Xtant Medical Holdings, Inc. (XTNT) Q3 2012 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Bacterin International Holdings, Inc. Third Quarter 2012 Earnings Conference Call. [Operator Instructions] Today’s conference is being recorded November 7, 2012. I would now like to turn the conference over to our host John Gandolfo. Please go ahead.

Thank you, and good afternoon, and thank you for participating in today’s conference call to discuss Bacterin’s third quarter financial results for the period ended September 30, 2012. My name is John Gandolfo, Bacterin’s CFO. With me today is Guy Cook, the Company’s Founder and Chief Executive Officer. Following our remarks, we will open up the call for your questions. Then before the conclusion of today’s call, I’ll provide the necessary precautions regarding forward-looking statements made by management during this call. I would like to remind everyone that the replay of this call will be available for one month starting later this evening. A webcast replay will also be available via the link provided in today’s press release, as well as the Investor section of the company’s website at www.bacterin.com. Now I would like to turn the call over to the Chief Executive Officer, Guy Cook.

Thank you, John, and good afternoon, everyone. Thank you for joining us today to discuss our third quarter 2012 results. Bacterin continues to improve and develop innovative biological scaffolds for tissue regeneration. Our best-in-class platforms for bone standard cartilage regeneration address multiple billion dollar market opportunities. Our flagship product, OsteoSponge, which is a novel form of demineralized bone matrix provides a natural scaffold for cellular in-growth and exposes bone growth inducing proteins to the healing environment. Used by orthopaedic surgeons in the disciplines of neurosurgery, spinal fusion, trauma, hip and knee reconstruction, sports medicine extremities including hand, foot and ankle, the unique malleable properties in osteoinductive of OsteoSponge to conform to irregular bony defects has found wide adoption across all of these orthopaedic call points. Moving on to our direct and biologics dedicated sales force to meet the particular needs of multiple end-users, Bacterin has expanded into acellular dermal matrix to use in breast reconstruction, hernia repair, rotator cuff repair, diabetic foot ulcers and tendon augmentation. And finally, our OsteoSponge SC graft used for subchondral repair has been used to successfully treat over 250 patients for [indiscernible] bone fractures and subchondral defects on the knee. As the clinical evidence continues to grow for the appropriate utilization of this product, we expect the unique handling properties and ability to use to graft in minimally invasive manner for a solid adoption into the foot and ankle and sports medicine market. Addressing a wide variety of specialty biologic needs, Bacterin intends to become the #1 direct biologic supplier choice for both our surgeon and hospital partners. Our GPO partners from Premier Innovation and MedAssets have accelerated adoption of our products and allows us into almost 80% of all U.S. hospitals, as well as being able to introduce new products quickly and easily into our direct distribution model. But the recent $25 million financing from OrbiMed, we are well-positioned to achieve our growth objectives, with expanded processing capabilities coupled with the dedicated and growing sales force, increased marketing and excellent product pipeline of new and second generation products, we are well-positioned for 2013 and beyond. Turning to this quarter’s results, we issued a press release this afternoon announcing our earnings. Revenue for the quarter was $8.9 million, compared to $8.2 million in the previous quarter and an increase of 18%, compared to $7.5 million in the third quarter of 2011. Revenue for the first 9 months of 2012 reached $24.9 million, an 18% increase year-over-year. That accounts were 71% of our annual guidance. With numerous growth catalysts in place and a strong October complete, Q4 is off to a good start toward our forecast. Margin of 71% remains solid within the guidance range of 70% to 75%. As of September 30, 2012, we had approximately $8.6 million in cash and net accounts receivable of approximately $7.2 million. Before we go much further, I’d like to turn the call back over to our CFO, John Gandolfo, who will step into a summary of the quarter and year’s financial results. When he is finished, I’ll return to give a more detailed operational update and then look forward. And we’ll open up the call up to your questions, John?

