Xtant Medical Q2 2023 Earnings Call Transcript

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Provided by Quartr
August 1, 2023

There are 5 speakers on the call.

Operator

Greetings, and welcome to the Xant Medical Second Quarter 2023 Financial Results Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference call 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 Q2 2023 Financial Results Call. Joining me today is Sean Brown, President and Chief Executive Officer and Scott Neils, 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 Xtend's current perspective on existing trends and information and can be identified by such words as expect, plan, will, may, anticipate, believe, should, intend and other words with Such forward looking statements are not guarantees of future performance and involve risks and uncertainties, including those noted in the Risk Factors section on 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.

Speaker 1

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 ks 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 Tuesday, August 1, at approximately 9 am Eastern Daylight Time. The company declines any obligation to Now, I'd like to turn the call over to Sean Brown.

Speaker 2

Thank you, Matt, and good morning, everyone. On today's call, there are a number of key company updates that I'd like to highlight. Most notable, we delivered revenue growth of 30 2% year over year, driven by our core biologics and fixation businesses, guided by our mission of honoring the gift of donations so that our patients continues to make on our long term business strategy. I'd also highlight that we closed the 2nd quarter with adjusted EBITDA. This milestone was achieved faster than our internal expectations, underscoring the continued execution of our strategy.

Speaker 2

I am thrilled with the performance of our team and thank them for their incredible efforts that made this possible ahead of schedule. Last Friday, we announced that Xtend was the winning bidder for SurgAlliance domestic International Biologics and Spinal Fixation Businesses. Needless to say, we are thrilled at this opportunity to expand our footprint with new contracts and distributors. We are working on next steps and we'll update you on status and closing. The financial guidance that we are providing today In breaking out this quarter's performance, I want to first provide a reminder of our 4 key growth pillars and they're focused on 1, new product introductions 2, distribution network expansion 3, adjacent market penetration and 4, strategic acquisitions.

Speaker 2

We are pleased that we continue to generate Solid demand for our biologics products. We are driving growth across all channels of our business and we are seeing positive contributions from our newly acquired Coflex The integration of the Coflex business continues to progress smoothly. It's important to note that we are aggressively reviving this business, which was previously in decline. It will take time to properly transition this business to growth, but we are well on our way to restoring this highly profitable product. Organically, our Osteo Factor and Osteo Vibe Plus products have sustained strong demand since their initial product launches.

Speaker 2

Our current Portfolio addresses the entire $2,400,000,000 orthobiologics market, and we will remain opportunistic moving forward on future product launches And acquisitions that position us to take greater market share. Now turning to our distribution network, the addition of our new Coflex Distributors combined with our 24 new distributors against the stated plan of 10 each quarter has us well positioned to increase our distributor revenue by at least ten Our distribution network now stands at more than 4.50 total. Going forward, we will continue targeting new expansion opportunities in Our adjacent market strategy is performing well and we further penetrate the foot, ankle, trauma in Orthopedic Implant Markets. On the OEM front, we delivered on several sales with our recently expanded capacity. We also saw success from the ambulatory surgical center market, which continues to grow nicely and supports the promising trends with our fixation business.

Speaker 2

We continue to view our ASC market expansion as an important part of our growth strategy. Looking ahead, We will remain diligent in our approach to both tuck in and transformational acquisitions as the year progresses. Our primary focus will be on the assets to bring the 3 C's capabilities, capacity and cash flows. With both our Coflex and SurgLine deals, we feel we have hit on all 3 C's. In recent quarters, the focus of our operations has been to successfully implement key process improvement initiatives designed to increase our production capacity and efficiencies.

Speaker 2

I'm pleased to share that we have made significant strides in achieving this goal. As I noted earlier, our increased capacity enabled us to fulfill OEM orders With our adjacent markets, all those gains for the past two quarters have come from having full labor capacity at our Belgrade plant. Last year, our growth was hampered by having less than 60% labor capacity for most of the year. So needless to say, we are thrilled to have the people in place to help us drive our mission. Earlier in July, I'm happy to say we opened up roughly 50% of new clean room space in our plant.

