 revenue came from our portfolio selling initiative. We expect that number to increase steadily and accelerate in the second half of 2016 when the majority of the sales staff has completed training. We are targeting 10% to 12% of revenue from portfolio sales as we exit 2016 and enter 2017. To briefly review, slide number five shows our total addressable market opportunity in the United States approaching $9 billion. We offer a variety of soft tissue products for the sports medicine category, but the vast majority of our business is in spine where we offer a full suite of products. We’re committed to the continued development of new products to leverage our distribution channel and increase our ability to penetrate these market segments. And I'll discuss some of those newer products and the additions to our portfolio shortly. I'm very excited about the product pipeline that addresses our spine therapy category. Turning to slide six, in the second half of 2015, we announced OsteoSelect PLUS, demineralized bone matrix putty, the Aranax Cervical Plating System and the Atrix-C structural allograft implant. More recently, we announced the Xspan Laminoplasty System. Both Aranax and Atrix-C contributed small amounts of revenue in the first quarter of this year during their pilot launch and we’re expecting to see meaningful revenue contribution from OsteoSelect PLUS in the current quarter of 2016. Each of these product families represents a substantial total addressable market opportunity for the company and we plan to employ additional consigned inventory and instrumentation sets later this year to drive revenue growth. On March 24, 2016, we announced an agreement with privately-held by Vivex Biomedical, Inc. for distribution of OsteoVive, an exciting, viable cell allograft described on slide number seven. I'm really excited about the business potential that OsteoVive presents. OsteoVive is a viable, allogeneic bone scaffold derived from bone marrow in full compliance with all FDA guidelines regarding human cells, tissues and cellular tissue-based products, and is intended for use in bone remodeling. It contains cellular and bone scaffold complements. Furthermore, OsteoVive processing preserves a cell population that includes marrow-isolated adult multi-lineage inducible cells, also known as MIAMI cells. These primitive cells provide osteogenic properties that in combination with the osteoconductive and osteoinductive elements of the graft enhance the patient's innate healing process. The processing technology used to create OsteoVive is designed for cell viability and functionality. And the MIAMI cell has over 15 years of clinical research supporting the efficacy of these unique cells. Viable cell allografts, like OsteoVive, represent the next generation in bone healing technology and surgeons are very receptive. This category is already a $250 million market and is expected to continue growing rapidly. Because of these attributes, we expect OsteoVive to be a very strong addition to our already comprehensive biologics product portfolio and anticipate that will generate meaningful revenue in the second half of 2016. Turning to slide eight, demand for another of our newer biologic products, 3Demin, continues to outstrip supply. Revenues from this product family have been growing steadily over the past five quarters and we've been slowly opening up new geographies as we increase supply. I believe 3Demin has the potential to generate revenue of approximately $5 million to $6 million per quarter, similar to our flagship product, OsteoSponge, as additional supply becomes available. During the summer of 2015, we initiated various investments to increase the capacity of our tissue processing facility in Belgrade, Montana. That capacity has started to come online and should be fully in place as we exit the year. We processed about $1.4 million of 3Demin during the first quarter of 2016 to support more than $900,000 in sales. The balance has been dedicated to consigned inventory and will be converted to revenue in future quarters. As a result of our expanded facilities and manpower, we expect to be able to process approximately $2 million of 3Demin supply in 2Q of this year and anticipate a full $3 million of 3Demin in the third quarter. Similarly, we put more than $400,000 of OsteoSelect PLUS into finished goods inventory during the first quarter of 2016 to support pilot launch in the current quarter. We plan to process $0.5 million of OsteoSelect PLUS in the current quarter accelerating to $1.5 million in the third quarter of 2016. We greatly appreciate the support we’ve received from the State of Montana for this facility expansion. I'm thrilled by the product demand we see in our distribution channel. By resolving the inventory bottlenecks, launching more than 100 new instrumentation trays, and increasing our biologics processing capacity, I'm confident that our revenue will accelerate in the second half of the year. Don't underestimate the excitement that OsteoVive is creating in our distribution channel. I’m going to turn the presentation over to John for a more detailed discussion of our financial statements.

