Xtant Medical Holdings, Inc.
Q3 2014 Earnings Call Transcript

Published: 6 Nov 2014

[Operator:]

Greetings, and welcome to the Bacterin International Third Quarter 2014 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 Devin, and good morning to you all. Thank you for joining us today. With me on the call are Dan Goldberger, Bacterin's Chief Executive Officer; and John Gandolfo, Chief Financial Officer. As you may be aware yesterday afternoon Bacterin was pleased to issue a press release announcing third quarter 2014 financial results. Following remarks by management, the call will be opened to your questions and we expect the duration of the call to be approximately one hour. We've also included slides in this webcast and they will be posted after the call on the company’s website. Now 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 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 risk and uncertainties including those noted in the Risk Factor section of the company's annual report on Form 10-K and the company's quarterly reports on Form 10-Q. 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 held and recorded on Thursday, November 6 at approximately 10 AM 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. Bacterin 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 Goldberger. Go ahead Dan.

[Dan Goldberger:]

Thank you, Rich and good morning, everybody. I appreciate you taking the time to join us today to discuss our third quarter 2014 results. Let me begin by giving you some highlights on the quarter and then I'll turn it over to John who will review the financial statements in detail. I am pleased to report that the company had another solid quarter. We delivered revenues of $8.45 million, which was approximately 6.6% above the same period last year. This is our fourth consecutive quarter of year-on-year growth as you can clearly see on the bar graph. I also want to point out that we continue to improve our gross margins and narrow our operating loss, all while investing in new products and expanding our distribution channel. John and I started working together just over a year ago and we spent the bulk of 2013 in stabilizing the business. This year we've turned our attention to our sales channel and new products, investments that we believe will accelerate growth in 2015. Furthermore, I am very proud of the discipline that our management team has demonstrated by improving gross margin 18% and reducing our EBITDA loss by 55%. I was first attracted to Bacterin by the opportunity to grow a biomaterials company in regenerative medicine. This is a tremendous market opportunity that we participate in, estimated to exceed $3 billion. Our hMatrix line of acellular dermis is currently being launched into the plastic surgery in advance wound care categories. Our tendon and ligament allografts are used in sports medicine procedures. And last, but not least, our growing family of bone allograft has material share of the $1.7 billion bone repair category. We have every intention to penetrate these markets and have developed a three pronged plan of attack if you will. Our approach can be broken down into those three areas; products, places and people. Let's talk about product first. Bacterin is a world-class provider of allograft tissue. OsteoSponge our flagship product is indicated for uses of bone void filler. This product represents about 60% of our trailing revenue and continues to be the standard where clinical data and physician preference drive product selection. OsteoSponge provide surgeons with confidence and peace of mind because it's easier to handle in difficult geometries. It stays in place and it promotes faster, more complete bone healing. OsteoSelect is our demineralized bone matrix putty. OsteoSelect helps bone regenerate more quickly and thoroughly and is responsible for about 17% of our revenues. OsteoSelect is useful in a variety of surgical situations with published efficacy and superior handling characteristics. One of the upside surprises when I joined Bacterin last year, was the exciting pipeline of new products, which we are now starting to commercialize. We recently launched a new family of bone allograft developed internally with our proprietary technology that we call three demin and that’s DEMIN as in de-mineralized. We did not name after blue jeans or the devil. These products are indicated for a variety of orthopedic and reconstructive procedures where larger volumes of bone graft are required particularly spine fusion procedures. Our latest product, which we announced just a few weeks ago, is called three demin cortical fibers. These fibers are de-mineralized using Bacterin's proprietor processing technology and have excellent regenerative properties for healing bone. We've rolled out the product to seven surgeons and