Xtant Medical Holdings, Inc. (XTNT) Q1 2015 Earnings Report, Transcript and Summary

Greetings, and welcome to the Bacterin International First Quarter 2015 Conference Call. At this time, all participants are in a listen-only mode. A 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. Please go ahead, sir.

Thank you Kevin, and I appreciate you all joining us today for the Bacterin first quarter 2015 financial results conference call. On the call with me today are Dan Goldberger, our Chief Executive Officer; as well as John Gandolfo, Chief Financial Officer. Yesterday, the company issued a press release announcing 2015 financial results. Today's call is being webcast and will also include a slide presentation which has been posted to the company's website. Now following the remarks by management, of course we'll open the call upto your questions and 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 the company's future events and expected future performance. These forward-looking statements reflect Bacterin's current perspective on existing trends and information costs can be identified by words such as expect, plan, will, may, anticipate, believe, should, intend and other words of similar meaning. Any such forward-looking statements are not guarantees of the 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. These actual results may differ materially from those projected in these forward-looking statements. Now for the benefit of those of you who may be listening to the replay, this call was held and recorded on Wednesday May 6 at approximately 10 AM Eastern Time. Since then the company may have made additional announcements related to the topics discussed. 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. Now with that, I'd like to turn the call over to Dan.

Thank you, Rich thank you everybody for joining us, good morning. As may recall, John and I covered a lot of topics on our fourth quarter and year end 2014 call, just seven weeks ago. This morning of course we'll go over the financials for the first quarter and provide updates to items we discussed in March. As always, we'll be happy to answer any questions you may have at the end of the call. Let me start with our revenue numbers for the quarter. Slide 5 shows quarterly revenue since I joined the company in August 2013. First quarter 2015 represents a new record and our sixth consecutive quarter of year-over-year revenue growth. First quarter 2015 revenue was approximately $9.5 million, an increase of 6.6% compared to approximately $8.9 million for the same period during 2014. Sequentially, first quarter 2015 revenue increased 4.6% over fourth quarter 2014 revenue of $9.1 million. This is the trajectory we want to see, and we project accelerating growth over the next few quarters as our ongoing investments in sales representation and partner relationships continue to mature. Moving on to the next slide, you'll see our first quarter gross profits and gross margins. Gross profit for the first quarter of 2015 increased 9.6% to $6 million or 63.5% of revenues compared to $5.5 million or 61.7% of revenues for the first quarter of 2014. Our gross margins continue to track above our previously stated 2015 guidance between 61% and 63%. Improvement in sales mix and discipline and operations have driven gross margin expansion over the prior year. We covered a lot about our sales function last call, so I'll just touch upon a few key points. We continue to invest in sales and marketing headcount to build our distribution channel and fuel our growth objectives. We continue to exceed productivity metrics for the sales function as we add those resources. We expect that Spartan Medical will introduce Bacterin products to at least 20 government medical centers and major military treatment facilities during 2015, and substantially more in 2016. Spartan will therefore help us open up a whole new channel for our allograft products. On the product side, the launch of our 3Demin family of bone grafts continues to exceed our expectations. These proprietary cortical fibers were launched at the end of last year and have now generated more than $400,000 in revenue since introduction. Much of that revenue is coming from entirely new accounts that are also interested in the rest of our catalogue. Last month we announced that The United States Patent and Trademark office issued a patent covering certain demineralized bone matrix including products in our OsteoSponge product line. In addition to protecting our proprietary demineralized bone products and recognizing our company innovation, the patent is significant, and then it further substantiates our core competency in demineralized bone matrix technology and the leadership role we have in ortho-biologic technology. Last week we announced that our Acellular Dermal Matrix allograft, hMatrix, has received coverage from Novitas Solutions Inc., a Medicare administrative contractor or MAC. Novitas is one of the 8 MACs that are responsible for processing Medicare claims in one or more 12 geographic areas or jurisdictions in the United States. Novitas is responsible for approximately 11.3 million Medicare beneficiaries within its jurisdictions. This local coverage determination for hMatrix allows physicians in root care practioners to offer hMatrix to their Medicare beneficiaries. So as you can see, its business as usual here at Bacterin, our revenue is accelerating as our ongoing investment in field sales assets begin to pay off. Our new 3Demin product is gaining traction and we expect that trend to continue as we announced additional products later this year. Before I turn the call over to John I wanted to briefly touch on our decision to move to the OTCQX marketplace last month. As most of your are aware, we recently transitioned trading of our common stock from the NYSE MKT to the OTCQX. While we would have liked to maintain our listing on the NYSE, the transition to the OTCQX allows us to focus on the business and frankly, it allows us to save a little bit of money while growing the company. We view this as a temporary step within the process of strategic initiatives that we are implementing to bulge through the bickering business. Now I'd like to turn it over to John to discuss our financial performance in detail.

