Xtant Medical Holdings, Inc.
Q3 2016 Earnings Call Transcript

Published: 8 Nov 2016

[Operator:]

Greetings and welcome to the Xtant Medical Third Quarter 2016 Results Call. At this time, all participants are in a listen-only mode. A brief 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 your host, John Gandolfo, CFO. Mr. Gandolfo, you may now begin.

[John Gandolfo:]

Thank you. Good morning, everyone. My name is John Gandolfo, CFO of Xtant Medical. Thank you for joining us today for the Xtant Medical Holdings, Inc. third quarter 2016 results conference call. With me on the call today is Dan Goldberger, Xtant’s Chief Executive Officer; and Carl O’Connell our newly appointed President. Yesterday afternoon, Xtant was pleased to issue a press release announcing third 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 website. 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 the 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 Tuesday, November 08, 2016 at approximately 10 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. With that, I would like to turn the call over to Dan.

[Dan Goldberger:]

Thank you, John. Last night, we issued a press release announcing our third quarter 2016 results with record quarterly revenue of $23.1 million, 10.5% year-on-year growth as shown on slide number three. This was a breakout quarter for us in many ways, including financial performance and new product traction. Gross margin continues to expand with revenue growth, and we reported meaningful adjusted EBITDA of approximately $768,000. There is tremendous leverage in the income statement as revenue grows past breakeven and we are firmly on the path towards generating free cash flow after debt service. The supply chain issues that held us back in the first half of the year have been permanently resolved resulting in 7.6% sequential growth from revenues $21.5 million in the second quarter of 2016. Our sales force can now turn their attention from managing inventory at existing accounts to opening new account with consigned inventory. Revenue from our newer product are steadily increasing, and I’m very excited about the pipeline of new products to be announced in 2017. 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 more than 350 field sales asset as of September 30, 2016 per slide number four. All of our employees and an increasing number of our agents are exclusively selling Xtant product line. We plan to hold steady about 350 field sales assets through the first half of 2017. We launched our portfolio selling program in October of 2015. This activity is based on effective based [Indiscernible] biologics, the legacy hardware customers, and vice versa. In other words, we can continue to grow the business by selling existing products to existing customers with our existing sales force. You can see that we’ve made substantial progress towards our goal of 10% of sales derived from portfolio sales. We expect to exceed that level in the fourth quarter of 2016, setting the stage for sustained growth in 2017. 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 the hospital purchasing systems, attempting to reduce the number of vendors they work with and drive compliance in their systems. I’m very excited about our new product pipeline to address the $9 billion spine therapy category. Turning to slide 5, in last 12 months, we announced OsteoSelect PLUS, Demineralized Bone Matrix Putty, the Aranax Cervical Plating system and the Atrix-C structural allograft implant, the Xspan Laminoplasty System and our distribution agreement for the OsteoVive viable cell allograft. The total of five new programs in the past 12 months that address total U.S. market segments that exceed $1 billion combined. These five new products generated approximately $563,000 of revenue in the third quarter of 2016 or 2.5% of total revenue. And the first implant case into Xspan devices was completed just last week in Houston, Texas. Revenue from new products will accelerate through 2017 as we train the rest of our sales channel and deploy consigned inventory. We expect to maintain that cadence of four to six new product announcements in 2017 to support growth in 2018 and beyond. While we no longer count Silex’s [ph] "new product", both product lines grew more than 20% sequentially last quarter building on our thesis of using proprietary products to drive adoption of the rest of our product line. A few weeks ago CMS announced substantial increases to the MIS CPT code 27279, for Medicare payments and hospital outpatient and ambulatory surgery standard procedures effective January 2017. Our Silex product family can be reimbursed under that CPT code. And we expect accelerating interest the sacroilliac joint procedure in outpatient settings driven by the recently increased reimbursement. I’ll now turn the presentation over to John for more detailed discussion of our financial statements.

[John Gandolfo:]