[John Gandolfo:]

Thank you, Dan. Slide 11 outlines selected profit and loss statement information for the company on a pro forma basis. Total revenue for the three months ended March 31, 2016 was $21 million, slightly lower than $21.7 million of revenue for the same period of 2015. Net loss in the first quarter of 2016 narrowed slightly to $5.6 million from a pro forma net loss of $6 million in the first quarter of 2015. Gross profit grew slightly to $14.1 million from pro forma gross profit of $14 million during the same period of 2015. Our gross margin grew 2.9% to 67.2% from 64.3% for the same period of 2015. For the first quarter 2016, EBITDA was a loss of $145,000 compared to a pro forma gain of $282,000 in the first quarter of 2015 due to the slightly lower revenue figure. Slide 12 shows the balance sheet comparison between March 31, 2016 and December 31, 2015. As of March 31, current assets includes approximately $14.9 million of net accounts receivable and $24.2 million of inventory. Total liabilities include $68 million of convertible debt and $42 million of original principal amount senior secured debt which was incurred to fund the X-Spine acquisition in July of 2015. Company reported positive shareholders’ equity of $3.4 million as of March 31, 2016. In order to ease working capital constraints, OrbiMed, the key financier of the X-Spine transaction has deferred their cash-based interest due to them on March 31 2016 and April 14, 2016. Furthermore, we have executed a preliminary term sheet and are in vast discussions with a commercial financial entity for a $6 million accounts receivable revolver facility, which will provide additional working capital to fund our ongoing strategy. In addition, the company has approximately $8.5 million remaining on its equity credit facility with Aspire Capital. The company defines non-GAAP profitability as EBITDA less total cash-based interest expense. We have lowered our non-GAAP profitability breakeven figure to $24.75 million per quarter due to a recently enacted reduction in operating expenses, which will be effective in the second half of this year. On an incremental basis, after breakeven, the company expects a pre-tax profit margin of approximately 45%. This point is highlighted on slide number 14. As you will see, this slide shows, for each $1 million of additional revenue after breakeven is achieved, approximately $450,000 or 45% of incremental operating profit would drop to the bottom line. The company is reiterating its 2016 revenue guidance of $94 million to $99 million, which would compare to 2015 pro forma revenue of $86.5 million. Based upon achieving the revenue guidance, 2016 EBITDA is expected to be between $4.3 million and $6.3 million. 2016 non-GAAP profitability, which, as we mentioned, is defined as EBITDA less total cash-based interest expense, has been updated to be between negative $800,000 and positive $1.2 million for the year. This reflects the lower operating expenses over the second half of 2016 and the aforementioned lower cash-based interest expense for the year. I will now turn the presentation back over to Dan for a summary.

[Daniel Goldberger:]

Thank you, John. I continue to be very excited about the long-term prospects for Xtant Medical. Slide 16 lists some of the growth drivers for 2016 and 2017. Although we had some inventory headwinds in Q1 2016, those were largely resolved during the first quarter and will be completely resolved shortly. In the short-term, we will leverage the portfolio selling opportunity among our existing field sales agents and customer base. Increasing supply of biologics from our investments in plant and people in Montana will allow us to fully deploy 3Demin and OsteoSelect PLUS to our distribution channel. We’re going to deploy more than 100 new instrumentation trays in the second half of the year to support growth of Aranax, Irix, Certex, and Fortex Xpress product lines. Longer-term, we’re going to continue to invest in our product and technology platforms. As previously discussed, demand for 3Demin continues to outstrip supply and I look forward to continued growth as capacity becomes available. Aranax and Atrix-C are already generating revenue during their pilot launch. OsteoSelect PLUS will start generating revenue in the current quarter. And our distribution channel is signaling that that product, OsteoSelect PLUS, could be as large as or even larger than 3Demin. As I said earlier, we’re very excited about the prospects for OsteoVive in our distribution channel, our first live cell allograft offering. This product family could provide a meaningful lift in revenue over the second half of the year. Financially, I expect that we’ll return to mid-teens revenue growth in our core recurring sales to end users for the rest of the year. Gross margins should continue expand with revenue growth and better utilization of our fixed investments. The income statement has tremendous leverage as we move through the breakeven run rate of $24.75 million per quarter with as much as 45% of incremental revenue flowing through to EBITDA and non-GAAP profitability. Management has developed a plan to reduce OpEx by $500,000 to $750,000 per quarter which should be fully effective in the fourth quarter of 2016. As John explained earlier, we have adequate financial resources to execute our plan. Those points are summarized on slide 17. In closing, I want to thank our employees, sales partners, vendors and financial partners for working so hard to combine these two great. As always, we remain committed to the Donate Life community and our recovery partners. Thank you for joining us today and we’ll turn the call over to questions. So, Donna, if you can bring on the first question, that would be great.

