Greeting. And welcome to the Xtant Medical’s first quarter 2015 results conference call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce you host, Mr. John Gandolfo, CFO of Xtant Medical. Thank you. You may begin.

Thank you, Donna. Good morning and thank you for joining us today for the Xtant Medical Holdings, Inc. first quarter 2016 results conference call. With me on the call today is Dan Goldberger, Xtant’s Chief Executive Officer. Yesterday afternoon, Xtant was pleased to issue a press release announcing first quarter 2016 financial results. Today's call is being webcast and will also include a slide presentation which has been posted on the company's Web site. Following remarks by management, the call will be opened up for your questions. 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 future events and the company’s expected 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 future performance and involve risk and uncertainties, including those noted in the Risk Factors section of our most recent annual report on Form 10-K. In addition, any unaudited or 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, May 5, 2016 at approximately 9 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. The company 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.

Thank you, John. Last night, we issued a press release announcing our first quarter 2016 results with core recurring revenue of $20.5 million, representing 6.8% year-on-year growth. We continue to transition the business away from OEM partners in favor of higher-margin sales to end users – what we call, core recurring revenues. Gross margin has expanded 2.9% to 67.2% as a result of that emphasis and improving operational efficiencies. First quarter 2016 revenue in total was $21.0 million, somewhat lower than pro forma first quarter 2015 revenues of $21.7 million and fourth quarter 2015 revenue of $22.3 million. We previously reported a record fourth quarter of 2015; and as a result, depleted much of our finished goods inventory by December 31, 2015. That lack of inventory made it difficult for us to grow the business in January and February 2016. We were able to replenish most of our finished goods inventory by the end of February, but certain products, specifically Certex and Irix-C, remained on allocation until the end of April 2016. Revenue from 3Demin and OsteoSelect are increasing nicely, but those products continue to be on allocation as we ramped up our tissue processing capabilities. Inventory allocation was a drag on growth during January and February and affected the revenue we could generate in the first quarter. We believe that as much as $2 million of additional revenue could have been achieved with fully stocked shelves. Shortages were mostly relieved in February, allowing us to set several records in March 2016. That momentum is carried over into April 2016 and we will continue to implement systems to better forecast and manage our supply chain in the future. Inventory allocation also caused us to delay the launch of more than 100 new instrumentation sets for a variety of our fixation…

Thank you, Dan. Slide 11 outlines selected profit and loss statement information for the company on a pro forma basis. Total revenue for the three months ended March 31, 2016 was $21 million, slightly lower than $21.7 million of revenue for the same period of 2015. Net loss in the first quarter of 2016 narrowed slightly to $5.6 million from a pro forma net loss of $6 million in the first quarter of 2015. Gross profit grew slightly to $14.1 million from pro forma gross profit of $14 million during the same period of 2015. Our gross margin grew 2.9% to 67.2% from 64.3% for the same period of 2015. For the first quarter 2016, EBITDA was a loss of $145,000 compared to a pro forma gain of $282,000 in the first quarter of 2015 due to the slightly lower revenue figure. Slide 12 shows the balance sheet comparison between March 31, 2016 and December 31, 2015. As of March 31, current assets includes approximately $14.9 million of net accounts receivable and $24.2 million of inventory. Total liabilities include $68 million of convertible debt and $42 million of original principal amount senior secured debt which was incurred to fund the X-Spine acquisition in July of 2015. Company reported positive shareholders’ equity of $3.4 million as of March 31, 2016. In order to ease working capital constraints, OrbiMed, the key financier of the X-Spine transaction has deferred their cash-based interest due to them on March 31 2016 and April 14, 2016. Furthermore, we have executed a preliminary term sheet and are in vast discussions with a commercial financial entity for a $6 million accounts receivable revolver facility, which will provide additional working capital to fund our ongoing strategy. In addition, the company has approximately $8.5 million remaining on its equity credit…