Thank you, Guy. Turning to our results for the third quarter of 2012, as Guy mentioned revenue for the quarter was $8.9 million, compared to $8.2 million in the previous quarter, and an increase of 18% compared to $7.5 million in the third quarter of 2011. The year-over-year increase was largely the result of increased sales generated from the company’s direct sales force and independent distributors compared to the third quarter of 2011. Gross profit margin for the quarter was 71%, as compared to 72% in the previous quarter and 83% in the year-ago quarter, reflecting the addition of the second production shift in 2012, as well as increased allocation of G&A expenses due to the increased production. Operating expenses for the quarter totaled $6.1 million, as compared to $6.2 million in the previous quarter, and $7.8 million in the third quarter of 2011. Operating profit for the quarter was $212,711, and this compares to a loss of approximately $347,000 million in the previous quarter and a loss of $1.6 million in the third quarter of 2011. This marked the company’s first quarter of generating positive operating income. The company reported other expense of $1,738,000 in the quarter, relating to the one-time non-cash write-off of a debt discount, as well as fees and prepayment penalties of our prior debt financing. These charges were incurred in connection with the OrbiMed transaction and will not be incurred in subsequent quarters as they are one-time charges. Net loss was $2.5 million, or $0.06 per basic share for the quarter and this compares to a net income of 730,000, or $0.02 per basic share in the previous quarter, and the net loss in the third quarter of 2011 of $3.2 million, or $0.08 per share. EBITDA for the quarter totaled $820,000 compared to EBITDA of $8,000 for the previous quarter and an EBITDA loss of $316,000 for the third quarter of 2011. We’ll see the definition and then important discussion about our use of EBITDA, a non-GAAP term in today’s earnings release, which is available in the investors section of our website. Now turning to the balance sheet, we announced the closing of the $25 million non-dilutive financing with an affiliate of OrbiMed Advisors LLC during the quarter. This financing will give us the necessary working capital, which we believe enables us to execute our growth strategy through anticipated profitability. The company received net proceeds of approximately $9.8 million after repayment of existing indebtedness as well as other transaction related fees and expenses. Net proceeds will be used by the company for general working capital purposes. Cash and cash equivalents and net accounts receivables was $15.8 million at September 30 and this compared to a total of $7.8 million at June 30, 2012. This completes my summary report on our results. For a more detailed and complete analysis of our results for the third quarter, I’d like to direct everyone to our Form 10-K, which was filed with the SEC on March 2012 as well as the company’s Form 10-Q, which will be filed later this week and which will be available at www.sec.gov as well as via our website. Now I’d be happy to answer any questions you may have certainly during the Q&A session. Now I’d like to turn the call back over to Guy Cook, our President and CEO.