Thank you, Dan. I'd like to remind our listeners to refer to the first quarter 2015 earnings press release issued yesterday and also our Form 10-Q for the quarter ended March 31, 2015, which will be filed in the very near future. I will now review our profit and loss, and liquidity information in more detail. First quarter 2015 revenue was approximately $9.5 million, an increase of approximately 6.6% compared to approximately $8.9 million for the same period during 2014. Sequentially, first quarter 2015 revenue increased 4.6% over fourth quarter 2014 revenue of $9.1 million. The reported first quarter 2015 revenue figure represents the sixth consecutive quarter of increased year-over-year revenue growth since August 2013. We expect an acceleration of growth over the next few quarters as newly developed relationship of reduction from recently higher sales assets takeaways. Gross profit for the first quarter 2015 was $6 million or 63.5% of revenues, and this compares to $5.5 million or 61.7% of revenues for the first quarter of 2014 which marks the 9.6% year-over-year improvement in gross profit. Gross margins continue to track above our previously stated range of 61% to 63%. The increase in gross profit and gross margins are the results of a continuing focus on operations which has yielded improved manufacturing efficiencies, as well as a shift in product mix. Although the company continues to report gross margins in access of previously stated guidance and believes that there may be some upside, we are keeping the gross margin expectation for 2015 between 61% and 63%. First quarter 2015 sales and marketing expenses increased to $4.7 million as compared to $4.1 million during the same period in 2014. For the quarter, sales and marketing as a percentage of revenues increased to 49.6% compared to 45.5% in the first quarter of 2014 due to increases in sales and marketing headcount between the two periods. Sequentially, sales and marketing expenses have decreased to 49.6% of revenue from 49.8% in the fourth quarter of 2014. We believe the ongoing investment in sales and marketing assets will continue to fuel the revenue growth initiatives that we have in place. In the first quarter, general and administrative expenses increased slightly to $2.4 million as compared to $2.3 million reported for the same period last year. As a percentage of revenues, G&A expenses were 25.5% during the period as compared to 25.7% for the same period of 2014. Company reported first quarter 2015 research and development expenses of approximately $434,000, a decrease of $54,000 from $488,000 reported in the fourth quarter of last year. Company has continued to invest in product line extensions and clinical studies which will support our future revenue growth. The reported first quarter 2015 net loss was $4.2 million compared to a year ago period net loss of $4.1 million. The company defined EBITDA as net income loss from operations before depreciation, amortization, impairment charges and non-cash stock-based compensation. EBITDA for the first quarter of 2015 was a loss of $1.3 million compared to a loss of $700,000 for the same period of 2014. During the period, the company incurred $302,000 of operating expenses that will be eliminated over the second half of 2015. Excluding that expense, EBITDA would have been approximately negative $966,000 for the period. As of March 31, 2015, cash, cash equivalents and net accounts receivable were approximately $8.4 million by March 16, 2015, we entered into a common stock purchase agreement with Aspire Capital as amended and restated in our April 17, 2015. Proceeding to the terms of the purchase agreement, Aspire purchased $750,000 of our common stock at a purchase price of $3.62 per share, the closing sale price of March 13, 2015. The company can from time to time elect to sell to Aspire Capital upto an additional $9.25 million worth of common stock over a two year period. The sale price of common stock purchased by Aspire from the company will be based upon the market price of our common stock at the time of each sale. On April 17, 2015, we filed an SOM [ph] registration statement related to these buyer capital transactions which was declared effective by the SEC on April 27, 2015. No other issues were in connection with this transaction and we believe the purchased agreement with Aspire provides flexibility and obtain working capital under terms which are less diluted to common shareholders compared to other available options at this time. To-date, the company has not drawn down any firms from Aspire Capital. For full year 2015, the company has reaffirmed revenue guidance of approximately $40 million to $42 million and this compares to $35.3 million reported for 2014. With that I'd like to open the call to your questions.