initial clinical feedback has been very encouraging. Our three demin [boats] (ph) and strips which we'll be launching at the North American Spine Society in 2014 Meeting next week in San Francisco are targeted for use in more complex spine procedures and positioned to compete directly with product from Stryker and Medtronic including synthetic constructs and allografts. And finally hMatrix, our acellular dermis matrix which is used by plastic surgeons in breast reconstruction procedures secondary to mastectomy. This is a new distribution channel for us that we will further develop in 2015. I would like to turn your attention to our current distribution channel. Our primary call point is orthopedic surgery and neurosurgery but we also call on sports medicine and advance wound care opportunistically. With the ongoing launch of hMatrix PR, we're carefully developing a focused effort on plastic surgery. Our current sales strategy is to two fold, bottoms up by detailing physicians in their hospital staff on the clinical efficacy and the value proposition that our products deliver and top down through national relationships with GPO’s and regionally with integrated delivery networks or IDNs. We firmly believe that Bacterin's business will scale with professional representation in the field. We current have 35 full time employees in field sales leveraged by 115 manufacturer's representatives. Biomet GPS reports that Bacterin has a 6.4% share of the $410 million U.S. market for de-mineralized bone matrix. Since that’s an average over the entire United States, you can imagine that we do better in some cities than in others. The second of our three focus areas therefore has to do with our geographic presence or places. We have analyzed our market share by metropolitan statistical area or MSA. What we found is that we have an admirable market share in some cities and very little presence in other cities. You can see that we have more than 15% penetration in Dallas, St. Louis and Seattle and our share peaks at more than 25% in Phoenix and San Diego. It's within these markets that we intend to leverage our presence and name recognition to drive deeper into existing accounts and gain additional business. And even greater opportunity exists in other top 20 MSAs such as Houston, Atlanta and Miami, where we have a much smaller share of the market and therefore a much larger opportunity to grow. In these cities, we have the opportunity to recruit talented sales management and manufacturer's representatives to grow our business sustainably. So geographically, our growth strategy in these places will be to one, continue to recruit sales employees and manufactures reps where we already have solid presence in order to drive market share gains. We'll use our new products in those geographies to increase our revenue per procedures in those markets. Number two, recruit sales management and manufacturer's reps in cities that are currently underperforming in order to establish as foundation for future growth. And number three, build on the success we are having with regional hospital groups like Dignity and Banner Health. We've added two senior field sales executives to coordinate with these IDNs and drive sales opportunities. Finally, let me talk about our people. Bob" Di Silvio and Melanie Head joined us in leadership positions earlier this year and they continue to develop our hybrid sales team, which now consists of 35 full time sales employees, who manage the expertise and reach of 115 manufactures reps. As illustrated, we plan to grow from 35 employees today, 29 of which have been with us long enough to be productive to 50 employees by this time next year, 42 of which will be productive at that point in time. Similarly, we expect our team of manufacturers reps to grow from 115 today to 159 as we exit 2015. I continue to be pleased and impressed at the level of talent we're able to attract. Just this week, we announced that [Amy] (ph) joined us from Luminous Burwood Group and Draeger Medical, Troy Knief joined us from Baxter ApaTech and Synthes and Kevin O'Dare has joined us with experience from Olympus, Stryker Biotech, Ethicon Endo-Surgery and Osteotech. Before we move to operations I wanted to mention one more item of interest as it relates to product innovation. We recently received a grant from the Montana Board of Research and Commercialization Technology to help support one of our R&D programs. The State Board specifically looks to invest in research that has clear path to commercialization. So we're both proud and honored to be a part of that work. Our operations and finance teams are doing a fantastic job at controlling operating expenses, while we continue to invest in our field sales organization and new product development. John will discuss that in more detail.

[John Gandolfo:]