[Operator:]

Thank you. [Operator Instructions] Our first question is coming from Suraj Kalia of Northland Securities. Please proceed with your question.

[Suraj Kalia:]

Good morning, gentlemen. Can you hear me all right?

[Daniel Goldberger:]

Yeah. Good morning, Suraj.

[Suraj Kalia:]

Dan, pardon me if you hear some background noise. I’m on the road, so hopefully my voice comes through. So a bunch of questions. So, I guess, let me start out, Dan – some of your comments in your prepared remarks about OpEx reduction of $500,000 to $750,000, maybe I missed the details of that. Per quarter, what is that OpEx reduction specifically targeting? And I guess, where I'm headed at is, just trying to see if more designs to conserve cash or there are some inefficiencies that you’ll have highlighted that will not affect sales.

[Daniel Goldberger:]

It’s a good question. So, on Monday of this week, we implemented a significant reduction in force, so reducing headcount in a variety of functions throughout the company in recognition of the fact that our revenue run rate and our revenue guidance for the year was reduced last month. So you try to be careful about headcount reduction so that you don't impact the momentum of the business, but that's the primary element of the OpEx reduction. There are a few other elements that we’ll be working on for the rest of this quarter that are not headcount related.

[Suraj Kalia:]

So, again, in terms of the $94 million to $99 million guidance maintained, I guess a double part question, what is the implied growth rate now for X-Spine versus organic Bacterin, if you’ll could share those details? At the same time, are the reductions primarily on the X-Spine side or the organic Bacterin side?

[Daniel Goldberger:]

So the reductions were across the company. And as you know, we’ve integrated all of the back office functions of the company and the sales force has been integrated. So it's not that one product group or the other has been affected. It’s across the functionality of the company. And as far as the growth goes, biologics products have been hampered by supply and those supply constraints are being relieved by the investments in physical plant and direct labor in Montana. And the Certex, Irix, Fortex Xpress, those products are limited by working capital as represented by the investment in instrumentation and consigned inventory. And that's the 100 plus new instrumentation trays that we’re starting to deploy, is going to help that growth. Sorry, if it’s a bit of a winding road, but we believe that we’ll be able to drive mid-teens growth in all of the product lines because of those investments on the supply side.

[Suraj Kalia:]

And finally, Dan – thank you for taking my questions. Finally, the revenues per procedure, can you give us some color on the cross-selling synergies, at least the pro forma targets exiting this year? Thank you for taking my questions.

[Daniel Goldberger:]

So we had just under $1 million of revenue in the first quarter, came from what we call portfolio selling, legacy Bacterin customers purchasing X-Spine products and vice versa. And our goal is that – and that was about 4.5% of our revenue for the quarter. So our goal is to drive at least 10% revenue growth through that portfolio selling activity as we exit the year. So we need to sort of more than double that to $2.5 million or so at the top line. And that continues to be our largest short-term opportunity.

[Suraj Kalia:]

Great, thank you, gentlemen.

[Daniel Goldberger:]

Thank you.

[Operator:]

Thank you. Our next question is coming from the Swayampakula Ramakanth of H.C. Wainwright. Please proceed with your question.

[Swayampakula Ramakanth:]

Good morning, Dan and John. Thanks for taking my questions.

[Daniel Goldberger:]

Good morning, RK.

[Swayampakula Ramakanth:]

Just continuing on where Suraj left regarding the portfolio selling, I understand your goal is to get to 10% to 12% by the end of 2016. So what do you think needs to get done to get there, all the things you just talked about? And also, where do you think management will become [indiscernible] in terms of what’s the optimal goal, percentage, in terms of this portfolio selling?

