Xtant Medical Holdings, Inc.
Q2 2013 Earnings Call Transcript

Published: 7 Aug 2013

[Operator:]

Greetings and welcome to the Bacterin Second Quarter 2013 Results Conference 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. It is now my pleasure to introduce your host, Rich Cockrell. Thank you, Mr. Cockrell. You may begin.

[Rich Cockrell:]

Thank you and we appreciate you joining us today for the Bacterin’s second quarter 2013 financial results call. With us today are Kent Swanson, Bacterin’s Chairman; John Gandolfo, Bacterin’s CFO; Darrel Holmes, Chief Operating Officer; and Molly Mason, Head of Marketing. Yesterday afternoon, we issued a press release announcing second quarter results, within which we reported revenues of approximately $8.3 million for the quarter and $16.9 million in revenues over the first half of 2013. Today’s call is being made available to via the Investor Relations section of the Company’s website at investor.bacterin.com. Following the remarks by management, we will open the call up to your questions. We expect 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 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 certain risks and uncertainties, including those noted in the Risk Factor section of our SEC filings. Actual results may differ materially from those projected in these forward-looking statements. For the benefit of those of you who maybe listening to the replay this call is being held and recorded on August 7, 2013 at approximately 10

[Kent L. Swanson:]

Thanks Rich and good morning everyone. I want to begin by welcoming Daniel Goldberger as our new CEO. We are extremely pleased that Dan has agreed to join Bacterin, and we expect him to starting his new role next week. Dan joins us with a wealth of commercial experience in the medical space, and an exceptional track record of growing businesses of our size. Additional information on his experience and background is contained in the Form 8-K filed this morning. We have made the solid progress this quarter with riding the ship at Bacterin. We continue to find opportunities that streamline costs and enhance sales. Our leadership team has been resilient through the transitions we’ve experienced over the three months since our previous CEO departed. We have managed our business through an FDA warning letter, an OIG inspection, assumptions of all the responsibilities of our previous CEO, all this in an environment of increased market competition and pricing pressure. Despite those factors, our employees with the guidance of our leadership team has remained focused on maintaining our business and executing on strategies to position the Company for future growth. I believe that, we now have the right CEO, the right leadership team, the right employees, and the right product to drive growth and achieve profitability. I’d like to turn the call over to Darrel Holmes, who will provide you with further details on the quarter.

[Darrel L. Holmes:]

Thank you, Kent. With the sudden transition that company face at the beginning of Q2, our management goals were to focus on stabilizing the organization and providing the foundation we would need for continued success. This included, reaching out to some former customers to regain business and strengthen our relationship with core health systems that have been paramount to our growth historically. We also spend time working with our larger independent delivery networks or IDNs to understand their approach to selecting biologic scalpels. We are developing metrics to work more closely with healthcare administrators throughout this process. Our goal of each provide them with continuing eduction as needed and aims to position ourselves as a preferred biologic supplier based on cost value assessments, and published clinical efficacy. We are implementing in each strategy that will enhance sales in underserved markets. We have been highly focused on targeting distribution partners that have existing relationships with surgeons and facilities, personnel as well as experience with biologic scalpels. We also initiated a strategy earlier this year focused on eduction for trained biologics relative to the value proposition of our product. And we have continued to this platform relying on clinical evidence and published outcomes to help guide product selections and adoptions. Because of this evidenced based medicine, we have also revisited some pricing contracts that were out of line with where we wanted to be and were successful in renegotiating some of these agreements. Our customers and patients continued to be our first priority. We are continuing our discussions with the FDA with respect to the previously disclosed warning letters and these matters remain a priority for the management team. We are confident that the issues will be resolved. With regards to the OIG subpoena we had no new updates to include at this time. With regards to new products, Bacterin has recently received an additional indication for our OsteoSelect DBM Putty for spinal fusion. Bacterin provided funding to the hospitals with special surgery in New York to perform a study evaluating the efficacy of OsteoSelect in preclinical model. The results of this study indicated that OsteoSelect is equivalent to autologous iliac crest bone graft, which is widely considered to be the gold standard for spinal fusion. This clearance will allow us to market our Putty specifically for use in spinal fusion procedures and to expand product usage within the significant market segment. Now, I’d like to turn the call over to John.

