Xtant Medical Q3 2023 Earnings Call Transcript

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November 9, 2023

There are 6 speakers on the call.

Operator

Greetings, and welcome to the Exped Medical Third Quarter 2023 Financial Results Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. I would now like to turn the conference over to Matt Steinberg of Fin Partners.

Operator

Please go ahead.

Speaker 1

Thank you, operator, and welcome to Xtant Medical's 3rd Quarter 2023 Financial Results Call. Joining me today This is Sean Brown, President and Chief Executive Officer and Scott Neals, 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 Xcent's current perspective on existing trends and information and can be identified by such words as expect, plan, will, may, anticipate, believe, should, intend in other words, with similar meaning.

Speaker 1

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 ks filed with the SEC on March 7, 2023, and in subsequent SEC reports and press releases. Actual results may differ materially. The 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 our press release and are otherwise available on our website. Note that our Form 8 ks filed with our financial results press release provides a detailed narrative that describes our use of such measures.

Speaker 1

For the benefit of those of you who may be listening to the replay, This call was held and recorded on Thursday, November 9, at approximately 9 am Eastern 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 Brown.

Speaker 2

Thank you, Matt, and good morning, everyone. In recent years, Axant Medical's evolution has featured important value creating acquisitions. We have refinanced debt. We have lowered our operating cost basis We've done key financing and we've added new leadership. These critical initiatives have the company poised to achieve sustainable long term growth Notably, we delivered record quarterly revenue of $25,000,000 an increase of 73% year over year.

Speaker 2

The strong growth was driven by our core Xtant business, which includes organic growth of 18% and further bolstered by contributions from our Acquisitions. I want to reemphasize our strong organic growth in the quarter when we were in the process of digesting 2 very complicated acquisitions. So I'm particularly thrilled with Xtant team's continued focus on our core business. Our revenue growth and efficiently run operations are driving our bottom line as we recorded our 2nd consecutive quarter of adjusted EBITDA. Altogether, our business is clicking on all cylinders, giving us more confidence regarding our future prospects.

Speaker 2

During the Q3, as part of our expanding business, we completed the acquisition of Surgeline's Biologics and Spinal Fixation Business for $5,000,000 and in all cash transaction. We believe Surgi Line's business is a perfect complement with Xtant's offerings, primarily with their spinal fusion and motion preservation portfolio. So far, we have completed the commercial integration of the acquisition ahead of schedule. It has been a great fit that is helping us rapidly expand our commercial footprint with new contracts and distributors. We believe there is significant room for continued upside as we remain focused on streamlining operations and capitalizing on synergistic opportunities.

Speaker 2

Turning to a more detailed discussion of the quarter's performance, I want I first want to remind the listeners that our 4 key growth pillars are focused on: 1, new product introductions 2, distribution network expansion 3, adjacent market penetration and 4, strategic acquisitions. The sustained robust demand for our Osteo Factor and Osteo Vibe Plus products since their initial launch It's been a driving force in our success with the $2,400,000,000 U. S. Orthobiologics market. Our newly expanded comprehensive product Folio increasingly addresses this market, reflecting our commitment to patients in need.

Speaker 2

Looking ahead, we remain opportunistic on future product launches and acquisitions that position us to take greater market share. Now turning to our distribution network expansion pillar. With the successful integration of Surgeline's contract portfolio and distributor network, we've added roughly 50 new agreements for a Total of over 450 IDN and GPO agreements. Additionally, we picked up 150 new distributors, So now we have a network of more than 650 independent agents in creating a national network. In the quarters ahead, we will work on getting greater penetration With our current distribution network and we'll be opportunistic in adding new distributors where it makes sense.

Speaker 2

For our 3rd pillar of leveraging adjacent markets, we continue to make inroads in penetrating these markets, particularly in the foot and ankle and trauma and orthopedic implant markets. Notably, our expanded capacity has translated into increased OEM sales. Finally, our 4th pillar focuses on achieving growth through M and A. Our approach to both tuck in and transformational acquisitions remains a priority going forward. We continue to focus on acquisition targets based on our 3Cs Capabilities, capacity and cash flows.