[Daniel Goldberger:]

In the short run, we need to make sure we have adequate supply. The sales force rightfully has been reluctant to turn on new customers or to add a new product line to an existing customer until I could assure the sales force that we would have adequate supply to support their day-to-day needs. And that was a problem in January and February, and so we've revived – we've resolved those bottlenecks. So assuming adequate supply, which we’ve put in place, it just takes a little bit of time to introduce the products to our existing customers, get them to trial them. More often than not, they like them and then we’re off to the races. So I'm very comfortable with that 10% goal as we exit the year. Long-term, when we entered into the combination, we thought that the upside opportunity from portfolio sales visits, as much as 30% of revenue, and I continue to believe that that's an adequate goal – that’s an appropriate goal, provided that we can continue to invest in working capital to provide the products.

[Swayampakula Ramakanth:]

Okay, thanks for that. Of the four new products that you highlighted in your presentation, which looks like you have a total market opportunity of nearly $1 billion, what’s the market share that you need to achieve so that it is meaningful in the long term and what can be achieved in realistic terms of that $1 billion?

[Daniel Goldberger:]

So for Aranax and for Atrix-C, the next stage of our rollout is to deploy about 15 instrumentation trays for each product. That's enough to support, let’s say, 12 customers for each product and with an average revenue per procedure of $8,000 to $10,000 times 24 customers between the two product lines. That's the kind of revenue lift that we could see in the second half of the year from the controlled launch of those two products. For OsteoSelect PLUS, the upside is substantially larger, but it's limited to what we can process and put into consigned inventory. Similarly, for OsteoVive, we’re going to launch OsteoVive, our cell-based allograft into friendly customer accounts and we’re going to adjust the number of accounts that we launch based on our working capital abilities. So the business, as you and I have discussed, management has to be very careful about where we put our working capital investments to support consigned inventory, to support new customers that we’re launching.

[Swayampakula Ramakanth:]

Okay. So talking about the launches and the new customers onboard, you gave us some information regarding the 3Demin and the OsteoSelect and the amount of money you want to spend in the current quarter and the next quarter in terms of generating the product. Is this an indication of what the current backlog that you’re trying to fill in or is that just the kind of anticipated market from your market intelligence that you can achieve in the coming quarters?

[Daniel Goldberger:]

It's driven for us – for 3Demin, where we have the most data at this point, for 3Demin, we’re only opening up new accounts based on having the additional supply to service those new accounts. So we have demand among our existing customer base to double that run rate and probably get it up to that $2.5 million to $3 million per quarter run rate. That's existing demand where we are just carefully opening up new accounts as we get comfortable that we have reliable supply. It's a great situation to be in, but at the same time it's also very frustrating to not be able to ramp up faster.

[Swayampakula Ramakanth:]

Okay. And then the last question from me is on the OsteoVive product, you mentioned that the sales force is excited and the management is excited about this product, but this is a custom-made product, isn’t it? So what’s the basis for that? Is there groundwork done already that you feel [indiscernible] lot of intake on it.

[Daniel Goldberger:]

So, right now, we just started discussing OsteoVive with our current customer base and there is a lot of anecdotal receptivity to the MIAMI cell technology as applied to spine. But we need to get the product into the field with our surgeon customers and have them confirm their instincts that it's going to work well in their hands. And that's going to start to happen in the summer quarter.

[Swayampakula Ramakanth:]

Okay, thank you very much. Congratulations. And look forward to talking to you.

[Daniel Goldberger:]

All right. Thank you, RK.

[John Gandolfo:]

Thanks, RK.

[Operator:]

[Operator Instructions] Our next question is coming from John van der Musten [ph] with Zacks. Please proceed with your question.

[Unidentified Analyst:]

Good morning, Dan and John.

[Daniel Goldberger:]

Good morning, John.

[Unidentified Analyst:]

Thank you for taking my question. I first wanted to ask, I think I may have heard that you changed the number in terms of the breakeven revenues per quarter. Was that correct or did I just mishear it?