Thank you, John. As the company grows, we continue to build on our board. In the third quarter, we added John Deedrick, a new Independent Director. John brings to our board strong skills in the area of healthcare operations through an early stage life science companies, and use of information technology to improve operating effectiveness. We’re pleased to have him join us. We added a fourth national GPO contract with Premier Healthcare Alliance. Premier is one of the nation’s largest group purchasing organizations, serving over 2,600 hospitals and more than 84,000 other healthcare sites that represent over $43 billion in annual purchasing power. As a result of increased GPO relationships, we were experiencing a lot of inbound interest as hospitals in network began activating the pricing agreements. We remain on track to complete the hiring of approximately 10 direct representatives and sales managers before the end of this year, another 20 additional reps in January of 2013, and we expect 20 more in July of 2013. Our sales force continues to mature and we are placing more reps throughout the country into approved hospital systems and concentrating sales management into more defined territories. We expect this to add significantly to revenues in Q4 in 2013. The $25 million [indiscernible] that John mentioned marks an important milestone for the company. With this financing, we do not anticipate the need for any additional working capital in our pursuit of achieving profitability. Additionally, it was OrbiMed's recognition of Bacterin's unique technology and strong growth profile that enabled us to secure this non-dilutive financing option. I want to emphasize, for the strong balance sheet, and being EBITDA positive that the future and long-term opportunity for Bacterin products in multi-billion dollar addressable markets is today stronger than ever. We continue to have excellent positive results for our products with over 125,000 implants to-date. I’d like to give you an update on our products and expected revenue breakdown. OsteoSponge, which is our flagship product, was well received at last month’s National American Spine Society Annual Meeting. Used in the end of the tubal space posterior lateral gutters for spinal indications, OsteoSponge is unparalleled for handling properties osteoinductivity, safety and efficacy. We continue to see strong demand for this product moving forward. We are developing a second-generation patent protected OsteoSponge technology that we expect to be launched by mid-2014. And we remain confident that processing patent for the original OsteoSponge will issue. OsteoSponge continues to show excellent points of results, and we have recently had another paper accepted for foot and ankle indications. The study reports infusion rates of 80 joints among 47 patients resulting in statistically significant improvements in pain and function as well as an above the average fusion rate compared with current literature, an overall fusion rate of 97.5% was observed at a one-year follow-up. We expect OsteoSponge to account for 55% of sales in 2012, and approximately 51% of sales in 2013. Our OsteoSelect DBM Putty which has shown equivalency to autograft for graft of patient’s own bone, continues to find wide adoption across multiple call points. We’ve expanded the product line up, and are now putting the Putty into a pre-loaded syringe. Approximately 65% to 70% of the DBM Putty market uses preloaded syringes as a delivery method. And we believe this will give us greater market adoption. This particular tissue-based product utilizes a patent regulatory pathway unlike some other currently marked DBM Putties and in the process of seeking additional indications for spinal fusion and cranial/maxillofacial use. We expect the additional indications to be granted by Q1 2013. We expect OsteoSelect DBM Putty to be 18% to 20% of revenues both in 2012 and 2013. We continue to see increased adoption in plastic reconstruction call point. We are proceeding to build inventory and are confident will be a major revenue contributor. Opportunistically, we are seeing a synergistic effect with our antimicrobial-coated wound drain into this call point as an infection are a common complication from the mastectomies. We also expect to get a boost in uptake in chronic wounds, diabetic foot ulcer, venous leg ulcer indications, and we’ve recently been notified by CMS that we did receive necessary [indiscernible] for penetrating into these markets which becomes effective January 1, 2013. We expect hMatrix to be approximately 5% to 10% of total revenues both in 2012 and in 2013. For OsteoSponge SC we have treated more than 250 patients, and continue to see excellent clinical results. The paper; Reconstruction of Complex Osteochondral Lesions of the Talus with Cylindrical Sponge Allograft and Particulate Juvenile Cartilage Graft, Provisional Results with a Short-Term Follow Up, was published by Foot & Ankle Specialist in the third quarter. A follow on paper with one year follow-up with 25 patients with talar dome lesions is expected to be published in the first half of 2013. We are expecting 3 more independently published papers regarding the OsteoSponge SC product in the near future. We continue to look forward with the registry to monitor outcomes of OsteoSponge SC implantation remaining. And we hope to have early results from the registry in 2013. We believe the OsteoSponge SC product represents a substantial opportunity for Bacterin shareholders as more definitive clinical results become available. We expect OsteoSponge SC to account for 2% to 4% of revenues in 2012 and 2013. Across our OsteoSponge hMatrix products we instituted a key opinion leader program enabling top surgeons to travel to our Montana headquarters, witness the production of OsteoSponge and become greater advocates for our products. We expect to have over 200 training sessions in 2013 to help surgeons more fully understand the intended use, capabilities and performance of our products. For our soft tissues Sports Med products, we are seeing nice progress with improved training, a new product line meant for younger patients, Sports Matrix -- new market materials, and new distribution partners, we expect to launch our Sports Matrix line and soft tissue grafts by the end of Q4 2012. The Sports Matrix line has a validated low dose, terminal radiation of radiation of 15 kilogray, which is thought to be better preserved and improved graft integrity. We expect sales to be 7% for our Sports Med products in 2012 and 5% in 2013. We continue to leverage our direct sales force with new products that will allow our sales force to bid on either sole-source or dual-source contract for our hospital partners. In addition to several new skus addressing more traditional allograft tissues, we expect to launch a amniotic based graft in Q4 2012 and a [indiscernible] allograft in 2013. As new marketing initiatives develop through Q4 and we have greater clarity on new power releases, we expect to issue 2013 guidance in early January 2013. As for our annual guidance, we continue to expect a strong fourth quarter and reiterate revenue guidance of $35 million to $40 million for the year, with the current expectation of revenues between $35 million and $37 million. The third quarter represented major advances for Bacterin, firstly OrbiMed financing solidified our balance sheet. The companies own growth, strong margins that leverage led to operating income of 213,000 and 858,000 of positive EBITDA. Premier Healthcare was a major GPO win for us, and additional marketing efforts have been launched to increase penetration into those accounts. By Q1 2013, our throughput capacity is expected to be in the $120 million to $150 million range. We are laser focused on generating revenue growth rates among the best in all of medical technology industry. Now I think we’re ready to open up the call for your questions.