Thank you, Dan. Slide number seven outlines selected profit and loss statement information for the Company for the third quarter of 2016 compared to the pro forma third quarter of 2015 profit and loss information. Total revenue for the three months ended September 30, 2016 was approximately $23.1 million, an increase of 10.5% compared to $20.9 million of pro forma revenue for the same period of 2015. Gross profit grew 16.7% to approximately $16 million from pro forma gross profit of $13.7 million during the same period of 2015. Our gross margin percentage grew 3.7% to 69.2% from 65.5% for the same period of 2015, and 0.7% for the second quarter of 2016. Our quarterly operating loss narrowed from a pro forma loss of approximately $5 million in the third quarter of 2015 to loss of $1.9 million in the third quarter of 2016. For the third quarter of 2016, adjusted EBITDA was a gain of approximately $758,000 compared to a pro forma loss of $915,000 in the third quarter of 2015. The reconciliation of our operating loss to adjusted EBITDA is shown on the next slide; slide number eight, with a large portion of the difference between operating loss and EBITDA coming from depreciation and amortization from the X-Spine acquisition as well as post-transaction integration expenses. Slide number nine shows the balance sheet comparison between our actual December 31, 2015 and September 30, 2016 balance sheet. As many of you are aware, the company is in the process of completing the common stock rights offering with Maxim Group acting as dealer-manager on the transaction. Total assets at September 30, 2016 includes approximately $15.8 million of net accounts receivable and $27.8 million of inventory. Total liabilities include approximately $70.2 million of convertible debt and $49.9 million of senior secured debt. Orbimed Advisors, our largest stakeholder holds approximately $54 million of the convertible debt balance and the entire amount of the senior secured debt in addition to owning between 4% and 5% of our common shares as of September 30, 2016. In addition to our cash on hand, the Company has ready access to additional cash through its accounts receivable revolver facility with Silicon Valley Bank and its committed equity facility with Aspire Capital. Slide number 10 outlines the leverage of incremental revenues once break even and received. We define non-GAAP profitability as EBITDA less total cash based interest expense. Essentially, the revenues were acquired on a quarterly basis to cover our cash based operating expenses and interest expense. Quarterly non-GAAP profitability breakeven occurs at approximately $24.7 million of revenue. On an incremental basis, after non-GAAP profitability breakeven is achieved, we expect an incremental profit margin of approximately 42%. As shown in slide number 11, for each $1 million of additional revenue we have to break even to achieve, approximately $420,000 or 42% of operating profit would drop to the bottom line. Slide number 11, outlines our short term objectives to achieve non-GAAP profitability, allowing us to generate free cash flow after debt service. Our primary short-term objectives are to continue to increase revenues while controlling working capital cash outlays and maintaining strong expense controls. I’ll now turn the call back over to Dan to discuss our 2016 and 2017 guidance.

[Dan Goldberger:]

Thank you, John. I want to emphasize that management is laser-focused on making sure that we generate profitable revenue growth and free cash flow from operations as soon as possible. We’ve completely resolved our supply chain challenges and we have sufficient inventory and surgical instrumentation on hand to sustain mid-teens growth. I’m thrilled that Carl O’Connell has joined our team, as he will specifically be focused on supply chain, customer care, product pipeline and profitable sales growth. We expect to implement additional reductions in operating expense in the fourth quarter of 2016 that could further reduce our breakeven target and accelerate profitability and free cash flow. Therefore, we are raising our full year 2016 revenue guidance to $89 million to $91 million with expected adjusted EBITDA of $2 million to $2.8 million. This implies the fourth quarter revenue run rate of approximately $23.4 million to $25.4 million, growing sequentially in the range of 6% to 10% and solidly positioning the Company to achieve its cash flow breakeven milestone at $24.7 million. We’re also issuing full year 2017 revenue guidance of $98 million to a $102 million of revenue and positive $7.7 million to $9.2 million of adjusted EBITDA. Non-GAAP profitability is expected to be negative $700,000 to positive $800,000 in 2017. Since we have sufficient inventory and surgical instrumentation on hand to support our 2017 revenue growth, our free cash flow from operations in 2017 should closely match the non-GAAP profitability metric. I’m confident that our highly skilled and well-motivated team and our outstanding product portfolio can grow into a $150 million or even larger business in the coming years. At that run rate, we would generate adjusted EBITDA of $20 million to $25 million and deliver an outstanding return to our shareholders. Slide 13 lists some of the growth drivers for 2017 and beyond. Portfolio sales, selling existing products to existing customers will continue to expand from 7% in the quarter just ended to 12% and beyond over the course of 2017. New products are already contributing more than 2% of revenue and that will expand dramatically in 2017. Longer term, we’ll continue to invest in our product and technology platforms. We launched five new product families during the last 12 months and I expect that pace to continue through 2017. We’re going to hold the size of our sales force steady through the first half of 2017 and begin expanding again later in the year to build momentum for 2018 and beyond. Recent announcements from CMS, increasing reimbursement procedures in an outpatient setting, will also favor some of our flagship products. Financially, I expect that we’ll maintain lower mid teens revenue growth through 2017. Gross margins should continue to expand with that revenue growth and better utilization of our fixed investment will generate meaningful adjusted EBITDA and non-GAAP profit during 2017. In closing, I want to thank our employees, sales partners, vendors and financial partners for working so hard to build this great Company. As always, we remain committed to the Donate Life community and our recovery partners. Thank you for joining us today. We’ll turn it over to questions.

[Operator:]

Thank you. At this time, we’ll be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question is from the line of Swayampakula Ramakanth with H.C. Wainwright. Please proceed with your question.

[Swayampakula Ramakanth:]

A couple of quick questions. So, from what you’ve said, it looks like working capital issue is pretty much something that is done. So, are we really done with this issue and is there anything that you’re concerned about that could derail your 2017 guidance? And how confident are you on these numbers, and what could provide potential upside to the guidance? I know you gave us on growth drivers, but is there anything more that you’d like to add if you’re concerned about it?