Thank you, Dan. I would like to remind our listeners to refer to the third quarter 2014 earnings press release issued yesterday and also our Form 10-Q for the third quarter, which will be field in the very near future. Third quarter 2014 revenue was approximately $8.45 million, an increase of 6.6% compared to approximately $7.93 million for the same period during 2013. Gross profit for the third quarter of 2014 was $5.44 million or 64.3% of revenues and this compares to $4.61 million or 58.2% of revenues for the third quarter 2013. Over the last year we have continued to improve our processing productivity and this has resulted in the increased gross profits and gross margins on a year-over-year. Although this figure is in excess of the company's previously stated range, I would expect a gross margin of 61% to 63% for 2014, we're not modifying the guidance at this point in time. Third quarter 2014 sales and marketing expenses decreased 3.1% to $3.93 million, as compared to $4.05 million for the third quarter of 2013. For the quarter, sales and marketing as a percentage of revenues decreased to 46.5% as compared to 51.1% in the third quarter of 2013. In the third quarter, G&A expenses decreased year-over-year from $2.73 million in 2013 to $2.8 million in 2014. The company recorded third quarter 2014 research and development expenses of approximately $378,000 and this is related to our continuing clinical studies and new product development initiatives. The third quarter 2014 loss from operations was approximately $1.25 million, a decrease of approximately 46.7% over the same period in 2013 which reported a loss from operations of $2.35 million. The company defines earnings before interest, taxes, depreciation and amortization or EBITDA as net income/loss from operations before depreciation, amortization and non-cash stock-based compensation expense. EBITDA for the third quarter was a loss of approximately $839,000 a significant decrease over the third quarter 2013 EBITDA loss of $1.84 million. Cash, cash equivalents and net accounts receivable were $11.25 million as of September 30, 2014 and this compares to $7.84 million on December 31, 2013. We believe that the company has sufficient cash resources to continue to execute its growth strategy. Now, I'll turn it back to Dan.

[Dan Goldberger:]

Thanks John. Looking forward, I believe that our business is well positioned. We've improved the topline with high quality recurring revenue growth generated by end user sales. We'll continue to build our organization around three principles, products. Continue to develop and commercialize outstanding biomaterials for regenerative medicine applications. Places focused sales activities that are right sized for the specific metropolitan statistical area and associated business opportunities and people throughout the organization, but especially in our field sales team, which we expect will grow by 40% in 2015. We continue to restructure the sales force with more experienced assets, many of whom have had success within our specific industry and we're attracting new talent every day. John and I started working together at Bacterin just over a year ago and we spend the bulk of 2013 stabilizing the business. /This year, we've turned our attention to our sales channel and new products, investments that we believe will accelerate growth in 2015. We believe that Bacterin will be EBITDA breakeven with quarterly revenues between $10 million and $11 million. And cash flow breakeven including debts service with quarterly revenue of $10.7 million to $11.7 million. Thank you all for your patience and support. Now we’d like to open it up 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 Matthew O'Brien with William Blair. Please proceed with your question.

[Unidentified Analyst:]

Hi, guys this is actually Kelli in for Matt. You know we’re just curious can you just touch on the monthly progression in the third quarter you know the momentum we’ve seen more recently and then just your confidence in sustained growth at these levels?

[Dan Goldberger:]

So, there is some seasonality to this business and we’ve seen it in our results going back several years. The real issue for us in the short term has been building out to sales channel in recruiting new people and going through the training and on-boarding. So for the current quarter, we have 29 field sales employees who are fully trained and productive and a total headcount of 35 and we are planning to add six field sales representatives each quarter throughout 2015 and we’re going to adding manufacturer’s reps at the proportional rate. And as I said in the script, we firmly believe that from where we are today the business is going to scale with our field sales representation and that’s what we’re focused on right now.

[Unidentified Analyst:]

Okay, and then I know you’d mention you know the opportunity in certain places and you know I guess in prior quarters you’ve mentioned acceding the year with about 12.5 million in sales per quarter or acceding 2015, can you just comment on your comfort still in that metric or might we see that kind of potentially shift in the 2016? Thanks.

[Dan Goldberger:]

So, if you look at our headcount numbers and our productivity per head we’re clearly building an organization that’s capable of hiding those run rates. Now that the we absolutely have to execute we have to find field sales people, we have to get them trained and on-board it and our internal targets are lower than that are but clearly we are hiring a hiring plan will is designed to support that level of business.

[Unidentified Analyst:]

Okay, great thank you.

[Operator:]

Thank you. Our next question comes from the line of Suraj Kalia with Northland Securities. Please proceed with your question.

[Suraj Kalia:]

Good morning gentlemen

[Dan Goldberger:]

Good morning Suraj.

[John Gandolfo:]

Good morning Suraj.

[Suraj Kalia:]

So, few questions for Dan and a couple of questions for John, so Dan can you give us an idea you said there were 35 reps if I heard you correctly. Were revenues per procedure approximately $2,000 in the quarter and I guess you know normal seasonality in procedure volume is it a fair way to think about it?