Thank you. [Operator Instructions] Our first question today is coming from the line of [indiscernible]. Please proceed with your question.

Good morning, Dan and John. A couple of quick questions and then I'll get back in line. To start off, it's good to see the revenue momentum that you are building and feeling if it's really – could you help us understand the contribution of some of the related products, at least as a percentage of the quarter $9.5 million and also what would you contribute the gain from $9.1 million recorded in the fourth quarter of 2014?

I think there are two questions there. I'll answer the second one first, that the growth from – sequential growth rate is directly attributable to having increased headcount in the field, you will recall that we firmly believe that the business is going to scale with representation in the short run, and we're continuing to add headcount, two or three per quarter, and then the business scales from there. Our new product introductions, the 3Demin family that was nextgen [ph] has contributed material revenue during the period but then we expect that to continue to expand but the new product launch is mostly bringing in new accounts and that is an especially powerful driver of future revenue growth. So I think I answered your questions there.

Okay, that's fantastic. Actually let's keep that last line and tease that out a little bit more. This is actually very interesting to see that the 3Demin continue to be a new account and your additional comments was that you are excited about that – do you expected that to – actually for the rest of your portfolio, did you see some indication of that, is there already some outstanding orders that are coming in, and how – which part of the portfolio is this coming down, what I'm trying to find out is, OsteoSelect and OsteoSponge products or hMatrix products that is new products – accounts are getting interested in?

So the new accounts that are coming on are primarily in Spine, which is two-thirds of our business and which is our most efficient call point or most productive call point, it's measured by revenue per procedure and there is a hallow effect because we are talking about our new products that gives our field representation something new to talk about with the physician and with hospital staff, and gives us an opportunity once the door is open to talk about the rest of the catalogue. So there is both room for OsteoSponge and OsteoSelect, and we're going to continue to try and take advantage of those opportunities.

On this two products, are they better – gross margin, for the rest of the portfolio, so I was just wondering.

Right now we're still in the launch phase, so the trailing actually is probably not indicative but if we believe that as the product mix shifts to spine as the product mix shifts to OsteoSponge and 3Demin, away from OsteoSelect, there is improvement in gross margin.

Okay. I have another two questions. Novitas, it's great but you thought this is – relationship with hMatrix. One, how are you planning to capitalize on this benefit? And two, at some point you are considering hMatrix as a non-core asset, but this negative relationship in the – how about that or is that actually helpful in guidance of that product [ph]?

So we were very pleased to get the reimbursement decision from Novitas and that sets the stage for other MACs to give us approvals, though it's the first one that is the Artist. That coverage decision primarily covers the use of hMatrix in advanced wound care. So diabetic foot ulcers, be this leg ulcers, which is a call point that we do not currently address, we do have some small revenue in that call point but we are not currently structured to adequately address that market opportunity, that vertical. So the coverage decision for our Novitas in addition to getting us some small incremental revenue, what it really does is supercharge our conversations with distribution partners, it eliminates one more risk item if you will in the calculus that potential distribution partner looks at in taking on this product with us.

Okay, thank you.

Thank you. Our next question today is coming from Suraj Kalia from Northland Securities. Please proceed with your question.

