Xtant Medical Holdings, Inc. (NYSE:XTNT) Q3 2020 Earnings Conference Call October 29, 2020 9:00 AM ET

Company Participants

David Carey - Lazar FINN Partners
Sean Browne - President and CEO
Greg Jensen - VP, Finance and CFO

Conference Call Participants

Operator

Greetings, and welcome to the Xtant Medical's Q3 2020 Financial Results. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host.

David Carey

Thank you, Operator, and welcome to Xtant Medical's third quarter 2020 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 Web site 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 that can be identified by such words as expect, plan, will, may, anticipate, believe, should, intends, and other words with similar meaning.

Such forward-looking statements are not guarantees of future performance and involve risk and uncertainties including those noted in the risk factor section of the company's annual report on Form 10-K filed with the SEC on March 5, 2020, and is supplemented by the company's subsequent SEC filings including the most recent quarterly report on Form 10-Q. 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 Web site.

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, October 29 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.

Sean Browne

Thank you, David, and good morning to everyone listening. In light of the COVID-19 pandemic and under challenging and unique conditions, Xtant had a strong third quarter, achieving solid revenue growth compared to the second quarter of this year, although understandably still down compared to the third quarter of last year. We are pleased to have generated revenues of $14 million, and an increase of 33% compared to the second quarter of 2020, primarily reflecting a rebound in domestic spinal elective procedure volumes. We are now at approximately 90% of revenues from a year ago, which is a major accomplishment considering that a majority of spinal procedures were on hold early last quarter.

Going forward, we do anticipate that the pandemic will continue to impact revenue for the remainder of 2020, and at a minimum, into early 2021. However, based on current market conditions, we expect fourth quarter revenue to remain at approximately 90% of prior year sales levels consistent with current overall market trends. Taking a step back in anticipation of the evolving market situation, we took an aggressive approach in restructuring our business back in March and April. These actions allowed us to align our business with current COVID environment, while optimizing the cost structure of our business. These moves enabled us to further realize our mission of honoring the gift of donation by allowing our patience to live as full life as possible.

In so doing, we took the following measures; one, focused on reengineering our bioproduction processes to produce our products more efficiently and cost-effectively, two, initiated extensive cost reductions, conserved cash, and three, rebuilt inventory levels to catch up on production shortfalls prior to COVID. The actions we implemented allowed us to hit the reset button, and determine what was mission-critical and eliminate everything else. Now, we're in a position that the investments we make going forward will be targeted towards future revenue growth. As a direct result of the changes we made, we generated an operating profit of approximately $800,000 in the third quarter, a significant achievement and one that we've not realized in recent years.

Greg will elaborate more on this in a moment, but our recently completed debt restructuring was a major milestone for the company. It helped us improve our capital structure, regain compliance with the NYSE American and enhance our access to the capital markets. Moreover, the cost to service our debt is dramatically lower, thereby allowing us to use more of our cash towards our growth initiatives. The debt restructuring also provided the pathway to our proposed $15 million rights offering of which we announced specific details last Thursday.

We believe there's a great opportunity for our shareholders to take advantage of the rights offering, which if successful, will add more capital to support our growth. We're giving Xtant shareholders the opportunity to purchase Xtant common stock at the same price per share as $1.07 per share exchange price used in the debt restructuring. Moreover, having the full support of our largest shareholder underscores the confidence in our business and our long-term strategy. Now that we have implemented several changes to our business, we intend to leverage our strengths to focus more on growth and market access.

To that end, Xtant just signed an agreement with one of the country's largest group purchasing organizations, or better known as GPOs, giving Xtant access to a strategically important customer base in regions of the country where we have not historically had a strong presence. This agreement completes the one missing contract amongst the five largest GPOs in America. Another key achievement in the quarter was the US commercial launch of the Matriform Si, a silicated synthetic bone graft strip designed and cleared for spinal fusion procedures. The Matriform Si expands our biologics portfolio offering and increases our footprint in the US orthopedic biologic market.

Happily, we recently closed six new contracts signed with our GPO network for the Matriform Si with more contracts to come. With elective procedures on the rise across the country compared to second quarter of this year, we're ensuring that we can continue to invest in growth and meet demand through new products like the Matriform Si. Together with our improved financial position and ability to access the capital markets, we can now focus on increasing our cadence of new product introductions, and expand our distribution in sales channels.

Now, I'd like to turn the call over to our CFO, Greg Jensen, for discussion of our third quarter 2020 financial results.