[Dan Goldberger:]

Let’s, so for the third quarter we had 27 productive reps in the current quarter we have 29 productive reps. 35 is our current payroll but that difference those six individuals who are newer with the company and have not yet been full on-boarded. Procedure revenue is still north of $2,000 per procedure for us. And there is a certain amount of seasonality in the business so absolute numbers of procedure are scaling with our headcount super imposed with whatever seasonality’s out there.

[Suraj Kalia:]

Okay, John I know this will be a long winded question but you know we specifically misfired on the growth trajectory for this quarter in our numbers. Notwithstanding the delta between expectations, if you’d look in Q3 you know there is a certain amount of seasonality to be sure when you look out two-three-four-six quarters from now Dan is it increased reps is equal to increased sales or you think the new products that you’ll are bringing on online potentially could help not only increased rep productivity at the current level but at the same time take you to $12.5 million $14 million-$15 million per quarter run rate. Would how should we think about it in terms of the two elements here the added headcount and the new product lines?

[Dan Goldberger:]

See, it’s a very good question Suraj and off course we have to add another layer of complexity which is our geographical presence. In cities where we are already strong like Phoenix and San Diego where we have brand reorganization and we’ve got a solid team. That’s where we can launch the new products and work on that productivity that revenue per procedure very effectively. Those are also cities where we have enough leadership, that we can add people associate reps at the lower level and increase our footprint the increase the number of cases that we can cover. We have a parallel but a very different strategy in some of those Greenfield geographies. In Huston for example where we basically have zero business, first we have to establish solid leadership in that city and then start to recruit manufacturers reps who can bring come relationships. The new products helped get us in the door in those geographies, but it's going to take us a little bit longer to recruit the right people, get the story out, get on contracts and really start to generate revenue growth.

[Suraj Kalia:]

Okay, John if I am looking at the trajectory on gross margins, Q1 was I think it was around 62, Q3 was 63, Q4 was 64, can you give us an idea about you're still trying to maintain your gross margin guidance. Is that driven primarily by conservatism or is there more to that?

[John Gandolfo:]

No it's definitely driven by conservatism. You know we continue to be trending in the positive direction with a lot of the focus that we've done on the operations of the company and we still believe that that trend will continue. But you know we've seen one quarter of solid performance on the gross margin, we just wanted to see a more established trend. That was the only reason for reiterating that guidance.

[Suraj Kalia:]

Fair enough. Gentlemen, congrats on the progress.

[John Gandolfo:]

Thanks Suraj.

[Dan Goldberger:]

Thanks Suraj.

[Operator:]

Thank you. Our next question comes from the line of John Vandermosten with Singular Research. Please proceed with your question.

[John Vandermosten:]

Good morning Dan and John. How are you?

[Dan Goldberger:]

Good morning sir, how are you today?

[John Vandermosten:]

I'm doing pretty good. I was going to ask first just on the active sales people, it looks like you said there are29. Is that, I was trying to figure that in terms of a weighted average, where those more in the back half of the quarter or the front half of the quarter in terms of that number? And I guess what I'm trying to get to is the extra four people that were added in the quarter where did that come into play?

[Dan Goldberger:]

So I apologize. It's a little bit more complicated in that we have 29 productive sales reps in the current quarter in the fourth quarter. In the third quarter the right number to use is 27.

[John Vandermosten:]

Oh okay, all right that answers my other question. All right, so just, okay so those two that were added in the third quarter were those in the front half of the quarter or the back half of the quarter or…

[Dan Goldberger:]

Those employees came on six to eight months ago, so they came on in between February and April. And the way we do our arithmetic they are fully productive in the current quarter.

[John Gandolfo:]

Okay, okay and we're still on track I guess in terms of employees our sales people getting on, getting up to speed in about six months or so.

[Dan Goldberger:]

It's I think you can say kind of just more like six to nine months your Melanie and Bob have really been fully engaged only since the second quarter and it took us a while to put our training programs in our recruiting networks into place. So, six months is our goal, but when you deal with people there are always surprises.