[John P. Gandolfo:]

Thank you, Darrel. I’d like to remind our listeners to refer to the second quarter earnings press release issued yesterday, and also our Form 10-Q for the period, which is expected to be filed later this week. For the second quarter, revenues were essentially flat increasing 1% from $8.2 million in the second quarter of 2012 to approximately $8.3 million reported for the second quarter of this year. The increase was primarily attributed to higher volume sales, which were partially offset by lower sales prices resulting from discounting associated with higher volume distributors. For the first six months we were able to increase revenue from $15.9 million in 2012 to $16.9 million in 2013, a 6% increase. Second quarter revenues, excluding distributing stocking orders, were $8.3 million and increased 13% over the first quarter of 2013. It is important to note here that we are seeing strong indications of the stabilization of revenue generated from our core hospital business. And as Darrel mentioned, we are having success in winning back previous customers as evidenced by the sequential revenue growth of that core business. Gross profit decreased 20% to $4.7 million over the second quarter of 2012 as a result of decreased prices in the face of increased competition. Gross margin for the period was 57%, which compares to a gross margin of 72% reported for the same period last year. During the quarter, the Company took a charge of approximately $500,000 associated with the write-off of expired products primarily related to an improvement being made to our hMatrix manufacturing process, which we expect to result in an improved product in the future. Excluding this charge, gross margins in the quarter would have been 63%. The first six months of 2013 saw gross profit of $10.2 million, compared to $11.8 million for the same period of 2012. Gross margins for the first six months were 60% in 2013 compared to 74% in 2012. Sales and marketing expense for the second quarter increased to $4.2 million as compared to $3.8 million for the same period during 2012. As a percentage of revenues, selling and marketing expenses increased to 51%, which compares to 47% reported for the second quarter of 2012. The increase was primarily the result of higher personnel costs incurred prior to the recent reduction of headcount as well as increased administrative fees for GPO Contracts, which were initiated during the third quarter of 2012. In addition, we did incur $103,000 of severance costs associated with headcount reductions announced during the second quarter of 2013. The first six months of 2013, sales and marketing expenses remained flat at $8 million compared to the prior year. As a percent of revenue, the first six months of 2013 sales and marketing expense represented 47% of revenues as compared to 50% in 2012. General and administrative expenses for the quarter were approximately $2.3 million and were unchanged relative to the comparable period during 2012 and this represents 27% of revenues in 2013 and 28% in 2012. G&A for the second quarter included $164,000 of non-recurring severance costs associated with the previously announced headcount reduction as well as $125,000 of non-recurring expenses associated with a legal settlement. For the first six months of the year, G&A increased modestly to $5.1 million, which compares to $4.9 million for the first half of 2012. General and administrative expenses consist principally of corporate personnel, non-cash based stock option compensation related costs, and corporate expenses for legal, accounting and other professional fees, as well as occupancy costs. Operating expenses for the period was $6.6 million, compared to operating expense of $6.2 million in 2012, an increase of 5%. The first six months total operating expenses decreased from $13.4 million in 2012 to $13.3 million in 2013. Net loss for the quarter was $2.5 million or $0.05 per basic share and this compares to net income of $730,000 or $0.02 per basic share for the second quarter of 2012. It’s important to note that the second quarter of 2012 net income included a decrease in non-cash warrant derivative liability of approximately $1.3 million. Over the first six months of 2013 net losses have been $4.2 million, or $0.09 per basic share and this compares to negative $316,000, or $0.01 per basic share in 2012. EBITDA for the second quarter of 2013 was a loss of $1.4 million, which compares to breakeven EBITDA last year. However, when excluding the write off of inventory of approximately $500,000 and severance expenses associated with the headcount reduction of $267,000 EBITDA for the period was a loss of $637,000. We feel we are continuing to make progress on our cost reduction initiatives and we expect to begin seeing benefits from these reductions over the second half of 2013. At June 30, 2013, the Company had $5.1 million in cash and cash equivalents and $6.2 million in accounts receivable. Having completed our recent equity financing of $4.5 million of net proceeds we believe we have sufficient liquidity to execute on our strategy. In consideration of the challenges that we did face in the first half of the year and the transition of our leadership as Dan starts as our new CEO, we feel it’s prudent to not reiterate our guidance for 2013 at this time. We will continue to execute on our strategies and remain optimistic about the opportunities in front of us and this includes the conversion of new sales strategies that we are pursuing. For a more detailed and complete analysis of our second quarter results, I’d like to direct everyone through our Form 10-Q, we plan to file with the SEC later this week and this will be available at www.sec.gov and via our website. At this time, I will turn the call back over to Kent Swanson for closing remarks. Kent?

