Xtant Medical Holdings, Inc.
Q1 2017 Earnings Call Transcript

Published: 13 May 2017

[Operator:]

Greetings, and welcome to the Xtant Medical First Quarter 2017 Results Call. At this 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 your host, John Gandolfo, CFO 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. first quarter 2017 results conference call. With me on the call today is Carl O'Connell, our newly appointed Chief Executive Officer. Yesterday afternoon, Xtant issued a press release announcing first quarter 2017 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, its principal debt holder, about their short-term and longer-term strategy with respect to their investment in Xtant. As you know, to facilitate these discussions, the company has entered into successive interest deferral agreements with Orbimed, the most recent of which extends through May 31, 2017. We hope you will understand that given the confidential and ongoing nature of these discussions, we cannot comment further, and as a result, we'll not be accepting questions at the conclusion of this call. We will resume our Q&A on these conference calls when we have more information to provide and when our discussions with Orbimed have been finalized. In addition, as a result of the ongoing review of the company's capital structure, the company has made a decision to withdraw its previously provided 2017 financial guidance, and we will provide an update to shareholders once the review and related discussions have been finalized. 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, intends 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. 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 Wednesday, May 10, 2017, 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 Carl.

[Carl O'Connell:]

Thanks, John. Last night, we issued a press release announcing our first quarter 2017 results with quarterly revenue of $22.1 million, 5.3% year-on-year growth compared to the first quarter of 2016. First quarter was a transitional quarter for the company, with a change in executive management in January. Gross margin continues to expand with revenue growth and improved operational efficiency, and we reported positive adjusted EBITDA of approximately $577,000 for the quarter. With this 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. On our last call, I mentioned that 2017 would be a year concentrated primarily on operational excellence while driving and maintaining above-market growth. As the new CEO, these were priority projects identified as being vital to the future success of the organization. To that end, my management team and I, coursed implementation plans to work in three key areas of the business, all focused on opportunities for significant cost synergies, improved efficiencies and overall company performance contributing to profitability. These vital priorities have been revising the strategic position and goals of Xtant Medical, optimizing our sales channel and improving our inventory utilization programs. First, we are focused on expanding our portfolio, providing additional surgical options and specifically addressing regenerative care technology delivered to patients for better outcomes. This is a combination of elevating our premium Biologics portfolio and accompanied with enhanced fixation products that are more supportive to regenerative response within the patient. For initial positioning of this new strategic initiative, the majority of our year-on-year growth has been generated by an increase in revenue from Biologics catalogs. 3Demin, our proprietary, cortical fiber-based allograft, which has been discussed on previous conference calls, has achieved promising results, generating $1.56 million of revenue in first quarter of 2017 or 71% growth compared to $900,000 of revenue in the first quarter of 2016. We also launched OsteoVive last year, which is a viable cell allograft. This product was introduced to top customers in late June of last year and is our fastest growing revenue category within our Biologics portfolio. I think it's also worth noting that our flagship allograft, OsteoSponge, also saw double-digit growth in comparison to first quarter of 2016. Much of this success has been attributed to modifying our portfolio selling strategy, by sharing our regenerative care model with our distribution partners and targeting channels for expanded biologic revenue proliferation. Our near-term strategic initiatives include, expanding upon these successes even further and quickly addressing gaps within our current portfolio via licensing opportunities. We're in the final stages of negotiations with a few of these technologies, and we're excited to share additional detail with you in the near future. To drive sales optimization, we promoted Chris Valois, Xtant's Medical Vice President of Marketing to the position of Vice President of Sales and Marketing. Chris has extensive commercial background in the orthopedics space, previously working at Zimmer Spine and Tornier, which was recently acquired by Wright Medical. He has been a key member of our leadership team since 2015. His experience within the company as the leader of the marketing team has been a key driver to maintain strong relationships within our existing sales channel. We've also expanded our national accounts team, adding a Director of National Accounts in March and creating a new strategic position focused on enhancing our technical support provided to key integrated delivery networks. We've executed nine new IDN agreements in the first quarter of 2017, enabling to begin scheduling cases with these health systems, which translates to new customers. Another key element of our sales channel optimization initiative has been building upon the support system in place for our top distributor partners. In looking at our top ten distributors, their revenue grew on average 44% year-over-year, generating 60% of our commissioned revenue. Part of our plan for 2017 includes expanding these results-producing initiatives to over 300 distributors under contract to distribute our products. Our sales channel optimization strategy is committed to increasing the value we can deliver to hospitals, surgeons and to patients. The third vital initiative implemented in the first quarter of this year is inventory performance improvement. Making our capital assets work better for our business. These efficiencies have allowed for additional cases to be performed with fewer sets deployed in the field, bringing up inventory for the needs of a larger distribution network and reducing the capital investment required for additional sets. We're further improving our forecasting performance with the sales channel, which is driving this improvement as well. 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 we intend to extract profitable revenue growth out of our existing base of business. John?

