Xtant Medical Holdings, Inc. (XTNT) Q3 2019 Earnings Report, Transcript and Summary

Greetings, and welcome to the Xtant Medical Third Quarter 2019 Financial Results Conference Call. At this time all participants are in listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to David Carey of Lazar FINN Partners. Please go ahead. David Carey

Thank you, operator, and welcome to Xtant Medical’s Third Quarter 2019 Financial Results Call. Joining me today is Sean Browne, President and Chief Executive Officer; and Greg Jensen, Vice President, Finance and Chief Financial Officer. Today’s call is being webcast and will be posted on the company’s website for playback. During the course of this call, the 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 with 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 the company’s annual report on Form 10-K filed with the SEC on April 1, 2019. Actual results may differ materially. The company’s financial results press release and today’s discussion include certain non-GAAP financial measures. Please refer to the non-GAAP to GAAP reconciliations, which appear in the tables on our press release and are otherwise available on our website. Note that our Form 8-K, filed with our financial results press release, provides a detailed narrative that describes our use of such measures. For the benefit of those of you who may be listening to the replay, this call was held and recorded on Thursday, November 7, at approximately 9 a.m. Eastern Daylight Time. The company declines any obligation to update its forward-looking statements except as required by applicable law. Now I’d like to turn the call over to Sean Browne.

Thank you, David, and good morning to everyone listening. I would first like to express how excited I am to join the Xtant Medical team. When I was approached for the opportunity to work at Xtant, I saw a company that, despite recent challenges, has enormous near- and long-term potential. I was also impressed by the extensive pool of talent at Xtant and by the shared commitment of everyone on the team to developing innovative products that offer real solutions to clinical challenges. In just my first month, my initial impressions have already been exceeded through the productive interactions I’ve had with the team. The value and dedication of this team was the number one factor in my decision to join Xtant, and their collective expertise and commitment give me confidence that we can develop and execute strategies that will position the company for future success. I’m now in the process of working with our executive team to develop a vision for 2020 and beyond that will allow Xtant to achieve its full growth potential. While Xtant continues to address its prior challenges, my initial focus is to establish a culture of execution throughout the company with the goals of: one, developing innovative new products; two, reengaging with our distributor network; and three, continuing to achieve operational excellence. We believe these three items will be core to long-term value creation for our patients, our customers and our shareholders. I look forward to providing additional updates on our strategic plan in more detail in the coming months. Now turning to our performance for the quarter. In the third quarter, we implemented several marketing measures designed to stabilize and increase our revenue trajectory. Led by Kevin Brandt, our Chief Commercial Officer, our focused on improving our sales channel and recruiting new distributors is putting us back on track to regain sales momentum. These initiatives are beginning to generate promising results as we achieved a sequential increase in our third quarter revenues compared with the second quarter. In addition to these revenue drivers, we are focusing more on new product introductions. We recently introduced three new products, which we showed at NASS 2019 and featured at the Congress of Neurological Surgeons Annual Meeting. These innovative products included the Intice-C Titanium Cervical Interbody Spacer; Atrix-C Union, a cervical interbody spacer; and the Calix-C PC Plasma Coated PEEK Implant. These products expand our portfolio and give our surgeons and our patients greater options. At Xtant, we are making a commitment to new product development and expect to roll additional new products in 2020. In addition to our revenue growth drivers, we remain focused on enhancing our operational efficiencies. One area in particular is that we are upgrading our company’s existing enterprise resource planning platform, and we remain on track to complete the first phase of this upgrade in the fourth quarter of 2019 and the second phase during the first half of 2020. We believe this upgrade will enable our employees to better serve our customers, which is necessary for improving our sales performance and to greatly improve how our resources are deployed. On another important topic, we continue to make progress in maintaining our New York Stock Exchange American listing, by achieving certain milestones that we outlined for Xtant, to regain compliance with the listing requirements. As a reminder, Xtant has been granted a plan period through October 4, 2020, to regain compliance and is committed to doing so prior to such date. Now I would like to turn the call over to Greg Jensen for a discussion of our third quarter and year-to-date 2019 financial results.

Thanks, Sean. Total revenue for the third quarter of 2019 was $15.7 million compared to $17.3 million for the same period in 2018. For the first nine months of 2019, total revenue was $47.7 million compared to $53.9 million for the first nine months of 2018. These decreases were primarily attributed to reduced demand for our hardware products, which was due in part to the termination of an advisory agreement with an entity that provided services to some of our customers and the continued transitioning of certain independent sales agents that do not meet our internal contribution margin parameters. Gross margin for the third quarter of 2019 was 66.6%, which was comparable to the same period in 2018. Gross margin for the first nine months of 2019 was 65.4% compared to 67.2% for the first nine months of 2018. Third quarter 2019 operating expenses were $11.2 million compared to $13 million in the same period a year ago. For the first nine months of 2019 operating expense were $33.1 million compared to $41.6 million for the first nine months of 2018. As a percentage of total revenue, operating expenses were 71.1% and 69.4% for the three and nine months ended September 30, 2019, respectively, compared to 75% and 77.1% for the three and nine months ended September 30, 2018, respectively. General and administrative expenses increased by $1 million to $4.2 million for the three months ended September 30, 2019, compared to $3.2 million for the same period in 2018 and increased by $2.5 million to $12.5 million for the first nine months of 2019 compared to $10 million for the same period in 2018. These increases were primarily due to increases in bad debt expense, executive recruiting fees, the retention of finance and accounting consultants and for the nine-month comparison and increase in legal settlements. For both reporting periods in 2019, the increase in general and administrative expenses were partially offset by lower amortization expense of hardware intangibles from the X-spine acquisition. Sales and marketing expenses were $6.7 million and $19.5 million for the three- and nine-month periods ended September 30, 2019, respectively, a decrease of 15% and 21% for the three- and nine-month periods, respectively. The decreases were primarily attributable to the reorganization of the commercial sales team and lower sales commissions. Research and development expenses were approximately $200,000 for the third quarter of 2019, a decrease of 41% compared with the same period in 2018. And for the nine-month period ending September 30, R&D expenses decreased by $500,000 or 43% due to lower headcount compared to the prior year. The net loss for the business was $1.9 million or $0.14 per share for the third quarter in 2019 compared to a loss of $3.2 million or $0.24 per share in the comparable 2018 period. The year-to-date net loss for 2019 was $6.6 million or $0.50 per share compared to $13.4 million or $1.19 per share in 2018. Non-GAAP adjusted EBITDA for the third quarter of 2019 was $600,000 compared to $1.8 million for the same period of 2018. Non-GAAP adjusted EBITDA for the first nine months of 2019 was $2.7 million compared to $5.6 million for the same period of 2018. As of September 30, 2019, we have $5.7 million of cash and cash equivalents, $9.1 million of net accounts receivable and $16 million of inventory and $12.2 million available under our credit facility. Now I’ll turn the call back to Sean for additional comments.

Thank you, Greg. In closing, I’d like to emphasize my excitement in joining the Xtant Medical team. I truly believe that we have the right team in place to realize the full potential of our current products and to expand our product portfolio to include additional high-value clinical solutions. In recent quarters, we have taken positive steps to stabilize revenues and position the business for growth while enhancing our operational efficiencies. I’m confident that integrating a culture of execution with a laser-like focus on achieving our strategic objectives will position us to create long-term value for patients, our customers and our shareholders. I look forward to providing updates on our progress in future calls. Thank you for listening.

Thank you. That concludes today’s call. Thank you for joining. All parties may now disconnect.