Xtant Medical Holdings, Inc. (XTNT) Q4 2017 Earnings Report, Transcript and Summary

Greetings, and welcome to the Xtant Medical Fourth Quarter and Year End Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. And it is now my pleasure to introduce your host Ms. Laura Kendall, Deputy Restructuring Officer. Thank you. You may begin.

Thank you. Good morning, and thank you for joining Xtant Medical's fourth quarter and full year 2017 earnings call. Yesterday afternoon, Xtant issued a press release announcing fourth quarter and full year 2017 financial results and also filed its Form 10-K for the year ended December 31, 2017. My name is Laura Kendall, and I am serving Xtant Medical as Deputy Restructuring Officer and Principal Accounting Officer. Joining me today for the conference call will be Carl O'Connell, Chief Executive Officer for Xtent. At this time as noted, all participants are in listen-only mode and a brief question-and-answer session will follow the formal presentation. Today's call is being webcast and will be posted on the company's website for playback. We expect the duration of the call to be approximately 30 minutes. If I could for a moment just repeat some of the important cautions regarding forward-looking statements. 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, intends and other words of similar meaning. Any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, including those noted in the Risk Factors section of our most recent annual report on Form 10-K that was filed yesterday. 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 Tuesday, April 3, at approximately 09 A.M. 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. For today's call I am going to begin with a brief review of the company's financial performance for the fourth quarter and year ended December 31, 2017. I will also discuss the restructuring transactions that were executed last month and then we'll turn the call over to Carl to discuss Xtant's business performance. In 2017, the company undertook a review of its operations with the objective of improving profitability and liquidity, identifying areas to strengthen sales, improve gross margin, gain operational efficiency, and enable cost containment and better manage our assets. We expect this review and result in improvements to continue into 2018. Consolidated total revenue for the three months ended December 31, 2017 was $19.3 million compared to $24.5 million of revenue for the same period of 2017. For the 12 months ended December 31, 2017, revenue was $82.5 million compared to $89.4 million for the 12 months ended December 31, 2016. The decline in year-over-year sales is primarily result of evaluating the contribution margin from our sales distribution channels and transitioning away from unprofitable distributor relationships to improve profitability going forward. In addition, the highly competitive environment surrounding fixation products and no new hardware product introduction in 2017 adversely affected revenue. Good sales momentum in biologics sales offset these declines and Carl O'Connell will expand on these factors later in the call. Consolidated gross profit for the fourth quarter of 2017 was $10.3 million or 53.2% of revenue compared to gross profit of $17.5 million or 71.6% of revenue for the same period of 2016. For full year 2017, consolidated gross profit was $50.1 million or 60.6% of revenue compared to $62.3 million or 69.2% of revenue in 2016. During the fourth quarter and full-year 2017, additional reserves and impairment charges were taken related to excess inventory and inventory in surgical instruments on a consignment that maybe missing or not returned to the company or related to litigation with the former distributor. These charges totaled $2.5 million in the fourth quarter and $5 million for the full year 2017, lowering gross margin as a percent of sales by 12.7% and 6% in 2017. A shift in sales mix favoring biologics which carry at lower margins and fixation products caused remaining decrease in gross margin. Fourth quarter 2017 operating expenses were $34.6 million compared to $18.7 million in the fourth quarter of 2016. For the year 2017 operating expenses were $87.9 million compared to $69.8 million in 2016. The increase in operating expenses was largely due to a one-time fourth quarter impairment charge of $17.6 million related to intangible assets acquired in the 2015 X-spine acquisition. There was 4.7 million of one-time expenses incurred as a result of the ongoing turnaround and restructuring of the company and $1.9 million of separation related expenses. Operating expenses were also lower due to continuing cost containment and efforts to improve efficiency throughout the company. The company defines EBITDA as earnings before interest taxes depreciation and amortization and other income expense such as gain or loss on sale of assets. Adjusted EBITDA is EBIT less nonrecurring expenses and noncash stock based compensation. Adjusted EBITDA for the fourth quarter of 2017 was a loss of $1.1 million compared to fourth quarter 2016 adjusted EBITDA gain of 727,000. Full year 2017 adjusted EBITDA was a loss of $1.9 million compared to 2016's adjusted EBITDA gain of $1.6 million. The lower adjusted EBITDA is a result of lower sales volume and the impact of inventory reserves taken in the fourth quarter of $1.9 million and for the full year $2.7 million. With respect to our liquidity, as of December 31, 2017 we had $2.9 million of cash and cash equivalents, $12.7 million of net accounts receivable and $22.2 million of inventory. In addition the company had about $2.2 million available under its credit agreement. As previously noted in press releases and SEC filings which can be found in the company's website, Xtant successfully completed the recapitalization of the company lowering its debt and accrued interest by approximately 76 million through a conversion of all convertible debt and related interest to common stock. This transaction has returned stockholders equity to a positive position. In addition the company completed a private placement of common stock for $4.8 million in net proceeds enhancing the company's liquidity position. Xtant has successfully maintained its position on the New York Stock Exchange American and shareholders have selected a new Board of Directors in February composed of both independent directors with significant industry experience and representatives of Orbimed who now own approximately 70% of Xtant's outstanding common stock. The company is planning to conduct a common stock rights offering to its shareholders in 2018 as noted in the various SEC filings and press releases and that will further enhance the company's liquidity position. With that, I'd like to turn the call over to Carl O'Connell to go over some of the business highlights and strategy. Carl?

