Greetings, and welcome to the Xtant Medical Third Quarter 2015 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, sir. You may begin.

Thank you, Christiania. Good morning and thank you for joining us today for the Xtant Medical Holdings third quarter 2015 financial results conference call. With me on the call today are Dan Goldberger, Xtant's Chief Executive Officer; John Gandolfo, Chief Financial Officer; Dr. David Kirschman, Executive Vice President and Chief Scientific Officer; and Michael Schmitz, Chief Financial Officer of X-spine. Yesterday afternoon, Xtant was pleased to issue a press release announcing third quarter 2015 results. Today's call is being webcast and will include a slide presentation, which has been posted on the company's website. Following remarks by management, the call will be open to your questions. We expect the duration of the call to be approximately 1 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 Xtant'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 the future performance and involve risks and uncertainties including those noted in the Risks Factor section of the company's most recently quarterly report on form 10-Q. In addition, any unaudited pro forma financial information is preliminary and does not purport to project the future financial position or operating results of the company. Actual results may differ materially. For the benefit of those of you who may be listening to the replay, this call was held and recorded on Thursday, November 12th 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. Xtant declines any obligation to update these forward-looking statements, except as required by applicable law. And with that, I'd like to turn the call over to Dan.

Thank you, Rich. We have accomplished a tremendous amount since we last spoke to you in August and I'm very excited about prospects for our future growth. Today we will cover the following topics and give you an overview of the financial performance of the company and I'll discuss integration of the combined company which is proceeding ahead of schedule. We will talk about our distribution channel and growth drivers for 2016. We will review guidance for the rest of 2015 and 2016. Talk about our listing and investor relations activities and then John will go through our financial results in more detail. We have a lot to cover, so let's get started. As you saw in our press release last night, total consolidated pro forma revenue grew 6.5% to $20.9 million in the third quarter of 2015. Total consolidated pro forma revenue excluding OEM revenue grew 13.8% to $20.2 million an impressive result considering all the distractions related to the acquisition of X-spine Systems on July 31, 2015. It's gratifying to report that Biologics revenue grew 15.5% to $9.8 million. I joined the company in August 2013 and at that time I suggested that Bacterin could accelerate to mid teens growth rates within six to eight quarters. Our management team has now delivered on that promise. Fixation revenue grew 12.3% to $10.4 million excluding OEM revenue. I'm very pleased that the combined company maintained mid teens organic growth as we anticipated, in spite of the work involved with the acquisition and subsequent integration activities. As we disclosed when we announced the acquisition, X-spine recognized about $6.5 million of OEM revenue in 2014 from an important customer. The majority of that revenue was in the form of an upfront investment in instrumentation kits that should result in recurring revenue for…

Thank you, Dan. As previously announced, the company completed its acquisition of X-spine Systems, Inc. on July 31, 2015. The consolidated pro forma results I will be reviewing are presented as if the company's current subsidiaries were combined for all periods presented. Consolidated pro forma revenue for the third quarter of 2015 was approximately $20.9 million, an increase of approximately 6.5% compared to $19.6 million for the same period of 2014. During the third quarter of 2015 and 2014, the company generated approximately $745,000 and $1.9 million respectively of original equipment manufacturer or OEM sales from a large orthopedic device manufacturer. Excluding those sales third quarter 2015 consolidated pro forma revenue increased approximately 13.8% compared to the same period last year. For the nine months ended September 30, 2015 consolidated pro forma revenue was approximately $64.4 million an increase of $6.3 million or 10.8% compared to $58.1 million reported for the same period of 2014. Excluding OEM revenue, revenue increased approximately 15% compared to the same period last year. Consolidated pro forma gross profit for the third quarter of 2015 was approximately $13.7 million or 65.5% of revenue compare to $13.2 million or 67.3% of revenue reported for the same period of 2014. Gross margin was at the high end of the company guidance of 64% to 66%. For the nine months ended September 30, 2015 consolidated pro forma gross margin was 65.7% compared to 65.8% in the prior year. Consolidated pro forma loss from operations for the third quarter of 2015 was approximately $3.5 million compared to a loss of approximately $1.4 million for the same period of 2014. The loss for the period also includes approximately $610,000 of non-recurring G&A expenses and the non-cash impairment charge of $234,000 on the net carrying value of pre-acquisition intangible assets. For…

