Aurora Spine Corporation (ASG) Earnings Call Transcript & Summary

Good day, and welcome to the Aurora Spine Reports First Quarter Fiscal Year 2023 Financial Results Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. Adam Lowensteiner. Please go ahead, sir.

Thank you, Chuck. Welcome, everyone, and thank you all for joining us today to review the financial results for Aurora Spine for the first quarter fiscal 2023 ended March 31, 2023. With us on the call representing the company today are Trent Northcutt, President and CEO of Aurora Spine; and Chad Clouse, CFO of Aurora Spine. Before I -- before we begin, I would like to remind everyone that statements made during this course of this call may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 as amended and Section 21E of the Securities Act of 1934. These statements reflect current expectations concerning future events and results. Words such as expect, intend, believe, may, will, should, could, anticipate and similar expressions are words that are used to identify forward-looking statements, but their absence does not mean a statement is not forward-looking. These statements are not guarantees of future performance and are subject to risks and uncertainties and other important factors that could cause actual performance or achievements to be materially different from those projected. For a full discussion of these risks, uncertainties and factors, you are encouraged to read Aurora Spine's documents on file with SEDAR, including those set forth in periodic reports filed under the forward-looking statements and Risk Factors section. Aurora Spine does not intend to update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. On this call, management may refer to EBITDAC, adjusted EBITDAC, adjusted net income, adjusted EPS, which are not measures of financial performance under Generally Accepted Accounting Principles, or GAAP. Management believes that these non-GAAP figures, in addition to other GAAP measures provide meaningful supplemental information regarding the company's operational performance. Investors should recognize that these non-GAAP figures might not be comparable to similarly titled measures of other companies. These measures should be considered in addition to, and not as a substitute for or superior to any measure of performance prepared in accordance with GAAP. A reconciliation of non-GAAP measures to the most directly comparable GAAP measures in accordance with SEC Regulation G can be found in the company's earnings release. With that, I'd like to now turn the call over to Mr. Trent Northcutt, President and Chief Executive Officer of Aurora Spine. Trent, please proceed.

Thank you, Adam. I'd like to welcome everyone to the Aurora Spine first quarter fiscal 2023 financial results conference call. Earlier today, we issued a press release detailing our financial results. Hopefully, you've had a chance to review this news release. But if not, a copy can be found on our website at aurora- spine.com under the Investors section or in other financial websites. To lay out the agenda for today's call, let me first summarize a few key events for the quarter. And then I'll take a bit about the status of each one of our key initiatives and products like ZIP and SiLO as well as our initiatives on the Spine Division, including DEXA product line. Chad will then give a recap of the financial results and we will then conduct a Q&A session at the end. So let me talk to you about key events in Q1, the market overview, the dynamics of the new products and our clinical studies. The first quarter of the fiscal 2023 was a transitional quarter for Aurora, where the industry had managed certain reimbursement changes that affected our SI joint division, which in the interim has been resolved. We've also added new sales personnel during this time, and we will start to establish new relationships to renew our sales strategy. We believe that these changes and investments will be beneficial to the company later fiscal in the long term. Despite these short-term issues, the company has several key initiatives that were positive events, including the initial surgeries of our new SiLO TFX product, which successfully -- has been successfully implanted into patients. We are currently building inventory to ramp up for the new release of this product slated for the third quarter of 2023. We also embarked on clinical studies, which -- many of our products during the 2022 into 2023. That is important to have this data to share with the industry when selling our products. As we received early positive results from our ZIP device, it continues to build momentum. ZIP to act as a key contributor to the company's sales. And as the product has received approval reimbursements -- but it is versatile and is starting to gain momentum in the marketplace as more professionals, including neuro, ortho and pain interventionalists are recognizing the value of the ZIP line of the product and have other -- and to others. We believe that the true vision and intent of this product is now coming to fruition. Looking into 2023, we believe that the proper track for continued revenue growth -- while the first quarter was slower than anticipated, we took time to take -- make some changes to prepare the company for the long term, including adding some new personnel. On a macro level, we continue to see momentum gaining in the minimally invasive surgery market, especially in regards to the reimbursement coding as [ insurances ] are embracing more procedures that can be done in a minimally invasive manner and have the patient recoup at home in a quicker time frame. Aurora's products like the ZIP and the SiLO are very complementary to doctors and their patients and especially designed for minimally invasive procedures. I believe that these catalysts, while our products are able to gain traction, will be well received. Moving on to DEXA. We continue to work diligently in placing the kits. We are identifying appropriate homes for these kits. We feel confident that they will be able to place these kits by the end of the year. That said, in order to attract appropriate health care professionals, we will be starting to offer certain training capabilities for the DEXA-C to immerse them into the product and to the technology. While training isn't required, we believe offerings from training will be necessary to get the doctors to fully embrace the technology. Our goal is not only to have them use DEXA-C but to continue to use the entire platform as well, especially as we will have DEXA-L available in the near future. To summarize, I'm extremely proud of our team's performance and staying focused on building this company. We are well positioned to take advantage of growth markets in several new proprietary products. We will remain focused on penetrating these markets further this year through continuing training sessions and clinical trials. Looking to the long term -- longer term as well as position for success, we especially have the new products that are more -- and more clinical studies, providing out of our technology and education for more doctors on the benefits of using Aurora's products. We remain highly focused at the opportunities that are in front of us and continue to invest our growth with each of our major platforms: ZIP, SiLO and DEXA. I will now turn the call over to Chad Clouse, Aurora Spine's CFO, who will review the financial results. Chad, please proceed.