Thank you, John. I continue to be very excited about the long-term prospects for Xtant Medical. Slide 16 lists some of the growth drivers for 2016 and 2017. Although we had some inventory headwinds in Q1 2016, those were largely resolved during the first quarter and will be completely resolved shortly. In the short-term, we will leverage the portfolio selling opportunity among our existing field sales agents and customer base. Increasing supply of biologics from our investments in plant and people in Montana will allow us to fully deploy 3Demin and OsteoSelect PLUS to our distribution channel. We’re going to deploy more than 100 new instrumentation trays in the second half of the year to support growth of Aranax, Irix, Certex, and Fortex Xpress product lines. Longer-term, we’re going to continue to invest in our product and technology platforms. As previously discussed, demand for 3Demin continues to outstrip supply and I look forward to continued growth as capacity becomes available. Aranax and Atrix-C are already generating revenue during their pilot launch. OsteoSelect PLUS will start generating revenue in the current quarter. And our distribution channel is signaling that that product, OsteoSelect PLUS, could be as large as or even larger than 3Demin. As I said earlier, we’re very excited about the prospects for OsteoVive in our distribution channel, our first live cell allograft offering. This product family could provide a meaningful lift in revenue over the second half of the year. Financially, I expect that we’ll return to mid-teens revenue growth in our core recurring sales to end users for the rest of the year. Gross margins should continue expand with revenue growth and better utilization of our fixed investments. The income statement has tremendous leverage as we move through the breakeven run rate of $24.75 million per quarter with as much as 45% of incremental revenue flowing through to EBITDA and non-GAAP profitability. Management has developed a plan to reduce OpEx by $500,000 to $750,000 per quarter which should be fully effective in the fourth quarter of 2016. As John explained earlier, we have adequate financial resources to execute our plan. Those points are summarized on slide 17. In closing, I want to thank our employees, sales partners, vendors and financial partners for working so hard to combine these two great. As always, we remain committed to the Donate Life community and our recovery partners. Thank you for joining us today and we’ll turn the call over to questions. So, Donna, if you can bring on the first question, that would be great.

Thank you. [Operator Instructions] Our first question is coming from Suraj Kalia of Northland Securities. Please proceed with your question.

Good morning, gentlemen. Can you hear me all right?

Yeah. Good morning, Suraj.

Dan, pardon me if you hear some background noise. I’m on the road, so hopefully my voice comes through. So a bunch of questions. So, I guess, let me start out, Dan – some of your comments in your prepared remarks about OpEx reduction of $500,000 to $750,000, maybe I missed the details of that. Per quarter, what is that OpEx reduction specifically targeting? And I guess, where I'm headed at is, just trying to see if more designs to conserve cash or there are some inefficiencies that you’ll have highlighted that will not affect sales.

It’s a good question. So, on Monday of this week, we implemented a significant reduction in force, so reducing headcount in a variety of functions throughout the company in recognition of the fact that our revenue run rate and our revenue guidance for the year was reduced last month. So you try to be careful about headcount reduction so that you don't impact the momentum of the business, but that's the primary element of the OpEx reduction. There are a few other elements that we’ll be working on for the rest of this quarter that are not headcount related.

So, again, in terms of the $94 million to $99 million guidance maintained, I guess a double part question, what is the implied growth rate now for X-Spine versus organic Bacterin, if you’ll could share those details? At the same time, are the reductions primarily on the X-Spine side or the organic Bacterin side?

So the reductions were across the company. And as you know, we’ve integrated all of the back office functions of the company and the sales force has been integrated. So it's not that one product group or the other has been affected. It’s across the functionality of the company. And as far as the growth goes, biologics products have been hampered by supply and those supply constraints are being relieved by the investments in physical plant and direct labor in Montana. And the Certex, Irix, Fortex Xpress, those products are limited by working capital as represented by the investment in instrumentation and consigned inventory. And that's the 100 plus new instrumentation trays that we’re starting to deploy, is going to help that growth. Sorry, if it’s a bit of a winding road, but we believe that we’ll be able to drive mid-teens growth in all of the product lines because of those investments on the supply side.

And finally, Dan – thank you for taking my questions. Finally, the revenues per procedure, can you give us some color on the cross-selling synergies, at least the pro forma targets exiting this year? Thank you for taking my questions.

So we had just under $1 million of revenue in the first quarter, came from what we call portfolio selling, legacy Bacterin customers purchasing X-Spine products and vice versa. And our goal is that – and that was about 4.5% of our revenue for the quarter. So our goal is to drive at least 10% revenue growth through that portfolio selling activity as we exit the year. So we need to sort of more than double that to $2.5 million or so at the top line. And that continues to be our largest short-term opportunity.

Great, thank you, gentlemen.

Thank you.

Thank you. Our next question is coming from the Swayampakula Ramakanth of H.C. Wainwright. Please proceed with your question.

Good morning, Dan and John. Thanks for taking my questions.

Good morning, RK.

Just continuing on where Suraj left regarding the portfolio selling, I understand your goal is to get to 10% to 12% by the end of 2016. So what do you think needs to get done to get there, all the things you just talked about? And also, where do you think management will become [indiscernible] in terms of what’s the optimal goal, percentage, in terms of this portfolio selling?