Thank you, Laura, and thank you everyone for joining Xtant Medical's fourth quarter and fiscal 2017 conference call. We managed a lot of changes over the past 12 months and I look forward to highlighting some of our successes, which I feel will be growth drivers as we move forward and will highlight some key areas of focus for Xtant Medical through 2018. Our 2017 revenue declined in comparison to 2016. This was primary due to a lower fixation revenue in second half of the year, mostly as a result of making progressive changes towards sales channels throughout the year terminating some unprofitable distributorships and reducing high commission rates a non-profitable contracts. The positive shift away from these channels will have the company stabilize end-user pricing, as well as drive better margins and profitable growth opportunities long term. Due to this decline is a highly competitive hardware fixation market with increasing the reimbursement pressure and a demand for innovation and clinical justification which we plan in the coming quarters. Conversely, distribution of our biologics portfolio was very successful in 2017 achieving above market revenue growth. This growth was driven by penetrating new course with the OsteoSelect and OsteoSelect PLUS DBM product lines. Increased demand for 3Demin fiber technology supported by continued demand [Technical Difficulty].

Carl, you may begin.

Hello.

Carl, your line is live. Go ahead.

Thank you. Conversely distribution of our biologics portfolio was very successful in 2017 achieving above market revenue growth. This growth was driven by penetrating new accounts with the OsteoSelect and OsteoSelect PLUS DBM product lines. Increased demands for 3Demin fiber technology supported by continued demand by our flagship product line OsteoSponge. This product mix leading our biologics revenue DBM category, we continue to be one of the largest players in U.S. bone replacement market. We also saw robust growth driven by conversion of customers through our viable cell allograft OsteoVive, our product we launched in mid 2016. We anticipate the momentum and interest in our biologics portfolio will continue in 2018. Throughout the year, we touch upon progress the company was making with regards to three transformational initiatives, operational excellence in inventory utilization, strategic positioning from market leadership, and sales channel optimization. These programs were designed to support full integration of Bacterin and X-Spine into Xtant Medical, provide a stable foundation to support sustainable market growth and focus on EBITDA performance. The inventory and instruments optimization project was designed to precash by reducing existing inventory in instrumental levels and optimizing future inventory and instrument needs without negatively impacting delivery to the customer. Because of this project [inaudible] mostly driven by implementation of stronger forecasting processes and adopting integrated business planning and daily activities. In October 2017, we announced our decision to close the Dayton facility and transfer the fixation operation to our location at Montana in an effort to reduce cost by optimizing efficiencies of a single fulfillment location for our customers and appropriately utilizing our infrastructure. The total cost savings derived from the restructuring activity is anticipated to be $2 million annually. I am very pleased with the performance of Greg Juda, our General Manager of Operations at the Montana facility as he served as leader of this project. It was successfully completed ahead of schedule and because of the collective efforts of the Xtant team we were able to complete the [news] without missing a surgical case. This news allows us to complete our strategy for achieving operational excellence by fully integrating departments and simplifying processes under Xtant and driving towards a consolidated and profitable business. 2017 mark the first year of sales leadership under Chris Valois, Vice President of Sales and Marketing. A significant focus for Chris was implementing a sale structure for the organization that would be able to serve as a foundation for future revenue growth and accountability to company’s goals. Along with his team we identified opportunities for improving our channel and distributing our partnerships moving from high commission and unprofitable business to engage with channel partners to improve the quality of service and products offered to the end user. The expanded focus this initiative will drive profitable business to our sales channel while creating deeper relationships with our hospital customers and our surgeons. This will also assist us in ensuring that we are delivering products that are improving the lives of patients and exceeding our customer expectations. Under the leadership of Amy Radtke, our National Accounts team continues to excel. We are in the contract with more than 10 group purchasing organizations executing over 15 new IDM health system agreements and renegotiated or renewed more than 70 other health system agreements through 2017. Our post to contractual access and demonstrating the added value that we can provide as a supplier has emerged as a core competency of our organization. We're committed to improving our hybrid channel performance and partnering with high performing distributors moving forward securing our ability to provide world-class service to our contracted partners. While we did see a year-over-year decline, we are excited about our international opportunity which we plan to capitalize on in 2019. A decline in revenue was attributed to sales recognized in 2016 when our international partners purchased increment sets that were previously on consignment. The other contributor was modifications to the regulations in Germany, resulting in Xtant's exiting that market. There are many markets that prove to be strong versus year-over-year such as 20% growth in Latin America markets, South Africa with over 50% growth, and South Korea where we saw triple digit growth in comparison to 2016. We continue to see OUS business as a potential source of revenue growth with additional resources to help with driving international strategy which will be a key focus for us in 2018 and beyond. I'd like to turn to our initiatives for 2018. We're excited to have reached a restructuring agreement with Orbimed and our shareholders and I'm thankful and appreciative of their continued confidence for the company, our management team and our employees. With funds and support from this endeavor we will continue to focus on operational excellence driving our margins for profitable growth, engaging our employees to excel even further, and enhancing our sales channel optimization strategies. We will continue to evolve our products strategy focused on the product families with current demand and the support regenerative continuing care for patients. Lastly we'll be managing processes and projects moving forward legalizing the high performance management system as we continue to make improvements. While we made significant strides in organization, I believe we have great opportunities ahead of us and I’m looking forward to executing on these initiatives. Before closing, I’d like to take the time to thank our previous Board of Directors for their dedication to our shareholders, the company and our employees. I would also like to formally welcome our new Board of Directors, John Bakewell, Michael Eggenberg, Michael Mainelli, Robert McNamara, Jeffrey Peters and Matthew Rizzo. Lastly I would like again to thank our shareholders and [overwhelming] for their continued support not only throughout 2017 but moving forward in 2018 and beyond. Thank you for joining us on today's call. And with that, I'd like to turn the call over to questions.