[Daniel Goldberger:]

Yes. So we implemented a plan to reduce operating expense. And that in turn reduced our breakeven run rate to $24.75 million per quarter.

[Unidentified Analyst:]

Okay, great. That’s good. And then I was just going to jump to just inventories, I think you said that the fixation sets were the reason for the – at least part of the reason for the sales that didn’t materialize. But can you kind of breakdown for me, I guess, in terms of – was it just – was it also the fact that – some of the sales were kind of unexpected products or is that what happened? Or was it just – there is a breakdown in other parts of the system that stopped those fixation sets? Because it seems like there was pretty high anticipated growth forecasted, but did it just come from unexpected places?

[Daniel Goldberger:]

I wish it was that simple. But we have adequate instrumentation in the field to support that higher level of business. But we need to reliably replenish the implants that are used in surgeries and that's what broke down. With the increase in demand in November and December, we had not placed orders for replenishment implants that would come in to satisfy demand in January and February, so we were servicing our existing customers who already have the instrumentation kits. In turn, because we were scrambling to make sure that we had enough replenishment inventory we had to delay the launch of new instrumentation trays, which would service new customers. And so, the addition of new customers had been delayed by about a quarter. So it's very frustrating on the operational side, but it's very gratifying that we’ve got the demand through our distribution channel.

[Unidentified Analyst:]

And those trays, is that a third-party manufacturer? And also, what’s the, I guess, turnaround time on placing an order for those?

[Daniel Goldberger:]

So, in general, the instrumentation is our design, our proprietary technology, but it’s fabricated by a network of third parties and the lead times are between 8 and 12 weeks. Again, very generally.

[Unidentified Analyst:]

Okay. I was going to look at inventories again. You have $24 million, which is approximately a quarter’s full of sales, can you break that down for me in terms of kind of the percent of finished inventory and then unfinished inventory? And has that trended in any direction over the last several quarters?

[John Gandolfo:]

Yes. I would say that the finished goods represents about 30 to 40% of that total amount. And I think that the trend has been increasing towards finished goods inventory. With the amount of ordering we've done on the fixations side of the business and the expected product coming in, coupled with the increased processing we’re doing on the biologics side, we expect that finished goods piece to continue to increase.

[Unidentified Analyst:]

Great, great. And, I guess, most of the finished goods, that’s on the Bacterin side rather than the X-Spine side?

[Daniel Goldberger:]

It's spread out around all product lines.

[John Gandolfo:]

Correct.

[Unidentified Analyst:]

Okay, okay. Because that’s just the different manufacturing processes. I was thinking that it might – is it radically different, the percent of finished inventory to unfinished inventory between the fixation side and the Bacterin side?

[Daniel Goldberger:]

Yes. Even though the supply chains are dramatically different for biologics and for implants, the lead times end up being about the same. So the mechanics of the supply chain, you end up needing about the same amount of inventory to service the lead time and the consigned requirements.

[John Gandolfo:]

And remember, because the fixations side of the business does contract manufacturing, when that product comes in, it’s basically finished goods inventory compared to the biologics, where we do our tissue processing in Montana, we have much more raw material and work-in-process components of the biologics side.

[Unidentified Analyst:]

Justo one last question on the sales side of things. Is the training impacting sales productivity because I remember, last year, what we’re trying to do is, we had some new sales individuals, but then we’ve, of course, added X-Spine to it? And the anticipation was, therefore, productivity would pick up over time. And I’m wondering, is the training kind of slowing that anticipated trend to any degree or, as you discussed, kind of overwhelmed, the lack of the new instrumentation trays?

[Daniel Goldberger:]

So, absolutely. We’ve taken people out of the field quite a bit in the second half of 2015 as we integrated the sales functions and put people through – put individuals through training. So it certainly has affected the amount of time in the field. That was more of an effect in 2015 and is becoming less and less in 2016. And now that we’ve resolved the replenishment shortages, I am very excited about the current run rates.

[Unidentified Analyst:]

Okay. All right, Dan and John. Thank you for the time.

[Daniel Goldberger:]

Yep. Thank you, John.

[Operator:]

[Operator Instructions] Our next question is coming from Todd Robbins of Five Mile River. Please proceed with your question.