[Kent L. Swanson:]

Thanks, John. We have very substantial progress in a fairly short time here at Bacterin, but clearly there is more work to be done. We will be aggressive yet tactical in our approach to building market share, and extending our presence in the marketplace. As I mentioned before, Bacterin has built a solid foundation comprised of good, reputable products and resilient dedicated employees. With the addition of a new CEO we will leverage these core strengths to deliver value to our customers, to our employees, and to our shareholders. With that, I’d now like to hand the call back to the operator for questions.

[Operator:]

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) Our first question comes from the line of Matt O’Brien with William Blair. Please proceed with your question.

[Kaila Krum:]

Hi, guys. This is Kaila in for Matt. Just a couple of questions for you. First off, we were just wondering if you might be able to provide us with a little bit more color on maybe the near-term or longer term initiatives that Dan has perhaps discussed with your team. And then, maybe how you expect you will improve the business going forward.

[John P. Gandolfo:]

Well, I think that that ties into our decision not to reiterate the revenue guidance. I think that when Dan joins next week, one of the first things I think that he will be doing is to analyze the current sales and marketing strategy and really assess the situation. So, I think it’d be premature to walk around any color on what Dan is going to be focusing on until he has sufficient time to come in, look at the strategies that we are employing and really give reason further as to how he wants to bring the company forward. That being said, I think that all of the opportunities that we previously referred to relating to the large West Coast hospital chain as well as the large distributor spine surgeons throughout the country are still being pursued. So, I don’t want to that to signal that we don’t think that there are strong prospects for future growth, but we absolutely believe that we have some strong prospects.

[Kaila Krum:]

Okay. That’s helpful. And then, on several calls you’ve discussed additional sales channels in international markets, particularly in Europe and I’m just curious as to when we should start to see that contribute and what sort of opportunity that could represent long-term?

[John P. Gandolfo:]

Well, I mean, I think overall we believe that the international markets provide real, good expansion opportunities for the company from a revenue standpoint. In addition to Europe we are pursuing some relationships in Canada as well as Australia and I expect that they will start to come to fruition of being successful in our endeavors probably more in the beginning, the mid of 2014 timeframe.

[Kaila Krum:]

Okay. That’s helpful. Thank you.

[John P. Gandolfo:]

You’re welcome.

[Operator:]

Thank you. (Operator Instructions) Our next question comes from the line of Greg Garner with Singular Research. Please proceed with your question.

[Greg Garner:]

Yes. Thanks for taking the question. I wanted to ask you about the new sales channel that was referenced. Is there anymore you can tell us about that, are there new distributors or is there a change in the marketplace?

