Xtant Medical Holdings, Inc.
Q1 2013 Earnings Call Transcript

Published: 10 May 2013

[Operator:]

Greetings and welcome to the Bacterin first quarter 2013 earnings conference call. At this time all the 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, Mr. Rich Cockrell. Thank you. Mr. Cockrell, you may begin.

[Rich Cockrell:]

Thank you and good morning, and thank you for joining us today for Bacterin’s first quarter 2013 financial results call. On the call with us today are Kent Swanson, Bacterin's Chairman; John Gandolfo, Bacterin's CFO and Interim Co-CEO; Darrel Holmes, Chief Operating Officer and Interim CEO; and Molly Mason, Vice President of Marketing. Yesterday afternoon the company issued a press release announcing first quarter 2013 financial results, within which the company reported revenues of $8.6 million was an 11% increase over the reported first quarter of 2012. Today’s call is being made available to a broader audience via the company's Investor Relations website which you can visit at investor.bacterin.com. Following remarks by management, we will open the call to 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 future performance. These forward-looking statements reflect Bacterin’s current perspective on existing trends and information 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 a guarantee of the company's future performance and involve risks and uncertainties, including those noted in the Risk Factors section of the company’s quarterly filings on Form 10-Q, which will be filed later today. Actual results may differ materially from those projected in these forward-looking statements. For the benefit of those of you who may be listening to the replay, this call was being held and recorded on May 10, 2013 at approximately 10 a.m. Eastern time. Since then, the company may have made statements regarding their performance, please reference the company’s most recent press release and current filings with the SEC. Bacterin declines any obligation to update these forward-looking statements, except as may be required by applicable securities laws. And with that, I’d like to turn the call over to Kent Swanson. Go ahead, Ken.

[Kent Swanson:]

Thanks, Rich. Good morning. As Rich said, my name is Kent Swanson and as you may know, I am currently acting as the Board Chair for Bacterin International. We appreciate your interest in the company and thank you for taking the time to join us on this call today. I would like to begin by thanking Guy Cook for his many years of dedicated service to this company. His departure was his choice and was quite amicable. He is still our largest shareholder and he has assured us that his interests are aligned with Bacterin and those of our other shareholders. Guy left behind a significantly strengthened company. Many years of rapid growth had put Bacterin beyond the capabilities that were put in place ten years ago. With board approval in 2012 alone, Bacterin made significant progress in doubling its world class manufacturing capacity to accommodate over $100 million in sales revenue. We have also implemented new systems for financial management, inventory control, reduction planning and sales force management. These investments were significant and were made to position the company for growth over the next five years. Having said that, we also recognize that consistently missing revenue guidance over the last two years was and is unacceptable. The board and Bacterin's leadership are fully committed to correcting this issue. The new system, the expanded production capacity and strengthened sales force will help, but the most important element for profitable growth will continue to be Bacterin's products. They are superior in the market we serve. Most importantly employee morale is strong, our customer base has remained stable and is improving. And finally, we look forward to hiring a experienced CEO with a proven track record to build on the foundation that is put in place. John Gandolfo will now go into detail about our results. John?

[John Gandolfo:]

