Xtant Medical Holdings, Inc. (XTNT) Q4 2019 Earnings Report, Transcript and Summary

Welcome to Xtant Medical's Fourth Quarter and Full Year 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.

Thank you operator and welcome to Xtant Medical's fourth quarter and full year 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, 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 risk and uncertainties including those noted in the Risk Factors section of the company's annual report on Form 10-K that will be filed with the SEC today. 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 of 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, March 5th at approximately 9:00 A.M. Eastern Standard 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. Since joining Xtant five months ago, I've been very pleased with the commitment and contributions of our team members, especially the way they fulfill on a daily basis our mission of honoring the gift of donation by allowing our patients to live as full and complete a life as possible. It is also their commitment that has allowed us to execute numerous strategic and operational initiatives during 2019 and causes me to be excited about our prospects in 2020. From my first day with the company, my focus has been to establish a culture of execution throughout the company with an emphasis on; one, achieving operational excellence; two, reengaging with our distributor network and surgeon customers; and three, developing innovative new products. With these goals in mind we have rolled out some additional organizational changes to further support our commercial efforts, which are being led by Kevin Brandt, our Chief Commercial Officer. These changes, as well as the restructuring of the commercial organization started in early 2019 by Kevin, have flattened our organization, reduced our costs, and reduced the complexity of our commercial organization. As we look to the future, we've also developed a number of marketing initiatives designed to support our sales team and make it easier for customers to do business with Xtant. These changes and initiatives should work together to increase predictability of revenues and improve our profitability. The cornerstone of our marketing initiatives is a renewed focus on our top distributors and growth-oriented distributors who have shown a commitment to sell more of our product lines. To that end, we have recently rolled out a marketing program that allocates more of our resources to support and reward these distributors as they expand their partnership with Xtant. Early feedback on this program has been very positive and by working so closely with our distributor partners, we are getting greater access to the surgeons who use our products, thereby elevating the Xtant brand. Alongside our progress on the commercial side of the business, our finance team led by Greg Jensen, our Chief Financial Officer has done an excellent job streamlining our financial reporting, improving our internal monitoring and reporting capabilities and providing outstanding analytics to help us make better operational decisions. One important milestone achieved during the fourth quarter was the implementation of our enterprise resource planning platform, which will provide easier access to information needed to better serve our customers and should greatly improve our internal monitoring and financial reporting capabilities. Given the progress the team made in addressing and resolving a number of operational and financial issues, we reached a point where we had sufficient working capital to establish a plan for new product releases. In September 2019, we unveiled three new products at NASS showcasing our continued innovation. We are poised to announce additional new products during 2020 with a focus on enhancing our portfolio to be more competitive in our key market segments. As we look to the future, our goal is to have a more regular cadence of new products that support our distributors and provide new tools for our surgeons to drive better patient care. While there are several challenges ahead we have made tremendous progress to-date and the continued commitment and dedication of the team, I look forward to tackling the challenges that lie ahead. Now, I would like to turn the call over to Greg Jensen for a discussion of our fourth quarter and full year 2019 financial results.

Thanks Sean and good morning again everyone. Total revenue for the fourth quarter of 2019 was $17 million, compared to $18.3 million for the same period in 2018. For the 2019 full year, total revenue was $64.7 million compared to $72.2 million for the same period in 2018. These decreases were primarily attributed to discontinued hardware distributor arrangements and a reduced demand for certain hardware products, compared to the third quarter of 2019 revenues increased by 8% driven by a higher demand for the company's biological products. Gross margin for the fourth quarter of 2019 was 66.8% compared to 39.7% in the same period a year ago. Gross margin for the 2019 full year was 65.7% compared to 60.2% for 2018. In the fourth quarter of 2018, the company increased its inventory reserve by $4.6 million, primarily due to excess inventory in the spinal implant product line. Excluding the inventory reserve adjustment, gross profit in 2018 would have been 65.1% for the fourth quarter and 67.1% for the full year. Fourth quarter 2019 operating expenses were $11.6 million compared to $62 million in the same period a year ago. For the 2019 full year, operating expenses were $44.8 million compared to $103.6 million for the same period in 2018. As a percentage of total revenue, fourth quarter operating expenses were 68.6% lower by 2.5 percentage points compared to third quarter levels attributed primarily to higher sales in the fourth quarter. General and administrative expenses increased by $700,000 to $4.5 million in the 2019 fourth quarter compared to $3.8 million for the same period in 2018 and increased by $3.7 million to $17.9 million for 2019 full year compared to $14.3 million for the same period in 2018. These increases were primarily due to increased legal settlements, remediation expenses, the retention of finance and accounting consultants, increases in bad debt expense, executive recruiting fees and costs associated with our ERP project. Sales and marketing expenses were $6.8 million and $25.8 million for the three months and full year periods ended December 31, 2019 respectively, a decrease of 4% and 18% for the three and 12-month periods respectively. The decreases were primarily due to the reorganization of the commercial sales team and lower sales commissions attributed to lower sales. Research and development expenses were approximately $260,000 for the fourth quarter of 2019, a decrease of 51% compared with the same period in 2018. And, for 2019, R&D expenses decreased by $770,000 or 45%, due to lower headcount compared to the prior year. The net loss was $1.6 million or $0.12 per share for the fourth quarter in 2019 compared to a loss of $56.7 million or $4.31 per share in the comparable 2018 period. The net loss for 2019 was $8.2 million or $0.62 per share compared to $70.1 million or approximately $6 per share in 2018. Excluding the noncash impairment charges and the inventory reserve charges, the net loss was $3.9 million or $0.30 per share in the fourth quarter of 2018 and $17 million or $1.45 per share for the full year 2018. Non-GAAP adjusted EBITDA for the fourth quarter of 2019 was $1.2 million compared to $1.7 million for the same period of 2018. Non-GAAP adjusted EBITDA for the 2019 full year was $3.9 million compared to $5.4 million for the same period of 2018. As of December 31, 2019, we had $5.2 million of cash and cash equivalents, $10.1 million of net accounts receivable, $16.1 million of inventory and $10 million available under our credit facility. Now, I turn the call back to Sean for additional comments.

Thank you, Greg. I'm very pleased with the progress we have made to date. It is encouraging to see renewed interest from distributors, as we reengage with and focus resources on our best partners to increase the revenue predictability and profitability for Xtant. While the improvements made by our team should better position us to serve the needs of our customers, as well as the internal organization, there remains much work to be done, but we believe we are well positioned to create long-term value for patients, customers and shareholders. I look forward to providing updates on our progress on future calls. Thank you for your continued support. End of Q&A: This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.