In the short run, we need to make sure we have adequate supply. The sales force rightfully has been reluctant to turn on new customers or to add a new product line to an existing customer until I could assure the sales force that we would have adequate supply to support their day-to-day needs. And that was a problem in January and February, and so we've revived – we've resolved those bottlenecks. So assuming adequate supply, which we’ve put in place, it just takes a little bit of time to introduce the products to our existing customers, get them to trial them. More often than not, they like them and then we’re off to the races. So I'm very comfortable with that 10% goal as we exit the year. Long-term, when we entered into the combination, we thought that the upside opportunity from portfolio sales visits, as much as 30% of revenue, and I continue to believe that that's an adequate goal – that’s an appropriate goal, provided that we can continue to invest in working capital to provide the products.

Okay, thanks for that. Of the four new products that you highlighted in your presentation, which looks like you have a total market opportunity of nearly $1 billion, what’s the market share that you need to achieve so that it is meaningful in the long term and what can be achieved in realistic terms of that $1 billion?

So for Aranax and for Atrix-C, the next stage of our rollout is to deploy about 15 instrumentation trays for each product. That's enough to support, let’s say, 12 customers for each product and with an average revenue per procedure of $8,000 to $10,000 times 24 customers between the two product lines. That's the kind of revenue lift that we could see in the second half of the year from the controlled launch of those two products. For OsteoSelect PLUS, the upside is substantially larger, but it's limited to what we can process and put into consigned inventory. Similarly, for OsteoVive, we’re going to launch OsteoVive, our cell-based allograft into friendly customer accounts and we’re going to adjust the number of accounts that we launch based on our working capital abilities. So the business, as you and I have discussed, management has to be very careful about where we put our working capital investments to support consigned inventory, to support new customers that we’re launching.

Okay. So talking about the launches and the new customers onboard, you gave us some information regarding the 3Demin and the OsteoSelect and the amount of money you want to spend in the current quarter and the next quarter in terms of generating the product. Is this an indication of what the current backlog that you’re trying to fill in or is that just the kind of anticipated market from your market intelligence that you can achieve in the coming quarters?

It's driven for us – for 3Demin, where we have the most data at this point, for 3Demin, we’re only opening up new accounts based on having the additional supply to service those new accounts. So we have demand among our existing customer base to double that run rate and probably get it up to that $2.5 million to $3 million per quarter run rate. That's existing demand where we are just carefully opening up new accounts as we get comfortable that we have reliable supply. It's a great situation to be in, but at the same time it's also very frustrating to not be able to ramp up faster.

Okay. And then the last question from me is on the OsteoVive product, you mentioned that the sales force is excited and the management is excited about this product, but this is a custom-made product, isn’t it? So what’s the basis for that? Is there groundwork done already that you feel [indiscernible] lot of intake on it.

So, right now, we just started discussing OsteoVive with our current customer base and there is a lot of anecdotal receptivity to the MIAMI cell technology as applied to spine. But we need to get the product into the field with our surgeon customers and have them confirm their instincts that it's going to work well in their hands. And that's going to start to happen in the summer quarter.

Okay, thank you very much. Congratulations. And look forward to talking to you.

All right. Thank you, RK.

Thanks, RK.

[Operator Instructions] Our next question is coming from John van der Musten [ph] with Zacks. Please proceed with your question.

Good morning, Dan and John.

Good morning, John.

Thank you for taking my question. I first wanted to ask, I think I may have heard that you changed the number in terms of the breakeven revenues per quarter. Was that correct or did I just mishear it?

Yes. So we implemented a plan to reduce operating expense. And that in turn reduced our breakeven run rate to $24.75 million per quarter.

Okay, great. That’s good. And then I was just going to jump to just inventories, I think you said that the fixation sets were the reason for the – at least part of the reason for the sales that didn’t materialize. But can you kind of breakdown for me, I guess, in terms of – was it just – was it also the fact that – some of the sales were kind of unexpected products or is that what happened? Or was it just – there is a breakdown in other parts of the system that stopped those fixation sets? Because it seems like there was pretty high anticipated growth forecasted, but did it just come from unexpected places?

I wish it was that simple. But we have adequate instrumentation in the field to support that higher level of business. But we need to reliably replenish the implants that are used in surgeries and that's what broke down. With the increase in demand in November and December, we had not placed orders for replenishment implants that would come in to satisfy demand in January and February, so we were servicing our existing customers who already have the instrumentation kits. In turn, because we were scrambling to make sure that we had enough replenishment inventory we had to delay the launch of new instrumentation trays, which would service new customers. And so, the addition of new customers had been delayed by about a quarter. So it's very frustrating on the operational side, but it's very gratifying that we’ve got the demand through our distribution channel.