Thank you, Trent. With numbers highlighted in detail in the press release, let me focus my comments on a few areas and provide some color where I can. Total revenues for the first quarter of 2023 were $2.93 million, a decrease of 17.5% compared to the $3.55 million the same quarter 1 year ago. The lower revenues are due to less sales of the company's SiLO allograft system due to reimbursement coding change and lower sales in the Spine division. Gross margin on total revenues was 52.2% for the first quarter of 2023 compared to 53.5% in Q1 of 2022. The gross margin is slightly lower due to product mix, but remained strong historically. Total operating expenses were $2.19 million for the first quarter of 2023 compared to $2.29 million in first quarter 2022. Operating expenses slightly decreased primarily due to lower G&A and marketing expenses. EBITDAC was a negative $0.38 million for the first quarter of 2023 compared to a negative $0.15 million for the first quarter of 2022. EBITDAC was lower due to lighter revenue levels through the current quarter. Net loss was $0.662 million -- a negative $0.662 million for the first quarter of 2023 compared to the first quarter of 2022, which was a loss of $0.387 million. Basic and diluted net loss per share was negative $0.01 for each, for 2023 and 2021. During the balance -- turning to the balance sheet. The company ended the [ fourth ] quarter with approximately $362,000 in cash and cash equivalents. During the quarter, we received approximately $700,000 in proceeds from the conversion of warrants. Accounts receivables decreased sequentially. But we continue to remain highly focused on our cash collection and believe that we'll be able to lower these receivables over time. Our inventories were flat during the quarter as we've made a fair amount of products. [ We've ] had any shortages of materials. We continue to monitor our expenses and at tight control of our cost. That concludes my comments. I will now turn the conversation back to Trent.

Thank you, Chad. Before we open the call for questions, I'd like to conclude that we continue to make improvements internally to make sure that we remain on track [ for ] continued revenue growth. We obviously have more work to do. But the company is in a very good position to capitalize on the IP improvements we've established in the past 18 months. We are highly successful in creating new proprietary products. And now it's time to demonstrate that we can scale the company on the commercial side of the business. I appreciate everyone's patience. And I believe we are in the early stage of reaping the rewards of our efforts. With that said, operator, we are ready for any questions.

[Operator Instructions] And the first question will come from Tom Fedichin with Microcap Connection.

I want to dig into some questions regarding the -- really the capital on hand, cash on hand. It's -- we've had 2 quarters of pretty sizable losses and $360,000 on the balance sheet. At what point in time are we looking at doing a capital raise?

Yes, I am -- obviously, we are taking a closer look at our cash position. We have improved just recently on collections. We've seen some people that were slower in the payment schedule actually come through for us. And so our cash position is actually -- has improved even from this press release. So it doesn't mean that I'm not looking at obviously, making sure that we're stable financially and making sure that we have appropriate cash for operational expenses. So it's in our discussions now. I've had conversations with our Board. And I haven't accepted any financial raises or anything. But I am discussing it as either a possible bridge or a potential investment in the company.

And in regards to that, I know David Rosenkrantz has got a debenture. I believe it is -- that is outstanding. Have you ever thought of converting that? Because my understanding is that, to do a financing -- or they have a bank loan, I should say, that might be an issue in that he's got first right on the debt of the company, right, or the assets of the company. Has that ever been discussed about converting the shares and into his owing into shares? And second to that, I guess, if a raise was to take place, given the rollout of all these new products that are coming out of DEXA-C, of course, continually rolling out SiLO TFX, how much capital would we be looking at $2 million, $4 million, how much money?