Speaker 2

In terms of capabilities, we target businesses with our immediate needs of stem cells, Amneon, motion preservation hardware and a long term focus on the higher end regenerative biologics. In terms of capacity, increasing our biologics production capacity that meets the demand we envision in the years ahead. In terms of cash flows, we seek businesses that are profitable or can become profitable by producing Xtant's products. The recent Coflex, That are key for us in achieving our long term goals. While we believe the Surgeline acquisition will be a long term growth driver, In mid July, their largest product line, ViBone, was pulled off the market due to a tuberculosis infection caused by Azeo, A contract manufacturer of Surgeline stem cell products.

Speaker 2

This not only impacts Surgeline, but has had a significant impact on the entire stem cell market. Since then, the American Association of Tissue Banks or AATB released updated guidelines for donor screening requirements. We appreciate the AAPB's efforts in proactively addressing these important concerns to ensure patient safety. However, since this recall, donor availability has been limited and has adversely affected our stem cell business. We anticipate that this current stem cell shortage will adversely impact 4th quarter revenues.

Speaker 2

We are working tirelessly to mitigate These external constraints and are optimistic that this is a temporary supply issue and we anticipate that this will normalize by the Q2 of 2024. As part of our strategy to meet demand and achieve adjusted positive EBITDA, our operational efforts have been dedicated to the implementation of crucial process improvement initiatives and capacity expansion. These actions have successfully to both production and overall efficiency, and as a result, we can sell and deliver products on a greater scale. With the Recently announced acquisition of the Nano's production operation from RTI Surgical, we are even better equipped to produce more of our own orthobiologics products versus having to source these products from outside vendors. Having full control over Nanos enables us to begin the process of reviving and growing this important product line.

Speaker 2

Finally, we raised our 2023 full year annual revenue range to approximately $88,000,000 to $91,000,000 up from the previous range of $75,000,000 to $77,000,000 This newly revised guidance range reflects annual revenue growth of 52% to 57% from the year ago period. The updated guidance now includes contributions from the Surgeline acquisitions in addition to the strength of our organic business. Overall, we have come a long way in a short period of time. Our business is performing exceptionally well and we are excited about our growth which continues to rise with our continued execution. Xtant is strategically moving forward and we have solid products, operations and talent to back it up.

Speaker 2

Now, I'd like to turn the call over to Scott, who will discuss our Q3 2023 financial results.

Speaker 3

Thank you, Sean, and good morning, everyone. Total revenue for the Q3 of 2023 was a record $25,000,000 compared to $14,500,000 for the same period in 2022. This robust 73% annual increase Attributed primarily to greater independent agent sales, contributions from the Coflex and Cofix product lines, opportunistic private label sales Product sales from the recently acquired Surgeline Hardware and Biologics Business. Gross margin for the Q3 of 2023 was 61.3 Compared to 54.6 percent for the same period in 2022. The increase was primarily attributable to greater production, production efficiencies, Favorable product mix and a decrease in charges for excess and obsolete inventory, partially offset by higher product costs.

Speaker 3

3rd quarter 2023 operating expenses were $18,700,000 compared to $9,800,000 in the same period a year ago. As a percentage of total revenue, operating expenses were 75% compared to 68% in the same period a year ago. General and administrative expenses were $7,100,000 for the 3 months ended September 30, 2023, compared to $3,700,000 for the same period in amortization of intangible assets associated with the Coflex and Cofix product lines and higher consulting fees associated with acquisition related activities. Sales and marketing expenses were $11,100,000 for the 3 months ended September 30, 2023, compared to $5,800,000 for the same period of 2022. This increase is primarily due to additional commission and compensation expense and higher professional service fees.