[John Vandermosten:]

Okay. And just in terms of comparison, I'm not sure that I had the number of active sales people that were out there in the third quarter of 2013. What was that number?

[John Gandolfo:]

It was actually much higher.

[John Vandermosten:]

Okay.

[Dan Goldberger:]

We did a, you know John and Darryl had started a dramatic reduction before I joined the company and then we made it even more dramatic.

[John Vandermosten:]

Okay. All right that's thank you for that. And then just a last thing I was going to ask just on sales and marketing expense. You know we saw a change in that, it actually went down even though it looks like we're still continuing to add to the sales force. Can you just discuss maybe the seasonality of the trends that are in place there and what we could expect in the fourth quarter?

[John Gandolfo:]

Well I think that as we looked forward, obviously we just outlined a higher end program that will increase the salaries. But what's happening as well which is mitigating those increases is the fact that our structure commission rates are decreasing on a comparative basis. So if you look at the variance you're seeing an increase in sales personnel costs and a corresponding decrease in some of the commission rates because we've put I a more structured program that was in place before Dan joined the company. It was before Dan joined it was complex and a lot of different commission rates for different districts, different manufactures reps and sales level people. So that’s basically what we've seen is the increased personnel cost, but decreased in commission of our rates.

[John Vandermosten:]

Okay, well thank you both for update for sharing this.

[John Gandolfo.:]

Thank you.

[Dan Goldberger:]

Thanks.

[Operator:]

Thank you. (Operator Instructions) Our next question comes from the line of [Herb Heart] (ph). Please proceed with your question.

[Unidentified Analyst:]

Good morning. I have a couple of questions. The first is when did you release the time and phone number for your conference call? Because I got news recall on DOW and Thomson because I don’t see anything.

[Dan Goldberger:]

I believe that was released about a week ago or so. We do it through our website and through the press release section of our website.

[John Gandolfo:]

Yeah, on Newswire.

[Unidentified Analyst:]

Okay so you don’t put it on the normal wire services?

[Dan Goldberger:]

It is on the normal wire services. It is distributed widely.

[Unidentified Analyst:]

Okay.

[Dan Goldberger:]

So it is through the wire.

[Unidentified Analyst:]

First question is have you lost any reps in the last year when you talk about numbers? So not the ones you gotten rid of but once who have just packed up and left?

[Dan Goldberger:]

There have been, so there's been quite a bit of churn as new manage comes in. It is somewhat evitable. There are several senior level folks who left of their own accord, many of them have turned around and joined distributorships and are now acting as manufacturers reps that are still carrying the product. So it's a difficult question to answer without getting bogged down into the details. But the short answer is that yes there has been substantial churn.

[Unidentified Analyst:]

Okay. And as I understand your comments you have sufficient financing to be able to get to a breakeven on both cash flow and earnings?

[John Gandolfo:]

Yeah, well we ended September with approximately $7 million in cash which at current cash burn rates gives us four plus quarters of cash at our current revenue levels. So as of today we certainly have no plans for an additional capital raise.

[Unidentified Analyst:]

That would imply that you should be at breakeven before the next four quarters are up?

[Dan Goldberger:]

That's our goal.

[John Gandolfo:]

Correct.

[Unidentified Analyst:]

Okay, just that's my only other question is do you have any problems with raw material supply?

[John Gandolfo:]

No. Darryl and Rusty and or team in Donor Services have done a great job of solidifying our supply chain and we're in very good shape in terms of our supplies and the facility in Montana has plenty of room for increased production.

[Dan Goldberger:]

And that's for, you know that takes into account the growth we expect in 2015 as well. So we think our incoming supply of donors is in good shape.

[Unidentified Analyst:]

Okay, thank you very much.

[Dan Goldberger:]

Thanks Herb.

[Operator:]

Thank you. There are no further questions at this time. I'd like to turn the floor back over to management for closing comments.

[Dan Goldberger:]

Thanks Devin. I appreciate that all of your patience and support with our company. I am very excited and very confident that the turnaround is taking hold and we've built an excellent foundation for 2015 and I hope you'll all continue to follow the company. Have a good day.

[John Gandolfo:]

Thank you.

[Operator:]

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