[John P. Gandolfo:]

Well, I said – I shall reiterate the ones that we’ve previously discussed that we’re continuing to presume some work there with surgeons, one of the large West Coast hospital chain, think about approximately 40 hospitals. And we’re developing the strategy to continuing to make inroads into those hospitals. I would say probably in the second quarter, I know that the revenues from that hospital chains did increase significantly from the first quarter. We are still probably only in, I would say, maybe 30% to 35% of those hospital accounts. So that presents a greater opportunity for us to continue to increase our revenue base. The other relationship is with a distributor that has not only U.S. based targets, but also international relationships in Europe. There we have approximately 21 sponsors, I think throughout the U.S. who annually probably do spend to give you an idea in the $15 million to $18 million area for biologics, and we’ve begun developing the strategy and working on the strategy to convert some of those stocks. Currently we only have five of those surgeons utilizing the products. Now that’s probably up from two to three in the first quarter. So the conversion on both of these opportunities are definitely underway. It’s probably a little slower than I would like to say, but from my vantage point, everything is little slower than I’d like to say, but it’s definitely underway and we’re optimistic about the prospects.

[Greg Garner:]

Okay, and gentlemen, was that 30% or 30 of the 40 hospitals that you mentioned in the West Coast.

[Darrel L. Holmes:]

We are in about 30% not 30 of the 40.

[Greg Garner:]

Okay, thanks I just wanted to clarify that. And so the gross margin without the charge would have been low 60s. Is this the new norm due to stocking orders or is this – would stocking orders perhaps be a lower percentage within your marketing strategies that you just sort of outlined here?

[Darrel L. Holmes:]

Well, I mean there is, I would say that we believe that as I mentioned after the first quarter call. We believe that the margins will be probably somewhere around the 62% to 66% range going forward, if we are successful in generating revenues, and I’ll put it as a large stocking order with a distributor. Now the fine largest being over a $1 million that would have a negative impact on the gross margin, but to be honest with you, right now, we are not pursuing any of those relationships. The company has experience with those. I think has been somewhat negative. So our current focus certainly in the second quarter and Dan will have a chance to analyze this as he joins the company, has been really on generating that core hospital business. First, we think that will be the foundation going forward for us to continue to grow.

[Greg Garner:]

Okay. And that’s where some of the new customers or all the customers were going back in the quarter. Those were the hospital accounts, is that right?

[Darrel L. Holmes:]

I am sorry, Greg, can you repeat that please.

[Greg Garner:]

It was mentioned, I believe in the press release that some reps may inference that some new, some older clients were (inaudible).

[Darrel L. Holmes:]

Yes.

[Greg Garner:]

These are the hospital accounts, right?

[Kent L. Swanson:]

Yes, correct, absolutely.

[Greg Garner:]

Okay.

[Kent L. Swanson:]

We have lots on major ones back fourth quarter of last year that in May timeframe we were successful about getting them back in the fall.

[Greg Garner:]

Okay. And again a clarification on your prepared remarks, John, you mentioned, at least I wrote down here much. I’m not sure if I wrote this right, ex-stocking orders that the biologics were up 13% year-over-year, July write that down, did I get that correctly?

[John P. Gandolfo:]

I think sequentially that it was up 13%. So and let me get you a little more color on that. In the first quarter of this year about $1.3 million of our revenues were associated with the stocking order – with a large distributor. We didn’t have any of those stocking orders in the second quarter of the year. So when we feel that the revenues from the stocking order in the first quarter and look at the organic growth of the core hospital base, that’s the growth that we saw.

[Greg Garner:]

Okay. Favorable and how is your matrix doing in the second quarter? Remember it was mentioned how fourth quarter to the first quarter there was a large increase, is that still ramping?

[Molly M. Mason:]

Yes, we are still ramping that product. Yes, we did see a 14% growth in revenues from hMatrix between Q2 over Q1.

[Greg Garner:]

Okay. And finally as a one question, I will get back in the queue, let somebody else takeover. Can you give me a sense for the sales person counts, sales inside and outside sales, how that may have changed?

[Molly M. Mason:]

With the reduction of course that we incurred in Q2, we now have 36 sales reps in the field, from a national sales manager to (inaudible) regional managers, key account manager and then 20 direct reps. As far as independent distributors go, right now numbers around 120. We did spend quite a bit of time in Q2 evaluating our distribution channels, and moving around some underperformers and building a foundation, which we can grow from for increasing the appropriate independent distributors in the future.

[Greg Garner:]

Okay. Thank you.

[Kent L. Swanson:]

Thanks, Greg.