Speaker 3

Net income in the Q3 of 2023 was $9,200,000 or $0.07 per share compared to a net loss of $2,400,000 or $0.03 per share in the comparable 2022 period. Adjusted EBITDA for the Q3 of 2020 $3,000,000 was $500,000 compared to an adjusted EBITDA loss of $900,000 for the same period in 2022. As of September 30, 2023, we had $8,700,000 of cash, cash equivalents and restricted cash, $19,200,000 in net accounts receivable, dollars 34,300,000 of inventory and $3,300,000 available under During the Q3, Xtant closed a private placement with accredited investors for gross proceeds of $15,000,000 The company expects to use the net proceeds from private placement for working capital and other general corporate purposes. Operator, you may now open the line for questions.

Operator

Thank you. We will now conduct a question and answer session. Our first question comes from Chase Nikkorakkar with Craig Hallum. Please proceed.

Speaker 4

Good morning, guys. Thanks for taking the questions and congrats on the

Speaker 2

Great. Thanks, Chase.

Speaker 4

Just quick housekeeping one to start. Can we get a breakdown of orthobiologics and hardware revenue in the quarter and then kind of separate organic growth rates would be helpful if you have them?

Speaker 2

Scott, I'll throw that over to you.

Speaker 3

Sure. Give me one second, Chase. I think for the quarter, we had

Speaker 2

Overall,

Speaker 3

Orthobiologics revenue of $15,700,000 compared to endpoint revenue of about $9,300,000 $9,400,000 revenue or $9,300,000 rather.

Speaker 4

Great. Thanks. And if we kind of think about drivers within there, I mean, what products kind of really drove growth Within hardware from an organic perspective and then also orthobiologics, because again that organic growth was well ahead of our

Speaker 2

Scott, I'll throw it back to you as well unless you want me to dive in on that.

Speaker 3

Yes. I think on the orthobiologics side, it was the same products we've seen as in past quarters, our new product offerings, Those being the growth factor, the OsteoVIA plus in spite of some of the challenges we saw from a supply chain standpoint And then also on the private label and OEM front. And then on the implant side, really those ASC related products that have driven Growth in past quarters as well. So it's really the same story as past quarters from a growth perspective as it relates to both product families.

Speaker 2

And that's the interspinous product device of Axle and then the SI fusion product of Silex, which are the 2 big drivers there.

Speaker 4

Yes, got it. Helpful color, guys. And then maybe just for investors, as we think about kind of incremental EBITDA margin As you have this inorganic revenue kind of flowing into the model, is there a target that you guys have as far as what you're looking to drive from kind of the incremental inorganic revenue As far as what you think you can drive from an EBITDA margin on that revenue specifically?

Speaker 1

I think that will take us some

Speaker 3

time to get there. We had envisioned a number of synergies as part of the transaction. However, those will take time to get there. We've talked about ultimately working towards an EBITDA margin of 15 I don't think that will be the case in the near future. So there will be a ramp associated with that client.

Speaker 4

Got it. Maybe along those lines, what's kind of the learnings that we've had through these last two integrations here? I know you're still very much in the middle of How do you feel about how you've trained your muscles as an organization to make these integrations successful and successful consistently as we look for more accretive deals in the future.

Speaker 2

Yes. Scott, I'll jump on this. I think about each of these businesses, All of them were businesses that were in tough shape, quite frankly, from neglect. When you think about SurgLine overall, it was really betting on Holo. And so these businesses were ones that they were not being fed, if you will.

Speaker 2

And so for us, we saw Never mind the nanos business, which is something we've always liked. We saw those as businesses that if they were given the right kind of focus And in some cases, a little bit of investment, good things can happen and we still believe that that's Jason, and we're just even right away on the core Surgeline business that we brought over, I've been very, very pleased with what our funnels look like, what our just the commercial integration that's taking place, So which is quite frankly, that's the bigger one, right? That's the big one. That's the one that has the biggest impact to what we do. So I would say that, I think focusing on those small things of what I think we do really well, which is on execution and making sure that we do the first things first when it So I would tell you that that's Those are the things that we're working on to make sure that these become successful.

Speaker 4

Got it. And maybe on Nanos. Synthetic is a nice growth area for you guys. It's really greenfield at this point. It's a fairly large market, Both in the U.