The first three months of the new year saw positive growth for Bacterin, as we successfully executed strategies formed at the end of last year to combat a competitive and a wobbling healthcare environment. Throughout 2012, we introduced ten new allograft product lines into the market place, thereby developing a more robust portfolio of regenerative biologics that address the spectrum of specialty biologic needs. At the end of February we announced the additional of ISO certification for our biologics division, this certification strengthens our commitment to quality and customer service. We have reduced our projected fixed cost during the first quarter through a previously announced reduction in our workforce and we are currently analyzing the structure of our sales organization to focus on a more variable compensation oriented approach than we currently have in place. This will appeal to our more accomplished sales people and reduce the high fixed salary contributions to sales and marketing expenses. As of March 31, 2013, we had 51 full time employees in our direct sales force. On March 31, 2013, we had finished goods inventory of approximately $7 million in retail value on consignment at our hospital accounts which we expect to turn into future revenues. In addition, our current donor inflow of 40 per month is sufficient for us to meet our revenue objectives. After a slower than expected fourth quarter of 2012, we were able to see the value of strategies implemented last year through an 11% increase from revenues year-over-year and a 8% decrease in sales and marketing expenses over the first quarter of the previous quarter. In the first quarter, we generated approximately $8.6 million of revenues compared to $7.8 million in the first quarter of 2012. During the quarter, we were able to maintain gross profit margins of approximately 64%. The increased revenue includes the stocking order to a major distributor with domestic and international relationships which was signed during the first quarter. And we expect this will provide increased recurring revenues in the quarters to come. And after a lackluster end to 2012, for 2013 we have responded with solid growth. We are implementing policies and renewing our focus on processes that will allow us to be more nimble and gain market share, especially in the markets where our products have been proven superior. While the biologics market continues to be increasingly crowded with competitive products and there have been a proliferation of distributorships that seek to enter the market, our strategies have put us in a position to capitalize on the quality of our products. With healthcare reform creating a price sensitive environment, which has caused intense pricing pressure in the marketplace, our ability to decrease our fix sales expenses will be key to our future profits. In 2013, we are looking to counter the price sensitivity by, number one, aligning our sales force to work with certain channel partners that will help further penetrate and grow our market share. We have begun making progress in this area with a relationship developed with the stocking distributor during the first quarter, as well as becoming a preferred vendor for a West Coast hospital chain with 40 hospitals. Number two, we are looking to also bundle products to enhance our customer offerings in order to stabilize pricing and margins by entering into single source and dual source agreements. And three, we are instituting a renewed focus on our marketing activities to emphasize education about biologics in general, our products as well as their clinical success. In summary, Bacterin will continue to distinguish itself as a leading company in regenerative medicine through relentless focus on service and innovation. Our goal is to provide biologic products that are essential to improving the quality of life of patients around the world and are well regarded and preferred by the medical community and surgeons. At this time I would turn the call over Darrel Holmes, to review our current operations and provide a regulatory update. Darrel?

[Darrel Holmes:]

Thank you, John, and good morning. From an perspective, a large part of our focus was attributed to the expansion of our processing and manufacturing facilities to address future growth. The additional biologics processing clean room project is now 90% complete. With our current processing capabilities, we are able to support existing demand for our products by processing 40 donors per month with a focus on producing our distinguished allograft as well as traditional grafts that complement our overall product portfolio. The specialized tissue bank with our direct and independent distributor model, our focus on these proprietary allografts allows us to maximize the gift of donation while providing us with the most competitive position in the ever expanding biologic arena. We are also pleased to announce we have recently signed an agreement with an AATB accredited tissue bank for tissue recovery. Another partner we are very excited to have the opportunity to work with. As part of this partnership, we are excited to ensure, biologics are returned to their community to assist with the medical needs of their hospitals, surgeons and patients. In addition to our goal of increasing education as it relates to biologics and our products, we are equally committed to increasing awareness of the gift of donation and expanding avenues in which we can further support our tissue recovery partners. With our current partnership and the addition of this new relationship, our focus in the future is the expansion of our donor services facilities and preparation for increased donor receipt. This has been a busy quarter for our quality and regulatory department as well, successfully accomplishing multiple recertifications. In addition to passing our American Association of Tissue Banks re-accreditation inspection, we also expanded our ISO 13485 certification to include our biologics division, thus making Bacterin ISO certified companywide. Achieving companywide ISO certification is a significant milestone for the company as it speaks volumes to our promise of having world class quality systems in place. In terms of its global recognition, this certification should enable us to increase our international distribution abilities as well. We also hosted an audit with the Korean FDA in support of our ongoing relationships with our distribution partners in Korea. These recertifications highlight our commitment to our quality systems, our relationships various regulatory establishments showing our commitment to providing products that are safe and clinically effective. To briefly provide an update regarding the two warning letters we received in the first quarter of 2013. We have submitted timely responses to the FDA and have received initial confirmation that our actions have been appropriate in addressing their concerns. We respect that process as it provides us an opportunity to improve our quality systems and we are confident these will be fully resolved in the near future. We also provided an initial response to the OIG subpoena and are not [reading] things further on this matter. Bacterin continues to develop new products and the intellectual property associated with these endeavors. In Q1 2013, we filed three patent applications related to our product development efforts in the medical device codings and orthobiologics space. Additionally, we have spent significant effort improving our processing methods and capabilities to ensure the highest quality products possible. From a clinical perspective, we continue our commitment to demonstrating clinical efficacy for our products. The Journal of Foot and Ankle Surgery published an article documenting 97.5% fusion rates using our OsteoSponge product for foot and ankle arthrodesis in a respective review. We have multiple studies underway and we hope to have additional peer reviewed publications in the coming year, highlighting clinical efficacy of our products. Lastly, our OsteoSponge SC registry has been successful at last with first patient enrolled. We are excited to have the registry officially underway and had very been pleased with the results associated with the use of OsteoSponge SC to address subchondral defects in articulating joints. Thank you, and at this time I would like to turn the call back over to John for a review of our financial results.