[Dan Goldberger:]

Thank you, RK. As you know, in the first half of the year, our sales channel was frustrated with product availability of our most exciting flagship product lines. Those supply chain issues have been not only fully resolved, but the shelves are fully stocked right now and can support a higher run rate of the business. And so that -- because we now have the inventory support, our sales force can turn their attention from managing inventory out in the field on consignment towards opening new accounts deploying consigned inventory into new accounts, including new physicians and new facilities. And there is -- I can’t tell you how much pent up excitement there is in our distribution channel with the demand for our flagship products. On top of that, all of our new products OsteoSelect PLUS, OsteoVive, Atrix-C are getting tremendous enthusiasm. We just came out of the North American Spine Society meeting last week in Boston, where tremendous interest was demonstrated in our new products. So, the 2017 guidance is based on methodical growth within existing facilities using our existing distribution channel. I think there is nothing but upside, both from expanding within our existing customers and from drive new product growth.

[Swayampakula Ramakanth:]

Talking about potential upside and you just told about the CMS increasing its reimbursement rate on certain products. Can you give us a little bit more specific details regarding which products within your portfolio that it helps? And also, how should we think about the growth on the top line trickling down to the bottom line from the CMS?

[Dan Goldberger:]

Yes. So, what CMS is doing is recognizing that more and more of these spine fixation procedures can be done on outpatient setting and that outpatient setting as you know is better for the patients, is more efficient for the physicians and is more efficient for the entire healthcare system. Our Silex which is indicated for fusion of the sacroilliac joint, we’ll specifically reimburse under that outpatient code. And that increase in the economics for the healthcare system and the physicians is going to drive moving those procedures to the outpatient setting, doing more of those procedures in the outpatient setting and our Silex product line is specifically very well positioned for that. As far as the flow through to our income statement, Silex as a product line is one of our higher gross margin participants, it’s also one of the products that physicians are most interested in learning about. So, there’s pull-through when we train physician on Silex, there is pull-through for the rest of our portfolio, especially biologics.

[Swayampakula Ramakanth:]

And last question from me and then I’ll step back into the line. Since you came back into the field, [ph] you have been clearly laser focused in terms of getting this entity up and running. You certainly increased the topline going from $30 million plus all the to nearly $100 million at this point. So, how are you planning to be as laser focused on the rest of income statement, especially on the operational part of it? I know you just said that in the fourth quarter you were planning to make some adjustments, but can you please provide us with a little bit more color as to what for -- which part of the cost lines that you’re trying to attack especially with your G&A and S&M needing a quite a jump off your revenues, I’m just trying to understand how you want to get there?

[Dan Goldberger:]

Very good question. Carl O’Connell joined us earlier this month, I guess about a month ago now. And Carl brings a wealth of experience in orthopedics and specifically in spine. We are working with Carl and the Board of Directors to take the Company to the next level. And so, we’re looking at a variety of streamlining opportunities within the existing organization while we continue to focus on profitable revenue growth.

[Operator:]

Thank you. [Operator Instructions] Thank you. Our next question comes from the line of Joseph Borris. [Ph] Please proceed with your question.

[Unidentified Analyst:]

My question is actually in terms of the rights off that’s obviously going on right now. Has management announced how much you guys will be participating in the offering?

[Dan Goldberger:]

So, we need to direct your questions to the folks at Maxim around the rights offering.

[John Gandolfo:]

It was disclosed in the S-1 filing now. So, if you look in the S-1 filing, you’ll find it.

[Operator:]

[Operator Instructions] Thank you. Our next question is coming from the line of Anthony Freida Freida Consultants. [Ph] Please go ahead with your question.

[Unidentified Analyst:]

What progress are we making to avert the delisting that was mentioned in the previous release?

[Dan Goldberger:]

So, I think there was a release in less week or so ago.

[John Gandolfo:]

So, we announced that the MISC has accepted the Company’s compliance plan. So, in connection with that, what we needed to do was prepare plan to demonstrate what are plans are to be back in compliance within 18-month timeframe? So, we -- it was accepted by the MISC and we’ll continue to execute on that plan to get back in compliance by 2018.

[Unidentified Analyst:]

Is there a price limit that applies to that listing.

[John Gandolfo:]

Not a price limit per se. The reason why we were not in compliance related our negative shareholders equity net of our certain exemptions, without getting too technical that if the stock price goes above the certain amount and the market cap increases that you will be back in compliance, but there is no specific stock price associated with it.

[Unidentified Analyst:]

So, your current plan is to -- to be within the norms required in 2017 I think?

[John Gandolfo:]

Yes. So, we have till -- I believe the date was February 2018 to be back in compliance.

[Operator:]

[Operator Instructions] Thank you. At this time, I will turn the floor back to Mr. Dan Goldberger for closing remarks.

[Dan Goldberger:]

Well, thank you very much. We had a breakout quarter, and we’re looking forward to great things in the rest of the year. Happy holidays.

[Operator:]

Thank you. This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.