Speaker 4

S. And outside. In the deal, you kind of mentioned next gen potential products. Could you kind of discuss what those might look like? And then also kind of second part to that, I assume many of your distributors sell a synthetic today, right?

Speaker 4

Do you see it as pretty long hanging fruit to going to them with Nanos and trying to get them to

Speaker 2

Yes. And to answer the first part of that or the last part of that question first, yes, That's the hope here, right? But one of the challenges that Nanos has had is the economics for the business hasn't been great. And so by buying the product from RTI And a product line that had been going down again, it's just a little bit of a it's a bit of a challenge within that market because it does require high commissions. And so if you don't have high margins in there, it's hard to be able to compete.

Speaker 2

So by us owning the facility, essentially buying 2 years of inventory, All of that all of those economics are in our hands, right? So we think that we have, A, it's a very good product. It's actually it's one of the most studied Products that's out there in the synthetic world. So A, we think we got a great product. We think we can get the economics right.

Speaker 2

So B, we think that it Should lead to hopefully some growth. But then answering your first question, which was really getting into how do we feel about the next generation. They had worked on at RTI a couple of different variations. We are evaluating those As well as some of the things that we we've got just a really, really strong over the last year, we've brought on some of the best R and D guys going when it comes to the biologics world. And so I'm going to give Mark Shallenberger and his guys a chance to take a look at it and say, is there something better we can do?

Speaker 2

And so, so yes, so that's when we look at Nano's, the next generation, that's what's in the offing.

Speaker 4

Got it. Helpful. I'm sorry to take so much time here guys, but lots going on with the business. I want to make sure we kind of hit all the points. Maybe kind of an update on where Coflex sits today, progress with incremental coverage, how have the prior authorization approval rates kind of trended And just overall kind of what you're driving there?

Speaker 2

Good, good, good. Yes, thanks for asking. So as I said, these are all three businesses that have had Yes, we're neglected. And this is probably a great example of a great asset that we saw that we thought we could get a lot of value out of. So when we got this business, This is probably a good example.

Speaker 2

We bought it. It had 10 territories, of which 5 were open. So you had half of the country That was open. And then within 2 months, we lost 3 more guys. And so our job now has been really reviving this thing.

Speaker 2

So we got our people in place, Territories are filled and we started putting them in territories, even moving the territories to territories where the reimbursement is stronger On a commercial side, so in places like Pennsylvania and Upstate New York and in New York in general or Michigan, areas that we had one guy covering all of those states, we now have Essentially, 3 people, right? So putting people in the right places, getting our people in place. And so with that, I'm really excited That when you look at the new surgeon sign ons that we're getting are higher or up certainly up even from a year ago when Surgeline had the business, Our funnels look really, really strong. But this is a business though that still is taking a little more time for us to get the kind of traction we expected. It's relatively when you think about our overall business, it's relatively small.

Speaker 2

It's 10% to 12% of our overall revenue, but It has a high margin. It has a high contribution element to it. So as that climbs up more, we're going to see more of a positive EBITDA pickup.

Speaker 4

Got it. And then just last for me. There's quite a few products that came over with the Surgeline asset purchase, right? I mean, maybe just kind of hit the highlights As far as what you're most excited about, as far as the individual SKUs that came over with that asset purchase?

Speaker 2

Sure, sure. Couple of things. Cortero was a product line that they were in the throes of rolling out, which is a new pedicle screw system That had a number of surgeon advisors helping with that. And so when that got Slow down some of that momentum for them stopped. And so what we've been doing is really reinvigorating that.

Speaker 2

And so we're starting to see that happen right already. So that Cortera line outstanding. There is a couple of other product lines that actually are on the European side. One of them, I mean, again, I'd like to say that this was part of our great due diligence that we saw this Terrific DCI product, which is a dynamic Cervical implant, and it's a fantastic product. It's basically a coflex for the cervical area.