And those trays, is that a third-party manufacturer? And also, what’s the, I guess, turnaround time on placing an order for those?

So, in general, the instrumentation is our design, our proprietary technology, but it’s fabricated by a network of third parties and the lead times are between 8 and 12 weeks. Again, very generally.

Okay. I was going to look at inventories again. You have $24 million, which is approximately a quarter’s full of sales, can you break that down for me in terms of kind of the percent of finished inventory and then unfinished inventory? And has that trended in any direction over the last several quarters?

Yes. I would say that the finished goods represents about 30 to 40% of that total amount. And I think that the trend has been increasing towards finished goods inventory. With the amount of ordering we've done on the fixations side of the business and the expected product coming in, coupled with the increased processing we’re doing on the biologics side, we expect that finished goods piece to continue to increase.

Great, great. And, I guess, most of the finished goods, that’s on the Bacterin side rather than the X-Spine side?

It's spread out around all product lines.

Correct.

Okay, okay. Because that’s just the different manufacturing processes. I was thinking that it might – is it radically different, the percent of finished inventory to unfinished inventory between the fixation side and the Bacterin side?

Yes. Even though the supply chains are dramatically different for biologics and for implants, the lead times end up being about the same. So the mechanics of the supply chain, you end up needing about the same amount of inventory to service the lead time and the consigned requirements.

And remember, because the fixations side of the business does contract manufacturing, when that product comes in, it’s basically finished goods inventory compared to the biologics, where we do our tissue processing in Montana, we have much more raw material and work-in-process components of the biologics side.

Justo one last question on the sales side of things. Is the training impacting sales productivity because I remember, last year, what we’re trying to do is, we had some new sales individuals, but then we’ve, of course, added X-Spine to it? And the anticipation was, therefore, productivity would pick up over time. And I’m wondering, is the training kind of slowing that anticipated trend to any degree or, as you discussed, kind of overwhelmed, the lack of the new instrumentation trays?

So, absolutely. We’ve taken people out of the field quite a bit in the second half of 2015 as we integrated the sales functions and put people through – put individuals through training. So it certainly has affected the amount of time in the field. That was more of an effect in 2015 and is becoming less and less in 2016. And now that we’ve resolved the replenishment shortages, I am very excited about the current run rates.

Okay. All right, Dan and John. Thank you for the time.

Yep. Thank you, John.

[Operator Instructions] Our next question is coming from Todd Robbins of Five Mile River. Please proceed with your question.

Good morning, Dan and John.

Good morning, Todd.

I'm getting on the call a little bit late, so I apologize if some of this has already been covered. The breakeven run rate of $24.75 million, where do you expect that breakeven run rate to get to, say, by the end of the year or, let’s say, fourth quarter?

If you look at our guidance for the year, it's going to be back-end loaded because of the portfolio sales ramp-up as well as the new product ramp-ups. So we should be blowing through that as we exit the year.

It will be lower than the $24.75 million in the fourth quarter. That’s what you’re saying?

No, I think the amount will be $24.75 million, but we expect our revenues to be above that $24.75 million number.

The OpEx reductions are reflected in that $24.75 million. When we did our third – our fourth-quarter call, our breakeven number was substantially higher than $24.75 million, so this is a dramatic reduction from where it was as recently as March.

What's the med device tax savings that you no longer have to pay?

About 2% of revenue.

2 million bucks.

Yep.

So, let’s say, $0.5 million a quarter. So the $25.5 million breakeven, by that alone, goes to 25.

That’s reflected in the $25.5 million breakeven.

It was? Okay.

Yes.

Okay. The inventory shortfall on the fixation device trays, it sure sounds like that was a simple problem of one of the guys at X-Spine not ordering enough. Is it that simple?

Yes.

So the shortfall of $1.5 million to $2 million from that, can that be recaptured or is that lost business?

Those are procedures that we didn't get, but the run rate has already been recaptured.

So from a share point of view, you still see that growing, not stabilizing?

Now, it’s stabilized because we have corrected the replenishment shortages. And as we deploy new trays, we’ll be able to grow it.

Okay. I don't know if you covered this in some of the prepared comments, but could you discuss what you see as the significance of OsteoVive? This was announced, I guess it was March.

It was announced at the end of March. Yes, sir.

Just sounded like a really exciting product. Is that something you’ve already recovered or could you give us some color, just how that’s positioned in the market and what you see is the opportunity for it?