So the answer to the first question, yes, I mean, David Rosenkrantz, our Chairman, has been obviously a great ally to the company and a strong leader on our board. He is definitely here to help the company in any way that is possible with the company. So I'm not going to put words in his mouth. Obviously, he's here firmly on our side to make sure that things continue to run smoothly with the company. And we'll obviously make adjustments where we need to, if you need to -- if he wants to participate in that type of selling off of his -- more into that -- have the decision he makes. So obviously, he's active. David and I speak every week and its very hands on, which is a good thing for us to be in. The second part of the question is, I did say that we have -- we are seeing some bright lights on the collection, which has been promising. I'm not saying people won't continue to hold tight on their purses. But we did get a little bright spot over the last couple of weeks here, seeing some improvement in areas where money was finally being released. I'm not trying to cut myself on the back too hard. But I was aggressively and diligently being -- I was on the AR collections team for a few weeks, just dialing the phones and getting people to pay their bills. So as far as how much money we have to pick up, a lot of them [ about ] bring in, if we did do a raise. The good news is most of the products that we've been talking about for a while, such as DEXA-C and SiLO TFX, a lot of those products have already been built up and built out. So we're not going to have to grab extra money for that -- for those products. The TFX product is -- as of today is on time with its scheduled release. We feel confident that the TFX will fill in the gap that has obviously the hole that got created in our revenues with the T-code reimbursements on the SiLO allograft systems. This was probably -- we're the publicly traded company. So we're the ones who get the most attention on this space. But many of the allograft SI companies are also dealing with the same T-coding reimbursement challenges. So we are very confident. And I'll broadly say that I know the TFX will fill that gap and actually come up and out of it on top because the product is performing well in its trials. And the TFX product has already added some additional revenue to the company that we needed and is getting a favorable reimbursement. On the DEXA-C side, the challenge there is just simply been getting it approved at the facility. It's not a matter of, does the doctor like the product, does the doctor see the advantages of the product. The answer to these questions are yes. I sweep the phones regularly asking the doctors how are the patients doing, how the patient is responding to it, and they're all very, very impressed. And many of the accounts that we had slotted for DEXA-C implants were simply -- the hospital just hasn't given us the approval yet to have the product available. So we continue to sell the product and we continue to get the product introduced to doctors. And there's many people who want to use the product. But it's still just not available at their facility for committee approvals within that facility.

As for the accounts -- get back to the accounts receivable for a second. With increased growth, if you double your business, I would expect that you would double the accounts receivable. And that's kind of where I was coming up with maybe $2 million to $4 million required to raise for future growth. Would that be a correct assessment?

Yes, that's a fair comment. And it's certainly -- yes, we're not internally discussing $10 million raises or anything like that. That's not the conversation we're having. We're just basically talking about more of a bridge extension of making sure that we can execute. I reset the sales organization. We have new salespeople who've come in. We've doubled down on education. We added a clinical specialist in the field to help support [ Chrissy ]. We hired a new Regional Manager that's already put up new numbers for the company, brand new revenue for the company. And we're adding more regional sales management, which we are confident will bring new revenue for the company in areas that we don't currently have strong revenue. So this will be new business for us. And it will be focused on the ZIP, the SiLO TFX and the DEXA products, as I've been discussing now for 18 months.

Now at the start of 2023, you had 8 DEXA kits in the field. How many currently do you have outstanding?

Yes. We have 9 kits in the field. And there's -- I believe there's another 9 here active, ready to go in the office. So that puts us at 18. And I know that they'll have all of the DEXA kits beyond 20, I'll say, 20 and higher available here by midyear. But still, I have -- like I said, I have 9 extra kits that I know can be placed right now. And we are holding our breath on a couple of accounts because they're -- we're in the vast committee. We're in the committee approval process and we're just waiting for them to represent that approval so we can move on in and start to have the DEXA-C utilized and used in surgery. Now, with that said, I know you didn't ask, but I'll highlight that, we are forging ahead on the DEXA-C multicenter study. And I think that with that multicenter study, similarly, what we saw with the ZIP technology where it was maybe a slow start with us with ZIP, ZIP became widely accepted. The study that we put out there for the DEXA was widely accepted. It was a nice crossover hit amongst the different groups of doctors you're working with. DEXA-C, of course, is very focused on ortho and neuro spine market. But as much as we talk about it, and I know, Tom, you know about the product and I know a lot about the product. We need to get more people behind more doctors, more surgeons to -- who know the product have the ability for the product to be used in their center. And we think that this multicenter study that we are embarking on and do have IRB approval on, will start to help the doctor with the VAC committees, with the approval committees to get the product more readily available to them because we picked in the extra step to make sure that there's some clinical data coming out from behind it, so we can support it as we enter into new facilities.