[Todd Robbins:]

Good morning, Dan and John.

[Daniel Goldberger:]

Good morning, Todd.

[Todd Robbins:]

I'm getting on the call a little bit late, so I apologize if some of this has already been covered. The breakeven run rate of $24.75 million, where do you expect that breakeven run rate to get to, say, by the end of the year or, let’s say, fourth quarter?

[Daniel Goldberger:]

If you look at our guidance for the year, it's going to be back-end loaded because of the portfolio sales ramp-up as well as the new product ramp-ups. So we should be blowing through that as we exit the year.

[Todd Robbins:]

It will be lower than the $24.75 million in the fourth quarter. That’s what you’re saying?

[John Gandolfo:]

No, I think the amount will be $24.75 million, but we expect our revenues to be above that $24.75 million number.

[Daniel Goldberger:]

The OpEx reductions are reflected in that $24.75 million. When we did our third – our fourth-quarter call, our breakeven number was substantially higher than $24.75 million, so this is a dramatic reduction from where it was as recently as March.

[Todd Robbins:]

What's the med device tax savings that you no longer have to pay?

[Daniel Goldberger:]

About 2% of revenue.

[Todd Robbins:]

2 million bucks.

[Daniel Goldberger:]

Yep.

[Todd Robbins:]

So, let’s say, $0.5 million a quarter. So the $25.5 million breakeven, by that alone, goes to 25.

[Daniel Goldberger:]

That’s reflected in the $25.5 million breakeven.

[Todd Robbins:]

It was? Okay.

[Daniel Goldberger:]

Yes.

[Todd Robbins:]

Okay. The inventory shortfall on the fixation device trays, it sure sounds like that was a simple problem of one of the guys at X-Spine not ordering enough. Is it that simple?

[Daniel Goldberger:]

Yes.

[Todd Robbins:]

So the shortfall of $1.5 million to $2 million from that, can that be recaptured or is that lost business?

[Daniel Goldberger:]

Those are procedures that we didn't get, but the run rate has already been recaptured.

[Todd Robbins:]

So from a share point of view, you still see that growing, not stabilizing?

[Daniel Goldberger:]

Now, it’s stabilized because we have corrected the replenishment shortages. And as we deploy new trays, we’ll be able to grow it.

[Todd Robbins:]

Okay. I don't know if you covered this in some of the prepared comments, but could you discuss what you see as the significance of OsteoVive? This was announced, I guess it was March.

[Daniel Goldberger:]

It was announced at the end of March. Yes, sir.

[Todd Robbins:]

Just sounded like a really exciting product. Is that something you’ve already recovered or could you give us some color, just how that’s positioned in the market and what you see is the opportunity for it?

[Daniel Goldberger:]

So we’re very excited about it and our physician customers, more importantly, are very excited about adding that osteogenic component, which is really the third leg of the stool for a regenerative medicine portfolio. Our OsteoSelect and OsteoSponge products are outstanding, class-leading, osteoinductive and osteoconductive components. And OsteoVive is going to represent that third leg of being osteogenic regenerative medicine driver. So the surgeons are very excited about being able to add that to their toolkit. The early data from implantations has been very exciting. These MIAMI cells, there's a long history of tier one science that's led into their development. So the partnership with our friends at Vivax is going to be very, very successful. So we’re on the verge of great things. We need to get the product into the hands of our solid customers and confirm all of the clinical scientific excitement. There's a lot of excitement in our distribution channel as well as the product will have some halo effect. It’s something new for our sales guys to be talking about as they go into a physician's office. It’s a way to get into the physician's office and then talk about the rest of our catalog.

[Todd Robbins:]

So Medtronic has a product called infused that’s doing about $0.5 billion in sales. How is this position relative to Infuse?

[Daniel Goldberger:]

So Infuse is a bone morphogenetic protein recombinant technology which has osteogenic properties. OsteoVive is very different. OsteoVive is live cells that are derived from vertebral [ph] bodies. And so, while Infuse is a single bone morphogenetic protein, the MIAMI cells, when implanted properly, are going to provide all of the signaling to create the entire menu of bone morphogenetic proteins and other signaling and regenerative properties to get bones to heal faster and more completely. So it's a far more comprehensive technologies than a single bone morphogenetic protein like Infuse.