Greg Jensen

Thank you, Sean, and good morning everyone. Total revenue for the three months ended September 30, 2020 was $14 million, representing a decrease of 10.9% compared to $15.7 million in the same quarter of the prior year. This decline in revenue was due primarily to the impact of the COVID-19 pandemic that began in March of this year. However, elective procedures have recovered to some extent as evident by third quarter 2020 revenue, representing close to 90% of third quarter 2019 revenue. As Sean mentioned earlier, sales increased 33% or 3.5 million compared to second quarter 2020 sales. Gross margin for the third quarter of 2020 was 66% compared to 66.2% for the same period in 2019.

Gross margin for the first nine months of 2020 was 64.6% compared to 65.2% for the first nine months of 2019. These decreases were primarily attributed to diminished economies of scale, partially offset by reduced depreciation expense. Third quarter 2020 operating expenses were $8.5 million compared to $11.1 million in the same period a year ago. For the first nine months of 2020, operating expenses were $26.4 million compared to $33.1 million for the same period in 2019. As a percentage of total revenue, operating expenses were 60.5% and 67.1% for the three to nine month period ended September 30, 2020 respectively compared to 70.7% and 69.2% for the three and nine months ended September 30, 2019 respectively.

The decreases in operating expenses are evident that our cost containment initiatives have been effective to preserve cash and align our business with the current market environment. General and administrative expenses decreased by $1.2 million to $3 million for the third quarter of 2020 compared to the same period in 2019, and decreased by $2.6 million to $10.3 million for the first nine months of 2020 compared to the same period in 2019. These decreases were primarily due to a reduction in salaries and wages, lower legal and consulting fees, and reduced legal settlement expenses, partially offset by additional stock-based compensation expense and severance related expense from the workforce reductions we enacted in March 2020 due to COVID-19.

Sales and marketing expenses were $5.3 million and $15.6 million for the three and nine month period ended September 30, 2020 respectively; a decrease of 21% and 20% for the three and nine month periods respectively. These decreases were primarily attributable to lower sales commissions because of lower sales, reduced salaries and wages due to the workforce reductions back in first quarter 2020, and lower travel expenses. As a result of the financial performance above, the company generated an operating profit of approximately $800,000 in third quarter, a significant achievement by our team.

Net loss in the third quarter in 2020 was $1.4 million or $0.10 per share compared to a loss of $1.9 million or $0.14 per share in the comparable 2019 period. The year-to-date net loss for 2020 was $6.3 million or $0.48 per share compared to $6.6 million or $0.50 per share in 2019. Adjusted EBITDA for the third quarter of 2020 was $1.6 million compared to $0.6 million for the same period of 2019. Adjusted EBITDA for the first nine months of 2020 was $2.8 million compared to $2.7 million for the same period in 2019.

As of September 30, 2020, we had $2.7 million of cash and cash equivalence, $7.3 million of net accounts receivable, $20.7 million of inventory, and $5 million available under our credit facility. Earlier this month, we completed our debt restructuring transaction that served two primary purposes. First, it reduced our standing debt to less than $16 million under our credit facility, thereby facilitating future access to the capital markets for investment in our growth initiatives, and second, it helped us regain compliance with the NYSE American's listing standards.

The debt restructuring also enables us to service our debt while eliminating further shareholder delusion. As we announced last week, we have set a record date of November 5 for our proposed rights offering of up to $15 million of our common stock. Pursuant to this announcement, we expect that subscription materials will be mailed on or about November 6, 2020 to holders of the company's common stock as of the record date. The anticipated expiration date for the rights offering is December 4, 2020. However, the company may extend the rights offering for additional periods of time in its sole discretion.

For further details regarding our third quarter results, please see our 10-Q file earlier today. For additional information on the rights offering, please see the prospectus included in the registration statement on Form S-1 and related amendments filed with the SEC.

Now, I'll turn the call back to Sean for closing remarks.

Sean Browne

Thanks, Greg. We are pleased with the third quarter revenue performance which trended positively throughout the quarter, supported by the rebound in domestic spinal elective procedure volumes. Our decisive actions earlier this year to preserve cash while investing in product and system enhancements have us well-positioned to drive growth and expand our distribution network as a stronger and leaner organization. From a financial perspective, by completing our debt restructuring and regaining compliance with NYSE American coupled with our proposed rights offering, we have increased future access to the capital markets to invest in our growth initiatives.

We believe this is an exciting time for Xtant as our recent initiatives enable us to deliver on our mission, drive better patient care, and return value to our shareholders. Thank you for joining us today and your continued support.

Operator

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.

Question-and-Answer Session

End of Q&A