[John Gandolfo:]

Thank you, Darrel. Turning to a review of our financial results, I would like to remind our listeners to refer to the first quarter earnings press release which was issued yesterday, and also your Form 10-Q for the period which is expected to be filed today. As I previously mentioned, we were able to increase our quarterly revenues from $7.8 million in 2012 to approximately $8.6 million this year. The increase of $800,000 was largely the result of a large order placed by a new distributor during the first quarter. Gross profits decreased 7% to $5.5 million over the first quarter of 2012. Our gross margin percentage for the quarter was 64% and was impacted by sales mix and pricing. Excluding the $1.3 million stocking order, gross margins in the first quarter of 2013 would have been 67%. Sales and marketing expenses decreased to $3.8 million during the quarter, compared to approximately $4.1 million for the first quarter of 2012. As a percentage of revenue, selling and marketing expenses decreased to 44% in 2013 from 53% in the first quarter of 2012. The decreases were primarily the result of more variable compensation paid to our direct sales force compared to fix salaries earned in the comparable period of 2012, as well as the lower corporate sales commission structure for direct sales reps and independent distributors. General and administrative expenses for the quarter increased to approximately $2.9 million as compared to approximately $2.6 million in the first quarter of 2012. General and administrative expenses consist principally of corporate personal, non-cash based stock option compensation related cost and corporate expenses for legal accounting and other professional fees, as well as occupancy costs. In addition, we incurred high administrative cost supporting the higher revenue in addition to added rental maintenance expense or increased operational expense. First quarter operating expense was $6.7 million compared to operating expense of $7.2 million in 2012, a decrease of 6%. Net loss for the quarter was $1.7 million or $0.04 per basic share, and this compares to net loss of $1 million or $0.03 per basic share for the first quarter 2012. EBITDA for the first quarter of 2013 was a loss of $1.1 million compared to a loss of $500,000 in the first quarter of 2012. As we announced on the last earnings call, we implemented a companywide expense reduction program to align our expense levels with our 2013 revenue guidance. We anticipate that this program will reduce our expense levels by $1.7 million for 2013 as well as additional $1.3 million of planned expenditures which will be deferred and not be made. The reductions are across all of the departments within the company. And we will continue to seek efficiencies in our expense levels in order to achieve our goal of profitability. If we are able to achieve our previously issued revenue guidance of $38 million to $40 million for 2013 as well as our cost reduction plan, we expect to be EBITDA and cash flow positive during the second half of the year. At March 31, 2013, we had $2.1 million in cash and cash equivalents and $7.2 million in accounts receivable. Based upon the achievement of our revenue objectives, we feel that we have sufficient liquidity to execute our strategy. However, it doesn’t provide us a lot of cushion. Accordingly, we are currently reviewing a number of alternatives to generate additional cash for the company and strengthen our balance sheet. We have strategies in place and in development that are focused on overcoming market forces and pricing pressures. We are also going to emphasize reeducating our customers on the superiority of our products from a quality and price standpoint. As a result of our continued innovation and efforts to enhance commercialization domestically and internationally, we continue to grow despite increased competition and pricing pressure. For a more detailed and complete analysis of our first quarter results, I would like to direct everyone to our Form 10-Q which we plan to file with the SEC later today and which will be available at www.sec.gov and via our website. Actually, before I turn the call over for questions and answers to the operator, I think it's important that I highlight what the key drivers are going to be from sales standpoint over the short term. Number one, we are going to look to continue to grow our core hospital business. Two, we are looking to convert all of our stocking order surgeons from the recent transaction, and that process has already begun as in April we have already converted 4 of the 21 surgeons that we look to convert to Bacterin in the future months. Number three, we are looking to continue with the conversion of the west coast hospital chain hospitals. This too has begun and 19 of the 40 have been approved with surgeons beginning use at those locations. Number four, we are going to look to develop new stocking and non-stocking distributor relationships. In the first quarter alone, we were able to develop our relationship with two new, smaller scale stocking order distributors in Texas which came on board. We have also added slow moving inventory products to our GPL agreements in the hopes of accelerating the sale of these products. And, finally, we are looking to reengage the lost accounts in hopes of winning back business with our superior product quality. Operator, you could now turn the call over for questions, please.

