Xtant Medical Holdings, Inc.
Q4 2016 Earnings Call Transcript

Published: 10 Mar 2017

[Operator:]

Greetings and welcome to the Xtant Medical’s Fourth Quarter 2016 Results Call. At this time, all participants are in a listen-only mode. The company will not be taking questions over the phone today. If you do have any questions you can direct them to the management after the call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host John Gandolfo, Chief Financial Officer for Xtant Medical. Thank you Mr. Gandolfo. You may begin.

[John Gandolfo:]

Good morning. And thank you for joining us today for the Xtant Medical Holdings, Inc. fourth quarter and full-year 2016 results conference call. With me on the call today is Carl O’Connell, newly appointed Chief Executive Officer. Yesterday afternoon Xtant was pleased to issue a press release announcing record fourth quarter and full-year 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. We expect the duration of the call to be approximately 30 minutes. Please note that the company remains in discussions with OrbiMed, it’s principle debt holder. Actually now to facilitate these discussions, the company has entered into a successive interest deferral agreements with OrbiMed, the most recent of which extends through March 31, 2017. We hope you will understand that given the confidential non-going nature of these discussions, we cannot comment further and as a result we’ll not be accepting questions as we normally would and had in the past at the conclusion of this call. We will resume our Q&A on these conference calls when we report first quarter 2017 earnings. At that time, we expect that we will have more information to provide as we expect discussions with OrbiMed to come to fruition. 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 Friday March 10, 2017 at approximately 10

[Carl O’Connell:]

Thanks John. When I joined Xtant last October I was very excited to join the company with such a promising future. I’m very grateful to have the opportunity to lead this incredible team as its new CEO and look forward to growing this company for employees and shareholders. Last night we issued a press release announcing our fourth quarter and full-year 2016 results with record quarterly revenue of $24.5 million that is 9.9% year-on-year growth. The fourth quarter continues to breakout trend we discussed on our call in November, with both financial performance and new product traction continues to improve. Gross margin continues to expand with revenue growth and we reported adjusted EBITDA of approximately $1.2 million. This is tremendous leverage in the income statement as revenue grows past breakeven, and we’re firmly on the path towards generating free cash flow after debt service. We continue to emphasize a distribution channel calling on orthopedic surgeons and neurosurgeons in the United States, who are committed to our hybrid structure numbering more than 350 distributors under contract, representing more than 700 sales reps as of December 31, 2016. We plan to hold steady at about 350 distributors through the first half of 2017, focusing on improving sales performance and overall productivity. In 2015 we launched our portfolio selling program. This activity is based on selling biologics to legacy hardware customers and vice versa. In other words we can grow the business by selling existing products to existing customers and with our existing sales force. As expected, portfolio selling contribution to our overall revenue continues to improve. During the fourth quarter of 2016 we saw 8% of our overall revenue from portfolio selling, a total of $1.8 million. 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 attracted to hospital purchasing systems attempting to reduce the number of vendors they work with and also drive compliance in their systems. Moving forward as a company, we’ll be shifting and paying more attention to becoming an increasingly customer-centric company for both the distributor and the end user. We’re currently focused on optimizing our sales channel to dramatically increase our revenue per distributor, to accomplish this we’ll be pursuing deeper distributor partnerships in addition to running out of our product portfolio. I’m very excited about our new product pipeline to address the nine billion spine therapy category. In the last 18 months we announced OsteoSelect Plus DBM putty, the Aranax Cervical Plating System, the Atrix-C structural allograft implants, the Xspan Laminoplasty System and our distribution agreement with OsteoVive viable cell allograft, a total of five new programs in the past 18 months that address the total U.S. market segment that exceeds one billion combined. These five new products generated approximately $819,000 of revenue in the fourth quarter of 2016, or 3.4% of total revenue. Revenue from these new products will accelerate through 2017 as we train the rest of our sales channel and continue to increase our GPO and IDN on contracting base. We currently have up to 68% of our revenue under a contract platform which continues to grow, improving access for sales channel and value creation for our hospital partners. I’m now going to turn the call over to John to step through the financials after which I’ll close the call with my comments regarding the strategic direction of the company and how I intend to extract profitable revenue growth as of our existing base of business. John?