Speaker 2

This project was important to our organization on two fronts. 1, the entire organization focused on getting these critical plan additions completed on time and significantly under budget. 2, organizational focus and having a very clear concept of what is most important and focusing That one main goal is the kind of operational discipline that makes for great companies. And looking back at what our management team started, We had the challenge of turning around a business that we had to fix many broken processes. Today, as the business is now growing and prospering, building in this kind of operational discipline We'll be the cornerstone of a company that will thrive for years to come.

Speaker 2

Consequently, we are much better at managing our supply chain and processes today than we were even a year ago. As a result, we are capable of selling and delivering products on a greater scale. That said, given the robust demand of our life changing products, the work is not done. We continue to explore various strategies to increase our capacity to support our growth initiatives. Finally, in today's press release, we raised our 2023 full year annual revenue growth range to Approximately 29% to 33%, up from our previous range of 26% to 29% year over year.

Speaker 2

These expectations do not include potential contributions from the Surgeline transaction if and when it closes. Our strong revenue results for the 1st 6 months of 2023 underscore our confidence in achieving this annual growth goal. Now, I'd like to turn the call over to Scott, We'll discuss our Q2 2023 financial results.

Speaker 3

Thank you, Sean, and good morning, everyone. Total revenue for the Q2 of 2023 was $20,200,000 compared to $15,300,000 for the same period in 2022. This robust 32% annual increase is attributed primarily to greater independent agent sales and contributions from the recently acquired Coflex and Cofix product Gross margin for the Q2 of 2023 was 61.6% compared to 54.8% for the same period in 2022. The increase was primarily attributable to the contribution of Coflex and Cofix products, partially offset by higher production costs. 2nd quarter 2023 operating expenses were $13,900,000 compared to $9,700,000 in the same period a year ago.

Speaker 3

As a percentage of total revenue, operating expenses were 68% compared to 63% in the same period a year ago. General and administrative expenses were $5,000,000 for the 3 months ended June 30, 2023, compared to $3,800,000 the same period in 2022. The increase is primarily attributable to the additional expenses related to Coflex acquisition. Sales and marketing expenses were $8,700,000 for the 3 months ended June 30, 2023, compared to $5,600,000 for the same period 2022. This increase is primarily due to additional sales commissions from higher revenues and increased salaries and wages from the Coplex acquisition.

Speaker 3

Net loss in the Q2 of 2023 was $2,200,000 or $0.02 per share compared to a net loss of 1,700,000 or $0.02 per share in the comparable 2022 period. Adjusted EBITDA for the Q2 of 2023 It was $100,000 compared to an adjusted EBITDA loss of $400,000 for the same period in 2022. As of June 30, 2023, we had $4,400,000 of cash, cash equivalents and restricted cash, $13,700,000 of net accounts receivable, dollars 20,400,000 of inventory and $3,000,000 available under our revolving credit facility. Subsequent to the end of the quarter, 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. At this time, we will be conducting a question and answer session. One moment please. And our first question comes from the line of Chase Knickerbocker with Craig Hallum Capital Group. Please proceed with your question.

Speaker 4

Good morning, Sean, Scott. Congrats on another good quarter here.

Speaker 2

Great. Hey, Chase. How are you?

Speaker 4

Hi, John. Thanks. I want to start by peeling back the onions a little bit here in hardware. What was the Copelix contribution approximately? And what dynamics are you seeing there, particularly around any improvements you may be trying to drive in reimbursement story there?

Speaker 4

And I've got 19% organic growth in legacy hardware, just kind of rough numbers in my model. What's driving the strength there? And I guess do you expect it to continue?