And SiLO TFX kits, you had 3. You're doing your alpha testing, I guess, or beta testing, I guess, would be on them right now as of the last call that is, I should say. I'm presuming it's still the 3 kits. How many kits do you feel you'll have by year's end? And will we see -- will we actually see midyear 10 kits in the field? Like what should investors expect when it comes to the SiLO TFX?

Yes. We'll have closer to 20 kits by the second half of the year and I mean in Q3. So we've got some really positive results from that -- from the doctors who've done a blend of ortho, neuro and interventional doctors have used the product with some really good clinical results. We're coming up to our first almost 6 months of use of the product because we had our first alpha sites done right away. So by the July, we'll be into our first 6-month outcome with the product. We're on schedule with the product as far as like the instrumentation and the implants. Our in-house manufacturing team has done a magnificent job of making the quick changes that we saw clinically in the product. And we were able to do that quick pivot on updating on the instruments. And the X-rays that I've seen, the comments that I've received are very encouraging. And I know it's going to fill the hole that we were seeing from the second half of last year, Tom, when you started to hear my concerns on the coding reimbursement on the T code, how concerned I was with that and how it directly affected our sales revenue, and this is why we made changes in sales. But we were also very optimistic about what the TFX is going to do. But we were -- we didn't get our FDA approval until October of last year, did our first cadaver lab course once we had the first kit available for the course to be able to teach on the product, which was in February, and that's where we got the alpha sites. We've quickly worked through all the modifications that were needed. And we've already performed 2 TFX along with ZIP trainings. We combined the trainings. We've already done 2 of those, one on the West Coast and one on the East Coast, to about 20 physicians on that in those trainings. And all of that -- we've got 100% approval from those doctors that they are going to use the product.

Now of the SiLO TFX kits that are currently out and even moving forward from an expectation standpoint, how many procedures should we expect per doctor per month based off of what you know from the SiLO in the past? And of course, now this is a new upgraded version of SiLO the TFX. Can we expect to see similar numbers as to what we saw with the SiLO? 10 procedures a month or is there a number we can expect?

Yes. I'm looking to obviously be consistent at 10 cases per month starting next month, but quickly moving up past 25 procedures a month going into July and then as high as 35 procedures per month. We've seen an increase of reimbursement on the device by over $3,000 from our $9,000 average sell price of SiLO to now we're getting over $12,000 for TFX. So we're encouraged by that because we've seen some additional pricing come in that's even higher. So we'll be able to maximize on that. And again, the kits are performing real well. The outcomes inside the operating room are looking promising. And we've already -- different procedures that have been booked out on personal injury cases, work comp cases, Medicare and in private payers, have all paid so far on the SiLO TFX. So that's also a nice promising spotlight in a darker Q1.

And then -- I'm sorry, I'm going to skip back to DEXA for a second because it's something that I don't [ know ] -- that I didn't ask. And that is, how did DEXA perform in Q1? We didn't see any language in the press release as to the success of DEXA. Did we see -- was it a successful quarter? What percentage of revenues was it for the quarter? Are doctors still performing 10 surgeries per month per doctor with the DEXA-C?

DEXA-C was down mainly because the -- one of our key users of the DEXA-C product was out and he was a high performer of the product for us. So that really hurt us, he put his shoulder out in December. So that -- all of -- essentially Q1, he was out in recovering. He is back. We've got some more surgeries with him scheduled and he had changed to another facility. The pricing is lower than where we were at the other facility. But we have different users, a more -- a bigger blend of doctors using the product. We just don't have all the approvals. One of the big facilities that I was counting on last year, one of the major universities that's part of the multicenter study, we're not -- they were -- they had pushed the VAC only back to June of this year where we thought we were going to build to do about 20 levels a month with that university in December. And then the committees pushed us all the way to midyear at that particular university. We hope that we don't run into those types of issues and we don't think we will. But that one was obviously earmarked to be a revenue generator for us, but turned into a longer committee approval process. So DEXA is out there. I think the challenge for us is just simply getting doctors familiar with the product and getting our sales team focused on the DEXA technology versus the TFX or the ZIP product. It's a matter of just picking the products appropriately on that sales call. And we've added a new field trainer to help support [ Christi's ] division to help train the doctors on the products. So that way they don't have to come to a lab and also -- every single time. And then also just to be in front of a distributor, this new field trainer, which we added here in the first -- end of Q1 he joined us. He is out actively training doctors and distributors, which is the key part here. The distributor and the distributor reps on why TFX, why DEXA and how the distributor can make money off of these products by introducing these technologies that, in our opinion, are door opening products in that area and to our -- more of a surprise, many of our distributors that were carrying ZIP and SiLO didn't know we had DEXA. So that was clearly something that we saw. And we fixed and we added that new component to the company so we could get better awareness and better training in the field on that technology. And our new tech support gentleman who joined us, is very, very excited about the technology and is actively out right now as we're speaking, talking to distributors and doctors and covering some surgeries that are needed. So we don't lose the sales cycle because when our sales people are stuck in a surgery, the clinical specialist is out in the field covering those procedures for us.