[Operator Instructions] And our first question comes from the line of Matthew O’Brien with William Blair.

This is Kyle in for Matt. So you brought on the top end of the guidance range by $3 million that implies pretty strong top line growth in the fourth quarter. How comfortable are you guys with this new guidance range?

Kyle, that’s where we are pretty comfortable October’s in and it was a strong month for us. We had an excellent meeting at NAS with multiple leads and so we are thinking the Q4 is going to come in the $10 million to $12 million range.

Okay, great. And then there was a pretty significant increase in the number of hospital customers. I think that was 132 sequentially, is that related to the recent GPO contract that you announced or when do you see those orders start to ramp up and how do you guys have enough supply to fulfill those orders?

Yes, we feel very comfortable with the supply issues. We think any of the backorder issues are behind us. Production is definitely ahead of sales at this point. And we did have a record 900 facilities that we are selling into, so far for 2012. The GPO contracts certainly helped that. But I would say it is just a kind of standard blocking and tackling that goes on, on a daily basis for us to get into more and more accounts. And typically, the way the sales cycle works is that we will have small dollar sales into those hospitals, but they will build into larger sales over time. So the total number of hospitals we do feel as a good indicator of future success.

Great, that makes sense. And then just one more from me, for SG&A, I know it’s just down quite a bit sequentially, why was that and how should we think about that going forward?

I think going forward that it will probably increase slightly over the levels that we had this quarter. So I don’t think you’ll see it going down sequentially by any great dollars. I think that is basically leveled up and it might increase slightly and as we go into future quarters.

Our next question comes from the line of Bruce Jackson with Northland Capital Markets.

First, I don’t think, I can’t remember of sales reps you’ve got at the end of Q3. Can you repeat that?

Yes, in the way we reported in Q2 Bruce, we have 67 dedicated to the sales function. We do expect to still hire 10 prior to the end of the year. That would bring us up to that 77 number. I know you were under the impression that is was supposed to be up to 100. But in Q2, we did say we end up about 86 for the end of the year. But we think it is going to end up around 77 at end of this year. We are still on track to hire 20 in January and 20 in July of next year.

Okay. And then do you have a rough idea on how much of the revenue was purely direct and how much went through distributors?

Yes. Pretty much of same breakdowns we did in Q2. Third of it comes solely from distributors, and third of it comes solely from our direct representatives. Now we do have a hybrid model where those 2 entities worked together and approximately the third comes from that commentarial hybrid model.

Okay. And then last question on the anti-infective trauma implants, what’s the latest news on those?

Yes, the FDA did request additional animal data. We have begun that. They had additional testing. We do expect recently that data in Q1 of next year. Depending on the quality or the results of that data will determine when it will hit market. But I would say we would have more guidance in the next earnings call.