Speaker 2

So I'll unpack that level by level. So first things first, when you look at the fixation business overall, we're really thrilled about where that is, especially Given where we had been, so when we look at that fixation just year over year, prior year variance, year over year On the base business, it was probably like 7%, at least on the fixation business. When you throw in the Coflex business, which was another 14% of our overall revenue. Net net, it was a very nice a very good quarter for us. When you look at the reimbursement story and this is actually something that when you think about Coflex and Coflex overall as a business, This is one that is about a reimbursement story.

Speaker 2

And so we're getting our guys very, very focused on the Medicare and Medicare Advantage markets. Those are 2 extraordinary opportunities for us that just that alone could more than make this a huge winner for us. So that's something at least from our end. We have the guys, our new sales team really focused and going after that market as much as possible. And so we're very, very bullish about what that even just that alone that reminds any kind of commercial pickups that we get along the way.

Speaker 2

But that is really kind of our starting point. So I hope I answered kind of the questions you were looking for there.

Speaker 4

No. Yes, that all makes sense. In orthobiologics, what was the impact of those OEM orders? And how do you kind of strike a balance between supporting those OEM orders and also fully shipping to that independent distributor channel. Are you kind of caught up in demand in that independent

Speaker 2

Yes. Happily, we're caught up, which is not where we were a year ago. So as we mentioned, the excess capacity both in labor and now we're really excited about with actually the plant expansion that we've had. So right now, when you look about the OEM business, it's about 8.6% of our overall revenue. Again, like anything, you always want to promote your own brand.

Speaker 2

And so right now, the fact that our Xtamp brand continues to be about 91% of what we do, we Keep that going, right? So that's always a good thing. Certainly, it looks like higher margins, the one thing I will say is our OEM business nets out about the Same from an operating income perspective. So it doesn't help the gross margins when you look at it. However, from a bottom line perspective, And so, yes, so we're we have not had to make those big decisions between those businesses.

Speaker 2

I mean, there There are some product lines, for instance, when we talk about putty, putty is one of those things that is a high OEM demand. We can fill up our Our whole facility with just OEM demand on that. However, that's not an optimal use of a donor. And so we want to make sure that we're controlling how much of that we're And so again, if you think and you go back to our mission, and that's the thing about our business, which is one of the most Not only the most mission driven organization I'll ever meet, but it's also one that is most congruent or at least has the same goals that our shareholders have. So if we're doing the right thing by the donor and we're doing the right thing in honoring that gift, we're going to be producing the best possible products.

Speaker 2

And so Certainly, our putty product is one that's outstanding. It's a 510 product. We really like it. However, we think that there Better uses of that donor for higher end use products. And So we'll always keep an eye on making sure we're not making too much of that.

Speaker 2

But for the most part, our OEM business is something that we enjoy. And If there's anything that we put any kind of control on, it will be on the putty side.

Speaker 4

Got it. And then maybe stay in there. Capacity expansion is good to hear that those clean rooms are built. You had said 50%. How much of that's online now?

Speaker 4

And I guess is it Kind of staffed up already. And then if that's coming online in second half, talk me through why that orthobiologics growth rate Would not increase in the second half relative to the first half if that kind of increased capacity It's going to be met pretty quickly. It's either that OEM demand or independent channels as well.

Speaker 2

Yes. Okay, good question. I'll break that down or unpack that. 1st and foremost, Not all of the clean rooms are online. We're still ramping up some of the training that has to take place, but Some of it is.

Speaker 2

So it's about a third of it is right now. There's still another 2 thirds that we would have that but still it's more than enough of what we need with respect to the demand that we've got coming in. And that's the immediate demand, right? We're not talking about what we do in cross selling even our Coflex distributors, Remaya will take place with our Surgeon line distributor. So we expect that the rest of that will be on up and running here in the next month.

Speaker 2

So we should have the capacity to be able to manage the demand that comes from that. So I Hope and then to get to your question about how would we look at moving forward. And I think that's part of the reason why we raised our guidance From $73,000,000 to $75,000,000 to $75,000,000 to $77,000,000 is that we do see that we will have an increase and we believe that Our Biologics business is looking really strong right now.