[Operator:]

(Operator Instructions) Our first question comes from the line of Greg Garner with Singular Research. Go ahead with your question please.

[Greg Garner:]

I appreciate the overview in the quarter and the changes there occurring. Couple of areas I just wanted to address. First of all, the first time I heard pricing pressure was in the last call of fourth quarter 2012. So I just wanted if I could get a view on how it is in the marketing landscape out there? If there is a number of competitors or if there is one particular one, or what kind of pricing concessions are being asked for? So if you could just comment about the education to the customer base, so this is the strategy that Bacterin is taking out to really educated the marketplace on the efficacy of OsteoSponge? And what kind of reception is going on there? So if you could just cover that a little bit more.

[John Gandolfo:]

Yeah. Thank you, Greg. I am going to have Molly Mason, who is our Vice President of marketing handle that. Molly, you want to take that question please.

[Molly Mason:]

Absolutely. With regards to some of the pricing pressure, there are multiple competitors in this space. Because when you are considering all those biologics in addition to ones that may compete with a putty or with a compressible like allograft, you also have to keep in mind that there has (inaudible) products and other allografts that can be used in those forms as well. So there are additional competitors (inaudible) in play. We are confident with our products just because of the science that we have within our technologies. The clinical efficacy that we have been show through studies and publications. And with regards to the education factor, we are committed to educating not only surgeons and our distributors and reps but also the importance of educating health system, from administrators within the hospital on how our products can help drive down cost while maintaining a high level of safety and efficacy. And then also training and educating material managers in purchasing. So we are trying to just kind of initiate a full global education process, if you will.

[Greg Garner:]

Okay. And as I recall year there was a -- well, first upon the pricing pressure, are you hearing if you just dropped your price 10% or 20%, will go for it or it has been of a (inaudible) activity to we really need that highest efficacy because (inaudible) products don’t have a lower percentage of efficacy. I am just wondering where is the general attitudes you are hearing from the hospitals administrators or I would think the surgeons just want to have something to make sure it works. But the hospital admin or do you feel they are probably more price sensitive.

[Molly Mason:]

Absolutely. And we are even finding surgeons that are focused on making sure the price point is adequate for their use as well. For the price pressure, we do have very aggressive pricing with our GPO contract. We do have some instances that require us to slightly better, such as another 10% off on what our GPO pricing would be. And for those situations, we try to support aggregate spending. So for example, working with an integrated [liberty] network, try to get system wide usage and in exchange for that they get better pricing for supporting us. For example, like where John was mentioning the West Coast system with 40 centers, because they are adopting us system wide, sometimes those situations garner better price points.

[Greg Garner:]

And with respect to the sales force and admitting the morale is high, can you give us a sense on where the morale is in sales force with change of the leadership, that factor and also the challenges in moving a product into different GPOs or having additional surgeons adopt the product.