Our next question comes from the line of Nathan Cali with Noble Financial.

OrbiMed, on the deal, as far as the structure that financing, is there any details around that or you paying them royalty on revenues or how is that set up again?

Yes, it set up as a debt transaction and the debt is paid up interest only, it’s paid off for a 7 year period -- interest only for the first 3 years and then principal and interest for the subsequent 4 years, and there is a royalty component as well. They earn 1.7% of the company’s revenues up to $45 million a year and 1% over that.

Okay. And then on the second gen product, just maybe a question more for Guy. The second gen product for OsteoSponge. What are the key advantages you think are over the first gen?

Yes, we believe it's going to potentiate cell viability and it brings patentability to the OsteoSponge. I’d rather not say a whole lot about that right now, but I think we have a one year to 1.5 year development cycle to bring that forward. It will be a 510(k) product because of its nature, the additive that we are using. But one, it meant to work better, we expect to have greater fusion than we do now.

Okay. And then you mentioned amnion graft, is that amniotic membrane product, or I didn’t hear you that, I don’t know that correctly.

Correct. Yes, it will be an amniotic membrane, as well as a morselized amnion has a fluid that can be added to the membrane.

And then you also mentioned a nerve graft?

Right, we are in development for a nerve graft as well. We think that product will be 361 tissue and we hope to have it available in 2013.

That will be a, the decellularized product as far as the nerve graft and the amniotic?

Correct. The amnion will be decellularized as well.

Okay. And where is that technology coming out of your current platform?

Yes, the nerve graft came out of a recommendation from some surgeons that we are using, and the amnion we are going to be in licensing it from a partner.

Okay. And will that amnion or will that replace your cortical bone tissue application product?

No, we are seeing the better uptick in the wound market to prevent adhesions that were in spinal surgeries. But other people have used it in with diabetic foot ulcers, with other types of tissues, but we’re still right in the earlier stages of bringing that product in before we have where we fully understand what can be used.

Our next question comes from the line of Greg Garner with Singular Research.

Regarding the production increases, did those new or clean rooms come online then in the last month or so? And could you just walk me through how that’s going to progress up to that $120 million to $150 million production capacity in Q1?

Sure, clean rooms are still being completed. We do expect them to be online in early Q1 operational, in early Q1. We currently have 4 clean rooms dedicated to our high demand products and we will be expanding, we’ll be adding 9 additional clean rooms for those products. So we are going to have the ability to triple our production at this point. And right now we’re running the 2 shifts, once the clean rooms are up and operational, we expect to go back for one shift. But if we did need to go up to 2 shifts as well, we think, we wanted to run flat out. We could be in the $120 million and $150 million throughput capacity range.

So that the $120 million to $150 million is the 2 shifts, is that right?

It would be, correct.

Okay. And I’m just wondering, did the work in putting the new clean rooms together, did that affect the gross margin in the quarter. It just seems like with higher volume your gross margin might be increasing a little bit, our product gross margin tissue sales for the quarter.

On a sequential basis it actually remain flat to gross margin -- went from I believe like 72% to 71%, but because the build that ’s nothing completed yet it had no impact at all on the margins certainly for the quarter. Going forward, we do believe that the margins will be somewhere in a range that they’ve been in between 70% and 75%, as we have stated previously. There is some pricing pressure in the marketplace, so we don’t see although production might increase. We don’t see the margins increasing with that. We think that basically that the price pressure that’s out there in a marketplace. We’ll have an impact and keep the margins between 70% and 75%.

What’s interesting is you've seen pricing pressure even when it seems like the OsteoSponge pricing is all a quite a bit less than infuse which is sort of losing share. Is it just when their hospitals and administration are reevaluating the product are just trying to get the best price that possibly can. Is that what’s going on? Or is there something what’s the dynamic there?

I would say that’s a fair statement, more they buy, more the discount they want so.