Thank you, John. We have an exhilarating opportunity to build a great company around our passionate employees and outstanding products. More specifically, we're going to be doing the following. We'll complete the integration of Bacterin and X-spine. We'll continue to build our distribution channel calling on orthopedic surgeons and neurosurgeons in the United States. We'll invest in our Biologics capacity and in instrumentation kits to support growth of new and existing products. We'll invest in product line expansions and new combination Biologics Fixation technologies that will leverage our distribution channel and we'll invest in clinical data to demonstrate efficacy and support reimbursement of our products. I'd like to take a moment to thank our dedicated employees and distribution partners who have worked tirelessly to bring these two great companies together. We're committed to providing outstanding products and customer service to our physician and hospital customers and their patients. I also want to thank the Donate Life organization for providing us the opportunity to participate in the gift of donation. With that I'll turn it over to the moderator to handle questions.

Thank you. We will now be conducting a question and answer session, [Operator Instructions] Our first question comes from the line of Suraj Kalia with Northland Securities, please proceed with your question.

Good morning everyone, congrats on a nice quarter.

Thank you Suraj, good morning.

Dan, let me start off with some obvious questions, and I will probably go to Dr. Kirschman also. This, Dan can you remind us now with the combined company Bacterin plus X-spine, what percent of the overall business being generated through distributors and to further that question I'm trying to understand you'll have done pretty well even on a standalone basis between direct versus distributors. For the combined company, how do you resolve conflicts? By that I mean, if you have a distributor which has good relationships in a certain geography and you have direct reps. Just if you could tie that together for me as you all try to maximize your sales per center also that would be great.

So, it's a good question Suraj. We have three business models if you will in the United States. We have direct sales in certain cities where that's been working well for us and we have contract access and physician support and outstanding people. We are -- a larger portion of our business runs through a consignment commission based model, where we pay straight commissions to, I call them sales agents, but the industry in general calls them distributors. And we also have a certain amount of our business that runs through a reseller business model. Roughly 90% of our business is going through the straight commission or reseller channels at this point in time. In cities where we have strong direct presence that's primarily Chicago, Phoenix and Seattle we will continue to build on the efficiencies that we've achieved there. In the rest of the country it's faster and more economical for us to continue to expand with those sales agents and reseller relationships and we remain committed to that hybrid sales function.

So you'd really, at this stage of the game you really don't see any conflicts per se between your resellers, directs and your hybrid model. Is that a fair assessment?

That's entirely accurate. We manage any potential channel conflicts by geographies, by hospital customer and in some cases down to the physician level.

Dan, two other questions and I'll hop back in queue. The OEM biz I presume the larger orders flow that you're talking about. Is this a onetime hiccup or somewhere I think so I remember talking about the $0.75 million run rate eventually. Is my, am I remembering it correctly and I'm also curious what your FY '16 guidance incorporates from the OEM side?

So, we've modeled that sort of $750,000 per quarter in OEM revenue and that's roughly what we booked for the September 30th quarter. We do not have a forecast if you will but based on the investment that our partner made in instrumentation kits and some assumptions about refilling those trays, that's a reasonable run rate for 2016.

Fair enough and last question Dan either for you or Dr. Kirschman, understanding, you guys have done a whirlwind integration and managed to get the two businesses running at least by the numbers you're all talking about already looking to cross sale between Biologics and Fixation. So, should the Fixation revenues per case, I thought I heard like $6,700 or $6,500 per case, they were a tad lighter either than what we were thinking, Dan or David. It just part of the integration process and then eventually we start to seeing it normalize at a higher level, any color would be great? Thank you for taking my questions.

The Fixation revenues per case have been around $6,700 over the last quarter, a lot of that is due to product mix. What we want to try to do is now that we are combining the both -- we are doing a better job of combining the Biologics aspect and the Fixation aspect of each individual procedure, we looked at -- for that -- we're looking at that to help grow, the total revenue for the future. I am really concentrating on that number and so that's where we're looking to do.

Thank you.

Our next question comes from the line of Jason Wittes with Brean Capital. Please proceed with your question.