Speaker 2

So that's something that's in Europe today doing very well. There's another product which we were aware of that's doing also really well in Europe. It's called the HPS system. Again, both of these are motion preservation So those are a couple of gems that will take us some time to bring here to America. But there's just a slew of other product lines that where the great thing about Surgeline, what they do for us, if you think about X Spine, we didn't invest In that over the course of time, it was actually one of the dictates that I had gotten from when I first got going.

Speaker 2

Listen, if we do anything in hardware, we better buy something because We just weren't going to invest in that. So what that's been able to do to our Xtant or the old X Spine product line, it's completely reinvigorated it. And quite frankly, we now have some offerings like our inner spinous process device, the Axle, as well as our SCylex product, the SiFusion product. These are products they didn't have. And so we now give them some products that they can sell.

Speaker 2

So it is actually a nice Melding of what we can offer and what they can offer to us. And so we're really very excited about that and what they're bringing to us.

Speaker 4

Great. Thanks for taking the questions, guys.

Operator

Thank you. Our next question comes from Ryan Zimmerman with BTIG. Please proceed.

Speaker 2

Hey, Ryan.

Speaker 5

This is Izzy on for Ryan. Just congrats on the quarter, guys.

Speaker 2

All right. Ryan, your voice has gotten a lot higher there. Wow, okay.

Speaker 5

Just a little bit. So I wanted to follow-up on your comments about the recent M and A activity in your product portfolio. So how are you guys thinking about The general size of that product portfolio, do you think it's sufficient? Are you going to look for additional targets over say the near or medium term?

Speaker 2

Yes, great question. So yes, we have a very robust M and A pipeline. I will say we have been a little bit more focused on digesting what we have, but there's a number of really great opportunities that are sitting out there as we speak. We have some areas of specific need. If you looked at our like for instance, our hardware line, there's areas, the expandable offering needs to Greatly improved.

Speaker 2

I mean, there's other things that we can be doing within our hardware side. Certainly from a biologics perspective, we are always looking for ways in We can increase our capabilities. So what do you mean by capabilities today, Xtant makes DBM and allograft products. We source things like stem We source things like our growth factor products. So where we can find opportunities to And our capabilities, by all means, we're going to be doing that.

Speaker 2

We also see anytime we can get greater capacity Within our biologics production, that's also going to be really, really important to what we're going to be chasing after. So I call it the 3 Cs of capabilities, capacity and Cash flows. And so those are the things that we seek as we look at deals. And happily, there's a lot of deals out there. And quite frankly, I think Both valuations are finally starting to come down, but then the other part of it is the fact that I do think that a lot of these companies that are capital constrained And are starting to waiver under some of these debt obligations.

Speaker 2

So I think that there's more and more opportunities that are going to be coming our way, especially for those companies that Are in a strong financial position like we are and companies that can show to potential companies Not only how they can win in way of getting an exit, but then having hopefully a substantial win as they hopefully take more of our stock as it goes up as well.

Speaker 5

Great. That's really helpful. Thanks for taking the question and congrats on the quarter again.

Speaker 2

Great. Thank you.

Operator

Thank you. At this time, I would like to turn the floor back over to Mr. Sean Brown for closing comments.

Speaker 2

Great. Thank you, operator. Overall, we are very proud of the tremendous strides We have made as an organization in recent years, our record quarterly revenue demonstrates that we are successfully executing on each of our 4 And by raising our revenue guidance and delivering positive adjusted EBITDA for 2 consecutive quarters, these accomplishments Further demonstrate the progress that we are making. We believe this is just the beginning of what we are working towards long term sustainable growth. Through our diligent approach of increasing our capacity and our distribution network, we are filling the higher order demand of our biologics and fixation products and achieving scale.

Speaker 2

We are realizing this demand not just organically, but also for our newly acquired businesses. We look forward to building upon this momentum and delivering on our broader goal of maximizing shareholder value. In closing, I'd like to reiterate that our mission of Honoring the gift of donation by allowing our patients to live as full and complete a life as possible is only made possible by our valuable employees. We thank them for their continued work and dedication. Thank you for joining us today and for your continued support.

Operator

Thank you. That concludes our call today. All parties may now disconnect and have a great

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