Okay. With all the GPO work in the hospitals proved for, it seems right now it’s really more of a block and tackle marketing game of getting the surgeons to understand the product and accepted. And so with that in this key surgeon program, it seem like it’s a good program that you’re putting together here. Is that started already or is that starting next year and how key is that to really make things ramping up revenues?

Yes, it has already started, surgeons calendars are typically full month or 2 months out. And so it does take a while to actively find to get a lot of surgeons out here. But it has been great that surgeons that have come out and visited us. They had almost 100% flip. I think 100% conversion rate that do come and visit us. Let’s say it’s like additive for the standard block and tackling that we’re already doing. But it’s definitely something that we couldn't afford to do prior to the OrbiMed financing. We just couldn't afford to pay for tickets for surgeons to come out and do the training. So it is area of focus for us moving forward.

So in other words, the expenses incurred by Bacterin to bring them to Montana and…?

Yes, it is.

Okay. And so I guess should we figure that sales and marketing expense as a percentage of tissue sales might increase a bit next year as a result of that?

We are definitely expanding our marketing efforts in a number of literature that we’re producing; we’re probably getting back little bit on our trade shows. And we just don’t get as much of adoption or conversion from the trade shows. I’d say it’s pretty much the same, but it’s just the reallocation of resources.

Yes. Okay. And just one last question on the marketing side, let’s say the new surgeons that were introduced in earlier part of the year or you seen the normal kind of ramp up in additional ordering of OsteoSponge or other body product as they become more familiar with it?

Yes. I mean we generally see the sales cycles play off where the surgeon want to try out in a small case where you would expect to have high fusion success rate and then they generally start giving it in more challenging environments until they have a level of comfort and that adoption cycle can be 6 months to 18 months.

[Operator Instructions] And our next question comes from the line of Benjamin Black [ph] with Maxim Group.

I’m asking questions on behalf of Anthony Vendetti. Can you speak a little bit about OsteoSponge SC in clinical study, how that's going along?

Yes, we are continuing to populate the study. We did add another site, we did move up the number of patients in the registry to 90 patients. And I think -- I believe all sites have been approved at this point. And we are continuing to enroll patients.

All right. And do you have timeframe as to when you will be receiving data from the study?

We are hoping for 2013.

All right. And most of the questions has been answered apart from -- you mentioned that your throughput will be somewhere in the range between the $120 million to $150 million once all the team moves online, do you know your current throughput is?

Yes, we currently are right around, our capacity is right around $65 million to $70 million right now.

I am showing no further questions in the queue at this time. I would like to turn the conference back to Mr. Gandolfo.

Thank you very much. Before we end today’s presentation, I would like to take a moment to read the company’s safe harbor statement that provides important cautions regarding forward-looking statements. During this call, the management and representatives of Bacterin International may have made comments that maybe deemed to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and these are subject to significant risks and uncertainties. Forward-looking statements include information concerning the company’s future results, operations, financing its product, research, testing, employment levels, market analysis, implementation, business strategy and expansion plans. As you consider forward-looking statements, we should understand that such statements are not guarantees of performance or results. They involve risks uncertainties, and assumptions that could cause actual results to differ materially from the anticipated results contained in those forward-looking statements. And these include the company’s ability to accomplish its goals and strategies, operational and clinical effectiveness of its products, the ability of the company’s sales force to achieve expected results, FDA approval of its products and general economic conditions. Additional information concerning these and other factors that may cause actual results to differ materially from those anticipated in forward-looking statements is contained in the risk factor section of the company’s Annual Report on Form 10-K. In closing, I would like to remind everyone that this call will be available for replay for one month starting this afternoon and approximately 2 hours after the completion of this call. Please refer to today’s press release for dial-in and replay instructions. And a webcast replay will also be available in the investor section of the company’s website at www.bacterin.com. Thank you, ladies and gentlemen for joining Guy and myself today for our presentation.

Ladies and gentlemen, this does conclude our conference for today. Thank you for your participation. You may now disconnect.