First off, in terms of integration of the sales force, I imagine -- it sounds like you're trying to see some Biologics cross selling. In terms of the hard work side, how long do you think you will start to see -- how long you will think take -- you start to see that in the numbers?

We have cross selling in both directions in October. So, it's still a small number. So, but there are -- some of our partners are very quick to pick up the new product launch.

And then integration through your growth is picking up new distributors, can you give us a sense for next year in terms of how much is built into your expectations for next year? In addition, how long the timing it will take before just signing a distributor and getting that distributor actually impacting sales?

So, we are pausing for the current quarter while we go through the integration and cross training. Will be churn to that historical rate of adding five to 10 new partners per quarter in 2016 and in general it takes two to three quarters for -- from the time a partner signs the contract until they become proficient with the product line.

Okay. Thank you and also if I think about Zimmer Biomet relationship that does not include anything on the Biologics side at this point, is there some hope that might be augmented to include Biologics as well?

We have not had any of those discussions. Our discussions have focused on the existing product lines in the agreement.

Okay and then for 3Demin, you are about to double production, I suppose you're still not…

Triple.

Pardon me, triple. Do we -- you sense there will be any cannibalization between that and your other Biologics, do you think these are two separate products and you're probably willing to supply constrain on the 3Demin side?

So, we're not seeing any cannibalization yet and pricing is such that it's highly unlikely. 3Demin is very much of a physician preference item and the physicians are very enthusiastic because it's working in their hands, its working better clinically. So, no, we don't see any cannibalization at this point in time.

Okay. Great. Thanks. I will jump back in queue.

Our next question comes from the line of Swayampakula Ramakanth with HC Wainwright. Please proceed with your question.

You said, you are certainly seeing positive trends in the integration for this something you talked about 3% now. What do you think you'd see the optimal percent that you want to fit to? And what do you think is that as a percentage at this point you want to call it 100% and what equals the 3% of revenue do you think for that?

I'm sorry, RK, I'm not sure, I heard the question, I think you're asking about what is a reasonable expectation for cross selling going forward. So we are ahead of schedule with our preliminary October experience. As you know, putting the two distribution channels together we've effectively doubled the reach of the Biologics product line and also doubled the reach of the Fixation product lines. So hypothetically once the distribution channels are fully engaged we've got an opportunity to double the business. That said my personal goal is to get to an incremental 10% to 15% of revenue from cross selling in 2016 and 20% to 25% of that cross selling opportunity as we roll into 2017.

In terms of increasing footprint across the nation. How has this acquisition helped or do you see now that you have traditional products in the bag that you would like to expand into certain geographies that you did not even think off [indiscernible]?

So we are still going through -- this an excellent question, we are still going through rationalizing our existing footprint and assessing the lower performing members of our sales channel. And as we complete that assessment in the current quarter that will inform our expansion plans for 2016 and we've always been tactical about where we add distribution presence and we will continue to do that.

Okay. While we are all enamored by the subsequent acquisition and the integration and what not, I also know that you have made few relationships before regarding to X-spine, I'm talking about [indiscernible]. How have they have been working out, and how has that helped the business? How they are viewing in the development of that business?

So our revenue from the [fixed] military and VA system channels continues to be very small. That continues to be a very large opportunity for us. Frankly the acquisition distracted our focus somewhat and we were not able to support those partners to the extent that we would have liked to for the summer quarter and now that we reorganized the sale force we will be turning our attention back to penetrating those channels.

Excellent. Thank you.

[Operator Instructions] Our next question comes from the line of John Vandermosten with Singular Research. Please proceed with your question.

Dan I just had a question regarding just how you look at revenue per head? I know that has been the metric in the past that was used and now that we have I guess different sales forces with different focused points. Are you still using that as a metric and I guess how -- is there any guidance also in terms of how you expect the different groups to proceed in terms of revenue per hit?

So we are resetting our metrics based on the combined sales force and as I've mentioned for the previous question, our revenue comes from three business models; the resellers, the straight commission sales agents and our direct channel and we have expectations and metrics for each one of those groups. But I think at the company level, it is appropriate to take a look at our 285 field sales assets for the third quarter and look at our total revenue and look at that as a blended average for some forward predications.