Speaker 4

Got it. Thanks. 6 months now Since the Coflex acquisition, those distributors that you brought on then that were selling Coflex, kind of talk through any You've had growing your wallet share there, particularly obviously with Biologics. Is 6 months enough of a kind of time period Kind of know how quickly you can kind of grow that wallet share after you acquire those distributors essentially?

Speaker 2

Actually, it's really since if you remember, we got that in March. So it's really we're at 4 months now, so with July. So We're getting a good indication. The first things first with this group, and this is again priority number 1, 2 and 3, and it goes back to that organizational Disciplined organizational focus, we need to make sure that, first of all, the sales team that we have and that we inherited, There were 10 territories in which 5 were open when we got it, 2 people stepped out. And so we really did fill 7 different spots.

Speaker 2

And so getting the sales team right on that, 1st and foremost. 2nd, making sure our Coflex distributors that are there Understand really the full value proposition. I guess if there was one fairly significant opportunity, I would say, on the Copelix side is that The distributors didn't understand the reimbursement story at all. And so it was catch as catch can. And so that's And because of that, we're starting to get some more traction.

Speaker 2

And so then as we start thinking about how do we grow and how do we get more out of that, I really want to make sure that 1st and foremost, we get those guys focused on what they have in front of them. And then the more we get an opportunity to get them Where they need to go is that then we'll start introducing more of our other products because quite frankly, we got plenty to work with, with our base Xtant business and weigh both the biologics and fixation opportunities. But those Coflex distributors are there. We're probably a few months still away from being able to start Cross sell to them, because quite frankly, I really want to get first things first with them. Any more questions?

Speaker 2

I'm or I there's a deadline here. I hope I didn't get turned off.

Speaker 4

I think you cut out there for a second, Sean. I got you back now.

Speaker 2

Okay, good. Okay, good.

Speaker 4

And then just last one for me, if I could sneak one more in. On Surgiline, what liabilities would you be assuming there If that deal does close and was there any hollow revenue at surge of line or we should be thinking kind of the substantial amount of the revenue that was at surge of line is what you're Kind of you're acquiring those assets that were the substantial amount of revenue there?

Speaker 2

Yes. So we're having we have nothing to do with Holo at all. So everything we're going to get It's all from the base instrument business. Now overall, I'm also I don't want to jinx the deal in any way. So we're Holding off all questions on the surgeon line until that closes.

Speaker 2

That closes actually, I should say, the judge sprinkles the holy water, if you will, on that on the 8th of August and then we will then be closing hopefully soon after. And what I'd like to do at that point in time is really start Answering and potentially even having a call at that time with respect to what that will mean for us because it is certainly very material and that will also mean that We'll be changing our guidance based on that acquisition. So if I may hold off on all of that to let the dust settle, because I'd hate to get in front of that if in fact

Speaker 4

Yes, totally fair. Thanks and congrats again on a good quarter.

Speaker 2

Thanks, Chase. Appreciate it.

Operator

And at this time, we have no more questions. I'll turn the call back over to Sean Brown.

Speaker 2

Thank you, operator. Before closing, I'd like to reiterate a few key points. First, our 2nd quarter revenue growth of 32% year over year the high order demand of our biologics and fixation products. 3, we are financially strong as illustrated by our 2nd quarter Positive adjusted EBITDA that we achieved faster than we originally planned and our latest infusion of cash through the fundraising we did earlier in the month has us And 5, the increase of our annual revenue guidance to $75,000,000 to $77,000,000 further illustrates our confidence in our business and strategy. With the strong demand and growth across our major product lines, we look forward to building upon this momentum and our broader goal of maximizing shareholder value.

Speaker 2

Finally, 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 support.

Operator

Thank you. That concludes our call. All parties may now

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