[Operator:]

Thank you. (Operator Instructions) Our next question comes from the line of Walter Schenker with MAZ Partners. Please proceed with your question.

[Walter Schenker:]

Hi, John. As a general question, when you are loosing accounts or are you loosing account or loose a hospital, that hospital previously had surgeons who were using your product because that’s what they required. What are they doing when they no longer have access to your product, assuming they’d been happy using your product?

[Molly M. Mason:]

For some of the transition, I’m sorry this is Molly. For some of the transition from those certain users they may try other products. For some of them it could be a hospital decision or just allowing vendors or flexing minimal number of vendors that can supply the facility. What we’ve been successful in achieving within the last quarter, we’re reengaging our surgeons, reviewing some of their clinical outcomes that they achieved with our products and renegotiating all contacts with the facility.

[Walter Schenker:]

I really thought given the history of success in using your product if the surgeons would have a fair amount of say in what products are available in the hospital.

[Molly M. Mason:]

If it’s that one, yes, that would be great. And they do have quite a bit of say, but at the end of the day, a lot of those goes through value analysis committees of the hospital system.

[Walter Schenker:]

Okay, thank you.

[Kent L. Swanson:]

Thanks a lot.

[Operator:]

Thank you. Our next question is a follow-up question from the line of Greg Garner with Singular Research. Please proceed with your question.

[Greg Garner:]

Thanks. Just want to follow-up on the distribution channel. You mentioned 100, probably 120 independent distributors I’m just wondering, what’s the strategies there. Is there different geographies that distributors are used for perhaps different market segments or and where you believe things are now versus where you may want to take them or is that…

[Molly M. Mason:]

I am sorry, go ahead.

[Greg Garner:]

I was just saying or is perhaps that something is still under discussion with the new CEO.

[Molly M. Mason:]

So that’s a great question. It does definitely depend on both regional, geographic as well as the market. What we have found is – what we are accessing even more and what we have found is that some independent contractors inside this referenced a case and that have been stronger for our sales channel. And then for some market specifically calling a certain discipline have been stronger as well for new product penetration. And our goals for the last quarter have been to stratify more stability and to reassess our distributors that we did have onboard, to try to incorporate incentives for growing sentimental relationships with our successful distributors, and really laying a infrastructure that our new CEO, Dan could have build upon once he begins.

[Greg Garner:]

Okay and so how does that work, refreshment memory with the GPO Contracts? When you have a GPO Contract, you have to have sort of distributed with them or is there, how does that work out?

[Molly M. Mason:]

For GPO Contracts, we do have the opportunity to work with some of the larger national distributor channels such as Medline or Cardinal, and however Bacterin what we do is, we work directly with the hospitals that are members of GPO partners. So for that all products are shipped from Bacterin to the facility, and that invoicing is done by Bacterin. So the distributors that handle these accounts are commission based distributors versus stocking

[Greg Garner:]

And what are you seeing with the physician owned distributors any update on how that dynamic is in distribution marketplace?

[Molly M. Mason:]

We can see that all of our articles that are coming out with regard to PODs as well as some of the suggestions of some of the regulatory and physicians are going to be placing. And currently we do not work with any PODs and we do not anticipate doing so in the future.

[Greg Garner:]

Okay. All right. Thank you.

[Operator:]

Thank you. (Operator Instructions) There appear to be no further questions at this time. I’d like to turn the floor back over to Mr. Cockrell for closing comments.

[John P. Gandolfo:]

This is John Gandolfo. Before we sign off, I do want to reiterate how excited the Board as well as everybody at the Company is about, Dan joining us next week as our new CEO. I will say once he is onboard, we do anticipate having management on the road in the September timeframe in order to meet with investors at various cities out there. So I will keep everyone apprised of that situation, because I think that it’d be great for the investors to meet Dan on a face-to-face basis. In addition, we will be attending a number of investor conferences in the September-October timeframe as well. So from everyone at Bacterin we want to thank you and we appreciate the support that you continue to give to the Company. Thanks

[Operator:]

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