[Operator Instructions] Our first question comes from the line of Anthony Vendetti with Maxim Group. Please proceed with your question.

So I just wanted to talk about the hardware business. It seems like biologics continues to do well with above market growth and that was the original factor in business. The X-Spine acquisition seems to continue to struggle here. Can you talk about what percent of total sales hardware is? How much it was done and Carl just kind of what the plan is to improvement. I saw you terminated some stockings' reseller agreement but anything you can do about the aging hardware product line, and where do you think this starts with the inflexion point for that business to start to turnaround?

I’ll have Laura answer some of details on the numbers and I think you pointed out correctly, our hardware line or sort of looking at the natural decline as the lifecycle of our hardware products sort to mature. And I think also as a factor of shift in distributor relationships, we have less reseller business. So we're not selling against ourselves. And I think going forward, we’re going to look at partnerships with better contributing margins and also looking at performance and management with better relationship with better distributors going forward. But we look forward to looking at where we can focus on our hardware lines and in the next few months and quarters, we’ll hope to address that in the form of hardware strategy going forward.

And Laura on the percent of sales and how much it was down?

Anthony, are you still on the line?

Yes I am. I'm still on the line.

Hi Anthony, we’re having some problems I guess with the line.

Okay, I have got it Carl sorry. I think the company has not disclosed exact percentages of business and declines or growth within its product categories simply because its highly competitive information as you know. So the direction that Carl gave as to what’s happening in the hardware business that we’re looking at it strategically I think we’ve done a great job last year of making inroads on the unprofitable portions of the hardware sector that we found we're not making the contribution and there will be opportunity as to take a look at what we have and figure out a future strategy for that. So at this point we don't disclose those percentages.

The unprofitable parts of that business has that been terminated or there are some unprofitable piece of that business that you think you could turnaround?

Yes, I think - let me answer that. We’re looking very hard into the contributing margins on commission rates and we’re looking also where there is opportunity to restructure a lot of our agreements but we're looking for better performance, better penetration where we have contractual access but we’re doing the deep dive into our margins and especially our commission rates in trying to meet sort of one obviously our goal is profitability. And so we can align that with our goals going forward.

And then Laura on some of the term loan, so was all the deferred interest on the term loans paid down and if not how much is left?

All the deferred interest on the convertible debt was paid down. The deferred interest on the term loan is still outstanding.

And how much is that left?

I don’t have an exact number with me but it's - I would say probably in the 3 million to 4 million range of deferred interest.

And is there a still plan to restructure some of those and if not I know it’s far out July 2020 but how do you plan to deal with the maturity well in 2020?

The maturity of the term loan?

Yes.

Or of the interest, at that point we’ll address but that’s quite a way out for us and definitely a lot of strategic planning will be done in between that on both of the core business, as well as the capitalization of the company. So again we’ve entered into a very corporative stands with Orbimed very supportive of us. And as you know the credit agreement is with Orbimed as well so I’m sure they’ll be much planning going into that renewal in 2020.

And then lastly on the rights offering, the expectation is sometime in 2018 is there any general timing as you trying to do that in the first half, second half?

I would say we are currently planning for the first half, so we want to conclude these transactions that we had queued up in the proxy. So, you should see some activities surrounding that within the first half of the year.

[Operator Instructions] There are no further questions at this time. I'd like to turn the call back over to Mr. O'Connell for any closing remarks.

Thank you. On behalf of the company I would like to thank you for your continued support for Xtant Medical. Thank you again and have a nice day.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation. And have a wonderful day.