[Todd Robbins:]

So this is going to go directly at Medtronic's Infuse product sales? And because it has improved morphogenetic characteristics and more cells that are triggered through this product, it has comparable or better strengthening and healing times. Is that the way to think about it?

[Daniel Goldberger:]

That’s the theory. We have to demonstrate that through clinical efficacy. So the surgeons will nod their heads and agree with everything you just said. We need to now go out and demonstrate it with longer follow-ups and studies.

[Todd Robbins:]

Just approximately how many procedures do your sales folks address that this might sell into?

[Daniel Goldberger:]

That’s a good question. Our channel is primarily focused on spine procedures and we participate in several thousand spine procedures per quarter. But the technology could easily migrate beyond spine, into other areas of orthopedics. So the long-term prospects are, as you pointed out earlier, as large as the Infuse franchise.

[Todd Robbins:]

And how is this going to be priced relative to Infuse?

[Daniel Goldberger:]

We really have not discussed pricing yet.

[Todd Robbins:]

So Infuse goes at about 5000 bucks a copy or a procedure. Are you going to be above that or below that?

[Daniel Goldberger:]

We not discussed pricing yet, but, obviously, we plan to be competitive.

[Todd Robbins:]

So chances are you’re not going to be below that? Okay.

[Daniel Goldberger:]

No reason for us to go at these early stages.

[Todd Robbins:]

Excellent. Just a high-level word, if you could, Dan, about your relationship with OrbiMed. They’ve supported the company extensively and there was a wonderful write-up in Barron’s about them this last weekend. Is this a relationship that continues to be a sort of a backstop for your company and what do you think their endgame is, if I might ask?

[Daniel Goldberger:]

OrbiMed has a very substantial position in the company. They have a lot of money invested in the company. OrbiMed principals act as observers on our Board of Directors. They've been very supportive most recently in allowing us to defer the cash-based interest payments, so that we don't have to go to the capital markets at a disadvantageous time. And all indications are that OrbiMed is in this for the long haul. The fund that has invested in OrbiMed does not have a specific timeframe. They seem to like what management is doing and it's very refreshing for management to have a long-term partner as opposed to the month-to-month, quarter-to-quarter kinds of things that we see in the public markets. So, John, did you want to add something to that?

[John Gandolfo:]

Yeah. The other thing is the particular Special Situations Fund that their investment in us is part of. We are one of the larger investments within that fund. So they continue to be very supportive of the company.

[Todd Robbins:]

So if they were to capitalize the interest payments that you have to make to them on a quarterly run rate basis, what would that do in terms of savings on your breakeven rate?

[John Gandolfo:]

Well, on the senior secured debt, it runs about $950,000 per quarter, the cash interest payment.

[Daniel Goldberger:]

That would reduce breakeven by $1 million.

[John Gandolfo:]

Yeah. Well, that’s just senior debt. They also have a piece of – a large piece of the convertible debt as well, probably another $700,000 to $750,000 per quarter of interest on the convertible bond. So all told, roughly, between $1.6 million and $1.75 million of quarterly interest payments to OrbiMed.

[Daniel Goldberger:]

And our breakeven run rate would be reduced accordingly.

[John Gandolfo:]

Yeah, correct.

[Todd Robbins:]

Have they indicated to you that that's a backstop for you should you need it?

[John Gandolfo:]

We haven't had those discussions with them.

[Todd Robbins:]

But isn’t that what they did in the first quarter?

[Daniel Goldberger:]

Yes, it is.

[John Gandolfo:]

Yeah, they did. And that related to the first quarter, but we didn't have a – we haven’t had further discussions about continuing that practice.

[Todd Robbins:]

Okay. That’s very helpful, gentlemen. Thank you very much.

[Daniel Goldberger:]

Thank you, Todd.

[Operator:]

Thank you. At this time, I’d like to turn the floor back over to management for any additional or closing comments.

[Daniel Goldberger:]

Thank you, everybody, for your kind attention and I will talk to you next quarter.

[John Gandolfo:]

Thank you.

[Operator:]

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