[John Gandolfo:]

Thank you, Carl. Slide Number 8 outlines selected profit and loss statement information for the company for the three months ended March 31, 2017, compared to the same information for the period ended March 31, 2016. Consolidated total revenues for the three months ended March 31, 2017, was approximately $22.1 million, an increase of 5.3% compared to $21 million of revenue for the same period of 2017 [ph]. Consolidated gross profit for the first quarter of 2017 was $15.5 million or 70.3% of revenue compared to gross profit of $14.1 million or 67.2% of revenues for the first quarter of 2016. The gross margin improvements were primarily the result of a higher operating yield for the company's Biologics products and the continuing focus on reducing supply cost while maintaining control over inventory. The company reported a loss from operations of $1.9 million compared to a loss from operations of $2.4 million in the first quarter of 2016. Net loss for the three months ended March 31, 2017, was $5.2 million compared to a net loss of $5.6 million in the first quarter of 2016. The company defines earnings before interest, taxes, depreciation and amortization, or EBITDA, as net income loss from operations before depreciation, amortization, impairment charges, nonrecurring expenses and noncash stock-based compensation. Consolidated EBITDA for the first quarter of 2017 was a gain of $577,000 compared to a pro forma loss of $145,000 for the same period during 2016. As part of our objective to focus this year on maximizing EBITDA, we will be continuing with an aggressive cost reduction program over the next few months, so we can exit 2017 with a highly efficient model that will provide a platform for growth in 2018 and beyond. Turning now to our balance sheet. Total assets as of March 31, 2017, included approximately $2.5 million of cash and cash equivalents, $16.3 million of net accounts receivable and $27 million of inventory. Total liabilities includes approximately $70.6 million of convertible debt and $51 million of long-term debt due to Orbimed. In addition, at March 31, 2017, the company had approximately $10.3 million outstanding on its accounts receivable credit facility with Silicon Valley Bank. Slide Number 11 outlines the leverage of incremental revenues once cash breakeven is achieved. We define cash breakeven as EBITDA less total cash-based interest expense. Essentially, the revenues required to cover our cash-based operating expenses and interest expense on our senior and convertible debt. After the planned cost reductions, we expect quarterly breakeven to occur at approximately $24.2 million to $24.5 million of revenue. On an incremental basis, after breakeven is achieved, Xtant expects an incremental profit margin of approximately 42%. As Slide Number 11 shows, for each $1 million of additional revenue after breakeven is achieved, approximately $420,000 or 42% of operating profit will drop to the bottom line. Slide Number 12 outlines our short-term objectives to achieve breakeven allow us to generate free cash flow after debt service on an incremental revenue above breakeven. Our primarily short-term objectives are to grow revenue while maximizing operating efficiencies, which can be achieved through working capital - through control in working capital cash outlays and maintaining strong expense controls. I'd now like to turn the call back over to Carl to discuss our plans for 2017.

[Carl O'Connell:]

Thank you, John. In summary, discussions with our major financial sponsors are progressing, and we are confident that they will come to resolution in the near future. We have core competencies and strengths within the Xtant organization, which I believe will be key components of our successful future. We're making appropriate and necessary changes to the organization, which will be essential for delivering continuous year-over-year results that I trust our shareholders have come to expect. This is also going to include some additional cost saving initiatives and finalizing the integration of Bacterin and X-Spine. We're committed to maximizing EBITDA and cash-based profitability. Our fourth quarter 2017 goal is to generate positive EBITDA in excess of $2 million. We'd like to thank our financial sponsors, investors, distributor partners, suppliers, customers, surgeons, employees and our recovery partners for the ongoing support, as we drive change for the long-term performance of the organization. Thank you.

[John Gandolfo:]

Thank you, everyone.

[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.