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Edited Transcript of XTNT earnings conference call or presentation 8-Aug-19 1:00pm GMT

Q2 2019 Xtant Medical Holdings Inc Earnings Call

BELGRADE Sep 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Xtant Medical Holdings Inc earnings conference call or presentation Thursday, August 8, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Greg Jensen

Xtant Medical Holdings, Inc. - VP of Finance, Interim CFO & Interim CEO

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Conference Call Participants

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* David Carey

Lazar Partners Ltd. - MD of IR

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Presentation

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Operator [1]

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Greetings, and welcome to the Xtant Medical Second Quarter 2019 Financial Results Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to David Carey of Lazar Partners. Please go ahead.

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David Carey, Lazar Partners Ltd. - MD of IR [2]

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Thank you, operator, and welcome to Xtant Medical's Second Quarter 2019 Financial Results Call. Joining me today for the conference call is 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, August 8, 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 Greg Jensen.

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Greg Jensen, Xtant Medical Holdings, Inc. - VP of Finance, Interim CFO & Interim CEO [3]

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Thank you, David, and good morning to everyone listening. I will begin by providing a general corporate update, followed by a review of our financial results for the second quarter and the first half of 2019.

While our second quarter revenue was soft, we have made significant progress towards streamlining and increasing the efficiency of our manufacturing operation and improving the organization of our sales channel. This is evidenced by the improvements in the second quarter in operating expenses, net loss, cash flow and adjusted EBITDA compared with the second quarter of 2018. These improvements allowed us to be cash flow neutral for the second quarter despite the lower-than-expected revenues.

We have already taken several measures designed to stabilize and increase our revenue trajectory, and we will continue to implement additional initiatives to support this critical goal during the second half of 2019 and into 2020. These initiatives include a major reorganization of our commercial sales organization, beginning with the hiring of Kevin Brandt as our Chief Commercial Officer in July of last year and the hiring of additional sales personnel through the first half of this year. In addition, we have had good success with the recruitment of new distributors during the first 6 months of 2019, which is proof that we are gaining traction with our new sales channel initiatives.

Further, to improve top line sales, we are in the process of creating and expanding new marketing program designed to educate our customers about the value of our products and support our sales personnel. Our initiatives also include a commitment to developing new products that are designed to give our customers a cost-effective approach in meeting their clinical needs and improving patient outcomes.

Accordingly, we expect to see an increase in our research and development spend in the second half of 2019 compared to the first half. In order to align our research and development investments with our growth objectives, we are focusing additional spending for new product development in a project-based manner. This will allow us to more effectively assess the cost and benefit of potential new products.

As I noted in our last quarterly call, we are making investments to improve our infrastructure, which includes an upgrade to the 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.

We remain committed to maintaining our New York Stock Exchange American listing and continue to make progress towards the milestones we've outlined for Xtant to regain compliance with the listing requirements. As we previously announced, the New York Stock Exchange regulation has accepted Xtant's plan to regain compliance with the exchange's continued listing standards. Xtant has been granted a plan period through October 4, 2020, to regain its compliance.

Now let me turn to our financial results. Total revenue for the second quarter of 2019 was $15.3 million compared to $18.7 million for the same period in 2018. For the first half of 2019, total revenue was $32 million compared to $36.7 million for the first half of 2018. These decreases were due primarily to reduced demand for our hardware products, which can be attributed to the effects from the December 2018 recall of our Calix Lumbar Spine Implant System and the termination of an advisory agreement with an entity that provided services to some of our customers, both as previously disclosed in the company's 10-K as of December 31, 2018.

Gross margin for the second quarter of 2019 was 64.9% compared to 66.6% during the second quarter of 2018. Gross margin for the first half of 2019 was 64.8% compared to 67.4% for the first half of 2018. During the second quarter of 2019, the company increased its inventory reserve totaling $0.4 million or 2.6% of net sales as well as an increase in manufacturing overhead absorption.

Second quarter 2019 operating expenses were $10.5 million compared to $14.7 million in the same period a year ago. For the first half of 2019, operating expenses were $22 million compared to $28.6 million in 2018. Second quarter 2019 operating expenses were lower primarily due to our reorganized commercial sales organization, including lower sales commissions and travel expenses, restructuring expenses incurred last year and lower amortization expense. As a percent of total revenue, operating expenses were 68.6% for both the 3 and 6 months ended June 30, 2019, respectively, compared to 78.6% and 78.0% for the 3 and 6 months ended June 30, 2018, respectively.

General and administrative expenses increased 15.5% to $4 million for the 3 months ended June 30, 2019, compared to the same period of 2018, and increased 21.4% to $8.4 million for the first half of 2019 compared to the same period of 2018. These increases were primarily attributed to legal settlement expenses, bad debt expense and executive recruiting fees incurred in the current year periods.

Research and development expense was $210,000 for the second quarter of 2019, down by approximately 50% compared with the same period of 2018. As we previously noted last quarter, consistent with our commitment to invest in our future, we expect to increase new product development spend in the second half of 2019 to approximately $1 million. The net loss was $1.9 million or $0.15 per share for the second quarter in 2019 compared to a loss of $5 million or $0.38 per share in the comparable 2018 period. The year-to-date net loss for 2019 was $4.7 million or $0.36 per share compared to $10.3 million or $1 per share in 2018.

Non-GAAP adjusted EBITDA for the second quarter of 2019 was $1.2 million compared to $0.8 million for the same period of 2018. Non-GAAP adjusted EBITDA for the first half of 2019 was $2.2 million compared to $1.8 million for the same period of 2018. As of June 30, 2019, we had $7.3 million of cash and cash equivalents, $8.6 million of net accounts receivable and $15.8 million of inventory and $12.2 million in availability under our credit facility.

In closing, I would like to reiterate our commitment to rightsizing our operations for improved top line growth. Our second quarter financial results highlight that we are making progress in improving our operating efficiencies as evidenced by the improvements made in cash flow, net loss and adjusted EBITDA despite softer revenues. Although the initiatives we're implementing will take time to gain traction and near-term challenges are expected to persist, I want to reiterate that stabilizing and improving revenue is a top priority for Xtant. I look forward to providing updates of our progress on future calls. Thank you for listening, and have a nice day.

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Operator [4]

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And that concludes today's call. Thank you for joining. All parties may disconnect.