Okay. So we may expect to see some numbers there as we have in the past to follow.

Yes.

Okay great. Another question on 3Demin. It seems like the bottleneck is holding back additional sales. When you are able to triple production, do you anticipate that you will immediately be up to capacity again, is that your sense of the market as this point?

Yes. That's why we've made the additional -- the capacity is going to come online in two steps. We will be at $150,000 per week in December and that product is already in the pipeline going through the sterilization quarantine. So I know it's going to be released in the next few weeks. And then there is another step up in capacity that will come online in April that will double it again to $300,000 per week.

Okay. And you anticipate that all being immediately sold, I mean the demand there it's just the suppliers.

The demand is certain. It's absolutely positive there to soak up all of that $150,000 per week and we'll have to see where we are in February, whether that $300,000 per week is adequate supply.

Okay, I mean it sounds like perhaps there might even be more demand than what a tripling would support?

Right now our indicators are that 3Demin with adequate supply will be as large a product as OsteoSponge is for us.

Right, and just jumping back to the OEM business. Can you provide some just explanation on terms of why it's been so volatile?

I don't think it's volatile at all. The nature of that, those product lines is that there's an instrumentation kit which is a piece of capital equipment that has a five to seven year lifetime. And so our OEM partner invested in acquiring a substantial number of those instrumentation kits and then each one of those instrumentation kits will do one or two procedures per month and pull through the implants, where we actually have a much higher gross margin. And it's that implant pull through business that generated about $750,000 in the September 30th quarter.

Okay, all right, thank you Dan.

We have no further questions. I'm sorry, we did get another question from Todd Robbins with Robbins Capital Management. Please proceed with your question.

Good morning gentlemen, nice quarter.

Thank you Todd, how are you today.

I'm well. Two questions. One is, inventories held at the hospital level are somewhat of a leading indicator for future sales. How is that tracked sequentially from Q2 to Q3?

Todd, because of the acquisition and integration activities, we don't have good visibility on the sort of true run rate.

That's right, the second quarter included Bacterin only and the third quarter balance sheet includes Bacterin and X-spine.

Right. So the right way to look at that is to go back into the private company reports.

Right.

We'll need to look at the details of that and we'll certainly get you a response Todd.

It looked like it was up almost 10% quarter to quarter, that's why I asked. Okay, the second question has to do with the incremental profitability. If I look at the EBITDA number in the fourth quarter it looks like roughly there's a step up in revenues from Q3 to Q4 of $3 million and EBITDA's a swing of 2. Reason I put it that way is because if I look at the same metric for '16 the revenue delta year-over-year is about $15 million and the EBITDA step up is about 8. So the question is, as we look at incremental profitability as you guys turn the corner, is it a 50% incremental profitability or 60%, how should we be thinking about that?

Well I think that was -- so what you're going to have, is you're going to have a few things happening at the same time. You're going to have gross margins which we reported at 65.5%, as we mentioned we expect them to increase incrementally as we go into 2016. So you'll have the gross margin percentage increasing from those two periods. In addition you will have your sales and marketing expense as a percentage of revenues coming down and the total R&D will remain flat in terms of the quarterly spend as well as for G&A. So if you think about roughly the guidance for 2015 being $90 million of revenues going up to the guidance for 2016 you should have about a 60% incremental increase in EBITDA between those two periods.

In other words there's a tremendous amount of leverage on the income statement with incremental revenue.

Or to say it differently your EBITDA has diminished. Is probably conservative. John you mentioned there was a breakeven run rate at $25 million, $25.5 million is that breakeven earnings or cash flow?

Well it's the non-GAAP profitability measure. So what we've done is we've taken EBITDA and we deducted cash based interest expense from that. So the reason why we feel that's an important metric is that it eliminates all of the non cash expenses, such as the warrant derivative liability, the non cash stock based compensation expense as well as the amortization of intangibles from the purchase price. So that's based upon looking at EBITDA less interest expense. So I would say it's a cash based profitability number.

That's terrific. Okay, thank you very much.

We have no further questions at this time. I would now like to turn the floor back over to management for closing comments.

Thank you everybody for your kind attention. And we look forward to continuing to improve our company.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation. And have a wonderful day.