[John Gandolfo:]

Yeah, I think across the entire sales force, the morale continues to be high. We haven’t lost any sales people when Guy resigned. So everybody from a sales force standpoint is still intact and morale does continue to be high. The thing that we are doing on the sales force structure right now, is really looking to analyze the structure we have in place which does have a high fixed cost component. And what we are looking to do with it, whether it model needs to be tweaked or modified in light of all the pricing pressure we are getting. So that becomes more variable cost focused and less of a burden on the fixed cost side. Now with that said, you know the objective is to continue to grow revenues in a more efficient manner, it’s not to reduce sales and marketing expenses. So we have had number of meetings over the last few days, going through that detailed analysis. And I expect, in very short order, that we are going to come with a consensus of what we believe the right structure is going forward. But to get to your point, overall, I think that we are making a number of inroads, like the ones I highlighted prior to turning over to the question session. So we are pretty optimistic about the future that we see, not only over the long term but over the short term as well.

[Greg Garner:]

Okay. And just one product question and I will turn it over to the others in the queue. The hMatrix product has received the Medicare code this year. Any report on the progress in the first quarter there? Anything you can, help us look on?

[John Gandolfo:]

Yeah, Molly, do you want to address how the hMatrix product is being received in the marketplace.

[Molly Mason:]

Sure. With regard to your specific question, we did receive our Q code in January of this year. We are still working with CMS with regard to getting the reimbursement prices and rate for those, for usage. In Q1 of this year, we did approximately 430,000 of that product and in Q4 it was 270,000. So we are up quite a bit and we look to continue to increase the adoption of that product in the marketplace.

[Operator:]

Our next question comes from the line of Matt O’Brien with William Blair. Go ahead with your question please.

[Unidentified Analyst:]

This is [Caroline] in for Matt. So operating results this quarter came in a bit below our expectations. I know you had mentioned a few of the cost efficiency program that should help improve this metrics in the coming quarters. But could you just elaborate a little bit on what gives you the confidence in your guidance to achieve positive operating income and EBITDA for the year.

[John Gandolfo:]

Well, the main driver of that is going to be the revenue growth and the things that I highlighted. Not only growing our core business but expanding upon the relationships that we put in place with the stocking order distributor as well as the West Coast hospital chain. You know the potential of those two relationships could grow into the high single millions to $10 million plus over a period of time. So that’s obviously going to be key to our growth. So it’s hitting or exceeding the top line guidance of $38 million to $40 million. In addition we expect on the G&A side with the cost reductions we have put in place, what we expect to see is reduction somewhere in the neighborhood of $200,000 to $300,000 per quarter. And when you factor that in with what we are looking to get in terms of reorganizing the sales structure, we feel pretty good that once we hit the revenue targets that we have outlined on a quarterly, that we will have positive operating income and cash flow.

[Unidentified Analyst:]

That’s helpful. And then just on the overall market. I know you mentioned last quarter that you are seeing increased competition from PODs. Are you seeing any hospital shifting away from PODs due to a recent issued fraud alert or do you continue to feel pressure from these entities.

[John Gandolfo:]

I believe that it depends upon the markets, but, Molly, you could probably address that in a little more detail as to what we are seeing across the markets.

[Molly Mason:]

Sure. Some hospitals systems, they are putting rules and policies in place with regards to allowing PODs or disallowing PODs to distribute allograft or products in to their facilities. And so will obviously work closely with those entities. And we are finding it, it tends to be more territorial on where PODs are succeeding and where hospitals are okay with them. Again, I think it really depends on how the POD is set up and ensuring that they are within the regulatory guidelines that are currently in place for allowing PODs. It remains to be a regulatory climate decision, it's ongoing at this time.

[Operator:]

Our next question comes from the line of Nathan Kelly with Noble Financial. Go ahead with your question please.

[Nathan Kelly:]

[Count of] reps in place, how many do you have and what are your expectations for the end of the year?