So we’re very excited about it and our physician customers, more importantly, are very excited about adding that osteogenic component, which is really the third leg of the stool for a regenerative medicine portfolio. Our OsteoSelect and OsteoSponge products are outstanding, class-leading, osteoinductive and osteoconductive components. And OsteoVive is going to represent that third leg of being osteogenic regenerative medicine driver. So the surgeons are very excited about being able to add that to their toolkit. The early data from implantations has been very exciting. These MIAMI cells, there's a long history of tier one science that's led into their development. So the partnership with our friends at Vivax is going to be very, very successful. So we’re on the verge of great things. We need to get the product into the hands of our solid customers and confirm all of the clinical scientific excitement. There's a lot of excitement in our distribution channel as well as the product will have some halo effect. It’s something new for our sales guys to be talking about as they go into a physician's office. It’s a way to get into the physician's office and then talk about the rest of our catalog.

So Medtronic has a product called infused that’s doing about $0.5 billion in sales. How is this position relative to Infuse?

So Infuse is a bone morphogenetic protein recombinant technology which has osteogenic properties. OsteoVive is very different. OsteoVive is live cells that are derived from vertebral [ph] bodies. And so, while Infuse is a single bone morphogenetic protein, the MIAMI cells, when implanted properly, are going to provide all of the signaling to create the entire menu of bone morphogenetic proteins and other signaling and regenerative properties to get bones to heal faster and more completely. So it's a far more comprehensive technologies than a single bone morphogenetic protein like Infuse.

So this is going to go directly at Medtronic's Infuse product sales? And because it has improved morphogenetic characteristics and more cells that are triggered through this product, it has comparable or better strengthening and healing times. Is that the way to think about it?

That’s the theory. We have to demonstrate that through clinical efficacy. So the surgeons will nod their heads and agree with everything you just said. We need to now go out and demonstrate it with longer follow-ups and studies.

Just approximately how many procedures do your sales folks address that this might sell into?

That’s a good question. Our channel is primarily focused on spine procedures and we participate in several thousand spine procedures per quarter. But the technology could easily migrate beyond spine, into other areas of orthopedics. So the long-term prospects are, as you pointed out earlier, as large as the Infuse franchise.

And how is this going to be priced relative to Infuse?

We really have not discussed pricing yet.

So Infuse goes at about 5000 bucks a copy or a procedure. Are you going to be above that or below that?

We not discussed pricing yet, but, obviously, we plan to be competitive.

So chances are you’re not going to be below that? Okay.

No reason for us to go at these early stages.

Excellent. Just a high-level word, if you could, Dan, about your relationship with OrbiMed. They’ve supported the company extensively and there was a wonderful write-up in Barron’s about them this last weekend. Is this a relationship that continues to be a sort of a backstop for your company and what do you think their endgame is, if I might ask?

OrbiMed has a very substantial position in the company. They have a lot of money invested in the company. OrbiMed principals act as observers on our Board of Directors. They've been very supportive most recently in allowing us to defer the cash-based interest payments, so that we don't have to go to the capital markets at a disadvantageous time. And all indications are that OrbiMed is in this for the long haul. The fund that has invested in OrbiMed does not have a specific timeframe. They seem to like what management is doing and it's very refreshing for management to have a long-term partner as opposed to the month-to-month, quarter-to-quarter kinds of things that we see in the public markets. So, John, did you want to add something to that?

Yeah. The other thing is the particular Special Situations Fund that their investment in us is part of. We are one of the larger investments within that fund. So they continue to be very supportive of the company.

So if they were to capitalize the interest payments that you have to make to them on a quarterly run rate basis, what would that do in terms of savings on your breakeven rate?

Well, on the senior secured debt, it runs about $950,000 per quarter, the cash interest payment.

That would reduce breakeven by $1 million.

Yeah. Well, that’s just senior debt. They also have a piece of – a large piece of the convertible debt as well, probably another $700,000 to $750,000 per quarter of interest on the convertible bond. So all told, roughly, between $1.6 million and $1.75 million of quarterly interest payments to OrbiMed.

And our breakeven run rate would be reduced accordingly.

Yeah, correct.

Have they indicated to you that that's a backstop for you should you need it?

We haven't had those discussions with them.

But isn’t that what they did in the first quarter?

Yes, it is.

Yeah, they did. And that related to the first quarter, but we didn't have a – we haven’t had further discussions about continuing that practice.

Okay. That’s very helpful, gentlemen. Thank you very much.

Thank you, Todd.

Thank you. At this time, I’d like to turn the floor back over to management for any additional or closing comments.

Thank you, everybody, for your kind attention and I will talk to you next quarter.

Thank you.

Ladies and gentlemen, thank you for your participation. This concludes today's teleconference. You may disconnect your lines at this time and have a wonderful day.