And do you feel you have the full roster staff that's required moving forward? Or are there still holes that are needed to be filled?

Well, internally -- we feel good internally. Externally, as far as like sales goes, Matt Goldstone is running in a series of interviews right now with different areas. And we have 2 new offers that went out, that are going out this week to salespeople that we believe will be impactful to the company sales-wise. And the roster that I see here on my board, he's got 8 more salespeople. So 6 more out of the 2 that he's making offers to, that are in strategic areas around the country and parts of the -- pockets of the country that we're just not either strong in or we just don't do anything at all there or areas that we think we need to improve on. We'll be adding those people here in the second quarter or early Q3 at the latest. But that will be -- all those salespeople will be joining us as fast as we can get them signed on.

[Operator Instructions] This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Adam Lowensteiner for any closing remarks. Actually, we just received a couple of questions that came in. I'm so sorry about that. Our next question will come from [ Sergio Hiper ] with [ Iber ] Research.

My job is to ask what Tom may have missed. So do you want to give any revenue guidance? Do you want to change the revenue guidance that you gave previously? Or you're sticking with it?

So we were chasing to get ourselves at about $1.5 million. That's what we were shooting towards. We'd actually felt on the sales -- in our sales forecasting from the field that we were going to be somewhere between $1.4 million, $1.5 million. But the team had some shortcomings within those estimates. So we've regrouped the team to be more accurate on our forecasting. So until I can get the team to accurately forecast consistently, I'll hold on where that number is. It doesn't change what we're shooting towards. We're shooting to -- obviously, to be profitable, number one; 2, to get to a point where we can get on a regular sales revenue above the $1.4 million, $1.5 million number. That's where we want to be. That's our first milestone that we're trying to consistently be at. We've shown improvement here in the second quarter from the first quarter. So that's the step in the right direction. But we must continue to take steps forward. And we have to get the TFX system out into the market because the sales shortcoming is primarily off of the T code on the SiLO allograft SI joint system. The reimbursement was being -- was a concern of doctors. And so, the procedures had dropped significantly. In fact, in the beginning of the year, it went down 70%. So that's why we are looking to reforecast the sales, especially in the SI market based upon the release of the TFX system, which we believe will be able to fill in the shortcomings of that device and then also add new revenues to the company above and beyond the shortfall of the SiLO allograft system with more firepower out on the street, which would be more salespeople.

So Trent, without getting more DEXA-C kits at -- the revenue for the next quarter is not going to be as good as last year's. So can you give more color as to what is taking so long with the -- that see -- my understanding is that you're not selling to just one hospital. It's a hospital group. So, is that correct? So when you say that it won't be just one...

Yes. The quick answer to the question is that we -- DEXA-C is in the hands of different doctors. The kids are being presented to different accounts. The problem we had with some of the accounts was that we would -- we could get the yes from the doctor, but we weren't approved at the facility. So we have to still go out, get a part of the hospital approval system where these particular procedures being performed. We've redirected our sales force to make sure that they were focused on accounts that could give us access to their facilities. It is a newer product. So the -- oftentimes some of the hospitals and even some of the surgery centers are year-to-year or quarter-to-quarter on approvals. And we got a slow start because we weren't set up right at the end of the year with the inventory headwinds that we ran into at the end of the year going into the first quarter this year, which rapidly affected on top of the SiLO reimbursement challenges that we went into the year. So those 2 things dragged our sales down in the first quarter. Last year's Q1 was a record-breaking Q1 for us with no headwinds of coding reimbursement and no inventory issues this quarter. Both those challenges were real but are being corrected. That happened correctly.