[John Gandolfo:]

Currently as I mentioned, we have 51 full time equivalents in the sales force. I really can't answer the second part of that question because as I mentioned we are going through this detailed analysis. So it depends upon what comes out of that sales structure analysis that we are doing as to how many we expect to have. Plus the possibility exists that we see more growth on the distributor side than the direct sales side. So you know we are probably going to be modifying the current model that we have in place. So it's difficult for me to give you what I expect it to be at the end of the year, until we come up conclusively with what the sales structure will look like.

[Nathan Kelly:]

What was the number at the end of the year in 2012, as far as the reps?

[John Gandolfo:]

54.

[Nathan Kelly:]

Okay. That was higher than that. Okay. And then as far as your strategy to hire a CEO, I know you guys have discussed that a little bit. Could you give us any color on how that’s going and sort of a timing that you guys have planned there to get somebody hired in a certain amount of time or how are you looking at that?

[Kent Swanson:]

Yeah, I could probably answer that. We already have a search committee on the board of directors which is handling the search along with Dan O’Hara, who is the outside search firm. And the process is already underway. I have already seen probably five or six resumes of potential candidates and there is bi-weekly meetings going on between the committee and Dan. So you know the timeline is difficult to figure out but from our company standpoint, we are looking to do it as soon as possible and as soon as we get the right candidate in place. Based upon preliminary discussions with Dan, it's generally a process that takes probably 90 to 120 days to give you some idea from the start. So that’s probably the type of timing that we are looking at, but if the right candidate comes along it certainly could be shorter than that.

[Nathan Kelly:]

And then you discussed pricing pressures, with that in play, what's kind of your expectations of margins? Do you expect them to be somewhat variable until you get things more ironed out here as far as your strategy goes?

[John Gandolfo:]

Yeah, if I were to put a range on the margins, I would say that they are probably going to come in, if I were to ballpark it, I would say somewhere between 62% on the low end maybe up to 68% on the high end. And that will depend upon how many stocking order, distributor sales that we do in the future, as well as what the pricing is coming through some of the GPO relationships that we have as well.

[Nathan Kelly:]

And then just one final question and I will jump back in the queue. On the stocking order situation, just want to get some color on that. Because previously your strategy was to more away from those because you had quite a bit of returned product and had to write that product off. How are you guys eliminating that risk as much as possible when you are moving more towards the stocking order situation again? Any color on that?

[John Gandolfo:]

Yeah, I think that we are doing much more due diligence on the entities that we would consider doing stocking order sales with. Also in terms of payment, we are looking for a large upfront payment or a guarantee to be placed on the receivable. And going forward I am not sure that we are going to be doing lot of stocking order sales. I think if the right relationship comes along and the company thinks that is prudent for us to do, then we will look to continue to do it. But I wouldn’t be surprised if we don’t see as much growth coming from the stocking orders going forward. But the main things we are looking to do is make sure that the receivable will be collected in timely fashion from the relationships that we are developing there.

[Nathan Kelly:]

Okay. Thanks. And then just one more question, actually. On OsteoSponge SC, you mentioned the registry was underway. When do we expect that sort of timing of that trial to progress? When do we expect data, when you guys expect to complete that study and so forth. Give us a little color on that?

[John Gandolfo:]

Molly or Darrel, do you want to take that question.

[Molly Mason:]

So we have been seeing preliminary results to OsteoSponge SC outside of the registry and it has been very positive. We have enrolled our first patient in the registry in March and we anticipate to have all 75 patients enrolled and hope to get some published data within the next year or so.

[Operator:]

(Operator Instructions) Thank you. There are no more questions at this time, I would like to turn the floor back over to Mr. John Gandolfo. Thank you.

[John Gandolfo:]

Thank you. And in conclusion, I just want to continue to thank all of our shareholders for that continued interest in the company. We realize from management team and board standpoint that it's been a challenging time but we feel very optimistic about our future base from where we stand right now. And we just want to thank you for your continuing support. We could end the call now, operator, please.

[Operator:]

Thank you. This will conclude today's teleconference. You may disconnect your lines at this time. We thank you for your participation, have a great day.