[John Gandolfo:]

Thank you Carl. Slide Number 7 outlines selective profit and loss statement information for the company for the three and 12 months ended December 31, 2016, compared to the same information for the period ended December 31, 2015. The gross margin improvements were primarily the result of a higher production yield from donors in our biologics division, as well as the higher average sales price for the Company’s fiber and OsteoSelect products. Consolidate total revenue for the three months ended December 31, 2016 was approximately $24.5, an increase of 10%, compared to $22.3 million of revenue for the same period of 2015. Consolidated total revenue for the 12 months ended December 31, 2016 was approximately $90 million, an increase of 4% from pro forma revenue of approximately $86.5 million for the same period of 2015. Excluding OEM revenue from Zimmer consolidated total core revenue growth were 5.9% for the 12 months ended December 31, 2016 compared to 2015. Consolidated gross profit for the fourth quarter of 2016 was $17.5 million or 71.6% of revenue, compared to gross profit of $14.9 million or 67% of revenues for the fourth quarter of 2015. As I mentioned, the gross margin improvements were primarily the result of a higher production yield from donors as well as a higher average selling price for the company’s fiber and OsteoSelect products. For the year, consolidated gross profit was approximately $62.3 million compared with pro forma 2015 gross profit of $56.6 million. Gross margin for the year was 69.2% compared to 2015 pro forma gross margin of 65.4%, a growth of 3.8%. The company defines earnings before interest, taxes, depreciation and amortization or EBITDA as net income loss from operations before depreciation, amortization, impairment charges, non-recurring expenses and non-cash stock-based compensation. Consolidated EBITDA for the fourth quarter of 2016 was a gain of $1.2 million compared to a pro forma loss of $350,000 for the same period during 2015. Full year 2016 EBITDA was a gain of $2 million compared to a pro forma loss of $33,000 in the prior year as shown in Slide Number 8. With respect to our balance sheet which is shown on Slide Number 9, you could see total assets of $144 million were reported at December 31, 2016 and this includes approximately $19 million of net accounts receivable and $27.2 million of inventory. Total liabilities include approximately $70.2 million of convertible debt and $50.6 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 3% and 4% of our outstanding common shares as of December 31, 2016. Slide Number 10 outlines the leverage of incremental revenues once breakeven has achieved. We define breakeven as EBITDA less total cash based interest expense. Essentially, the revenues were acquired to cover our cash based operating expenses and interest expense. Quarterly breakeven occurs at approximately $25 million of revenue. On an incremental basis, after breakeven is achieved, Xtant expects incremental profit margin of approximately 42% as shown on the Slide Number 10. Essentially, for each $1 million of additional revenue after breakeven is achieved, approximately $420,000 or 42% of operating profit would drop to the bottom line. Slide Number 11, outlines our short-term objectives to achieve breakeven, allowing us to generate free cash flow after interest expense on incremental revenues above that breakeven level. Our primary short-term objectives are to grow revenue while maximizing operating efficiencies, which can be achieved through controlling our working capital cash outlays and maintaining our strong expense controls. I’d now like to turn the call back over to Carl to discuss our 2017 guidance and plans.

[Carl O’Connell:]

Thank you, John. The X [ph] of 2017 and beyond will be concentrated primarily on operational excellence while driving and maintaining above market growth. As the new CEO, my management team and I have already identified key areas of opportunity where we can realize significant cost synergies, efficiencies and overall areas of performance improvement contributes to overall profitability. There are still numerous cost saving opportunities that will remain untapped as a result of the integration of Bacterin and X-Spine. A specific examples is the implementation of successful inventory management supply chain controls improve forecasting processes including kit utilization and optimization and reconfiguration driving increased cash flow over this period and well into 2017. Within inventory management, we’re executing changes which will lead to improvements in the accuracy of our product demand forecast, enabling refine timing of inventory to accurately meet customer demand. This would allow Xtant’s provide customers the right product at the right place, at the right time. You may have noticed in our release yesterday that we have slightly reduced revenue guidance for 2017, while maintaining above market growth. This adjustment is a direct result of our current commitment to our new operational excellence programs driving new efficiencies and more profits. Both Xtant’s new CEO, I believe we’ll be a unique and successful player providing with genitive solutions as a true biologics and hard work fixation company. In the short-term, we will focus on operational excellence, stabilizing cash flow and continue to build year-on-year profitability, moving from uncertainty to predictability, establishing sound business fundamentals, capitalizing on a large distribution footprint, portfolio selling and national contract access. And then looking forward creating structure for growth and rounding out our portfolio products. So in closing, I want to thank our employees, sales partners, vendors and financial partners for working so hard to combine these two great companies. As always, we remain committed to the Donate Life Community and our recovery partners. Thank you for joining us today.

[Operator:]

Ladies and gentlemen, this does conclude today’s teleconference. Thank you for your participation. You may disconnect your lines at this time. And have a wonderful day.