Good morning, gentlemen, congrats on the continued success. So Dan, let me continue on the hMatrix question, my apologies, cell phone is being acting up today. So currently you guys were – at least our understanding is don't push in the wound care sector as much as some of your other – as the other players do, so getting Novitas on Board obviously is a significant accomplishment. Can you walk me through – what the trajectory is going to be Dan in terms of – it's a different call point, so how are your sales guys going to be focused, are you all long term looking at distribution partners, as more Maxim [ph] come on board, just kind of give us the landscape that this is a significant – this could be a significant aspect of the business, let's say 12 to 24 months out?

It's an excellent question, Suraj. Our hybrid sales channel is focused on orthopedics and neurosurgery and we'll continue to focus on orthopedics and neurosurgery. We have some small revenue from the use of hMatrix in advance wound care to your point, we will pick up from those local centers of excellence, we'll pick up some additional revenue, especially in the Novitas coverage areas, but that's completely opportunistic sales, it is not at all focused of our sales force. In the same breath though, John and I have been actively communicating with potential distribution partners and getting the coverage decision is an obvious value increase in the asset for potential distribution partner, removes one of the overlying risks. So just to sum it up, we are actively looking for distribution partner who can effectively take the hMatrix product line to the advanced wound care vertical.

Okay. John, what was rep productivity in the quarter? If I remember correctly, last quarter it was like $340,000 per quarter per rep, can you give us some ballpark idea – should I just – I guess I'm not sure if I heard the number of reps on hand, there are 39 at the end of last quarter, if you could just give us an update that would be great.

So there were 39 total reps, 28 productive reps in the fourth quarter which equated to revenues per productive rep of $325,000. In the first quarter we had 30 productive reps, and that equates to revenues per productive rep of $317,000. Also these figures are above the target that we outlined in our prior call of $315,000 per productive rep. [Cross Talks]. I'm sorry, go ahead.

No, go ahead John.

So for the quarter we were at $317,000.

Fair enough. And finally Dan, let me pop in one more question and I'll get back in queue and I have to ask this, any update on the strategic discussions which we understand?

No comments.

Okay, fair enough. Thanks, gentlemen, congrats again.

Thanks, Suraj.

Thank you. [Operator Instructions] Our next question today is coming from John Vandermosten from Singular Research. Please proceed with your question.

Good morning, Dan and John.

Good morning, John.

The first question that I wanted to ask was just about cash balances, they are bit lower than I had projected and I was hoping you could walk me through just kind of where you expect that to trend quarter-by-quarter, take into account cash burn and potential financing inflows for the remainder of 2015?

For the first quarter we had an EBITDA loss of $1.267 million. So the – when you factor in your royalty in interest payments to over meet above that it was basically a pro forma cash loss of $2.2 million. We did receive the Aspire funds of $750,000, so for the quarter it ended up being about a $1.5 million change in our cash balance, negative. We did in fact debunk [ph] to decrease as we looked at the future, I think a good number to use on a quarterly basis we did ask some number covering cost in this quarter but I think a good number to use is about $1.5 million to $1.6 million per quarter which will be decreasing as we look towards the second half of the year. So we do have the current cash balance plus we do have the ability to draw on the Aspire line if necessary although nothing has been drawn to-date. The other thing is that we're looking at is, if we could generate some cash from some transactions with some assets that we have as well to generate additional cash, we get on to building – we're looking at some strategic names, maybe from sale lease type standpoint that might generate some cash as well.

Okay, that's helpful. The next topic I wanted to ask about was just your expectations for relative growth to sales and marketing expense to revenue growth, are we expecting those to converge, I guess the same rate or do you expect revenues to exceed that whenever you are adding people but I just wanted to get your thoughts in terms of the relative trend there between revenues and sales and marketing expense.

Let me take it to all of the expenses. So – on the last call we mentioned that EBITDA breakeven occurs at about $10.8 million of revenues per quarter, and what that implies is that we're gaining efficiencies across the Board on the cost side. We'll see slight improvements in our gross margin percentage, we think that will be able to reduce G&A as a percentage of revenues by about 2% to 3%. We expect sales and marketing to decrease as a percentage of revenue as well, last quarter was between 46% and 47%, we think that will get down closer to 44% to 45%. And R&D should also level off. So we do expect – in order to breakeven at that revenue level that we will see improved efficiencies across all of our cost centers at that time.

Okay, that's helpful. I also wanted to ask, and that was a question about Novitas relationship, is there – I guess first of all, I guess there is only expected to be just a minor revenue impact from that on the ADM side?

We're not modeling any revenue in that.

Okay. And I guess, do you expect that this may lead to other relationship for DMB or other products?

No, this is specifically out-patient wound care which is not our primary vertical.

Okay. So you don't expect that relationship in Novitas in the wound care to expand to the DMB or anything like that?

No, sir.

Okay.

The way to look at hMatrix is that the catalyst, the value creation event will be announcement of the distribution partner, and I'm not going to put a calendar, I'm not going to put a target date on that.

Okay, thank you for the answers.

Thank you, John. I appreciate your support.

Thank you. [Operator Instructions] Our next question today is coming from Todd Robbins from Robbins Capital Management. Please proceed with your question.

Good morning, gentlemen, how are you?

Good morning, Todd, how are you today?

Terrific. Just from the standpoint of modelling, we did 30 season sales people in the first quarter – should we be modeling in an increment of two or three per quarter going out for the rest of the year?

For modelling, I'd be more conservative in model one or two per quarter at a productivity of $350,000 per head.

Okay. So on the fourth quarter, we're looking at something 35, 36, and that would compare with 28 in the fourth quarter of last year. So that's almost a 30% increase in body count.

Yes.

Is it logical to assume that the rate of change in the decent sales force would translate into comparable rates of change in revenues?

We absolutely believe that the business will scale with representation, so absolutely.

So if that's true then we're looking at revenues of well over $11 million in the fourth quarter. Just assuming your $315,000 revenue per season sales rep, and therefore that would exceed your EBITDA breakeven number that John threw out of $10.8 million.

Yes.

So, John when you made the comment that you're looking at a cash burn of $1.5 million to $1.6 million per quarter, that doesn't square.

Well, does that includes the debt service spell, the EBITDA number is before debt service. So if you look at our cash burn per quarter on an ongoing basis its closer to $700,000 to $800,000. And then when you add in the debt service above that, that's what takes it to the $1.5 million to $1.6 million. And it's much easier – even $10.8 million is an EBITDA number, not after debt service but before debt service.

And I think Ross [ph] is saying it's going to take rock as we go through the counter year.

We're going to see our expenses as a percentage of revenue as I went through over John's question, decreased from that point in time.

What is your debt service per quarter?

Around about $850,000.

I'm still getting you pretty close to cash breakeven in the fourth quarter based on what you've given me.

Cash breakeven after we mentioned about the last conference call occurs at about $12.5 million per quarter.

Fair enough. What do you figure the share account would be at the end of the year John?

I would think it probably would be around $7 million.

So you don't anticipate the exercise of any further stock biased buyer?

We are using that as a safety net, we're certainly at this point in time we haven't made any decision about drawing down any funds.

Okay. The royalty line on the revenues, where does that source?

The royalty income is from our licenses to Bacterin and to Rymed [ph], excuse me, I misquote, [indiscernible].

And those licenses cover what products?

Those are long standing relationships around the original coding business.

Okay. So I guess the only other question I have is that it looks like the rate of change in the season sales people should be accelerating now as you look in anniversary your last year, and therefore the balance of the next nine months, you should be able to grow revenues on a year-over-year basis, probably greater than 20%, in the third and fourth quarter it should be close to 30%.

That's if we execute this plan and we coup the right kind of field sales asset that is absolutely what we expect to do.

Okay. Thank you very much.

Appreciate your support, thank you.

[Operator Instructions] We have reached the end of our question-and-answer session. I'd like to turn the floor back over to Mr. Goldberger for any further closing remarks.

Thank you. Once again, I want to thank all of our stakeholders out there, the players of this company, our physician customers that donate life to organization, certainly the stockholders that have stayed with us for an interesting ride. Have a great day. Thank you.

Thank you. That does conclude today's teleconference. You may now disconnect your lines at this time. And have a wonderful day. We thank you for your participation.