Xtant Medical Q1 2024 Earnings Call Transcript

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Provided by Quartr
May 15, 2024

There are 6 speakers on the call.

Operator

Greetings. Welcome to the Xtant Medical Holdings, Inc. 1st Quarter 2024 Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation.

Operator

Please note this conference is being recorded. I will now turn the conference over to your host, Brett Maas. You may begin.

Speaker 1

Thank you, operator, and welcome to Xtant Medical's Q1 2024 Financial Results Call. Joining me today is Sean Brown, President and Chief Executive Officer 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 the 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 can be identified by such words as expect, plan, will, may, anticipate, believe, should, intend and 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 April 1, 2024, and in the subsequent SEC reports and press releases. 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 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 on May 15 at approximately 4:30 pm 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. Sean, the floor is yours.

Speaker 2

Thank you, Brett, and good afternoon, everyone. I am pleased to announce another strong quarter for the Xtant team with 55% growth over the prior year. In preparing our 2024 outlook for the beginning of the year, we recognize the 1st two quarters would be difficult due to a couple of significant supply chain challenges. However, after completing our Q1, we are confident about our progress toward addressing these challenges and consequently are raising revenue guidance from $112,000,000 to $116,000,000 to a new range of $116,000,000 to 120,000,000 dollars Moreover, we are quite pleased with the growth of the surge line assets we acquired in 2023. Keep in mind that these product lines declined 37 over a period of 6 consecutive quarters prior to becoming part of Xtant Medical.

Speaker 2

Our first priority was to stem the losses and then start investing and building where it makes sense. Our collective team has done a terrific job of getting the flywheel moving on this business. More specifically, the surge line products have helped us transition some of our customers off the old Xpand hardware lines that were at risk, which was a main theme in our investment thesis for that acquisition. With the Surgeonline business, we saw an affordable way to dramatically improve our growth platform with new IDN contracts, new distributors, an international distribution network and a nice updated adult regenerative spine fixation business that could help us replace our aging X Spine systems. Moreover, we also saw a significant opportunity in pulling through our best in class biologics.

Speaker 2

From an organic growth perspective, we define as revenue growth excluding contributions from products acquired during the previous 3 65 days for which there are no comparable sales. 1st quarter revenue was flat over prior year quarter. And as I mentioned in the last two quarterly conference calls, we anticipated low organic growth in the first half of this year. However, as our supply chain challenges abate and we introduce new products to the market, we anticipate delivering organic growth during the second half of 2024 reaching double digits. Let me reiterate that.

Speaker 2

We will reach double digit organic growth in the second half of twenty twenty four. There are 3 key areas that have affected our growth thus far and we are actively addressing each of them to ensure robust and sustainable growth trajectory for Xtant. The first are stem cells. This product line has been in extremely short supply since August of last year. Happily, as of April, we are back up to a strong inventory levels and are building this business back up again.

Speaker 2

2nd, OEM sales. We had strong OEM sales in the first half of last year due to one of our competitors' supply challenges. This year, as we roll out new product lines like our amniotic membrane allografts, this will primarily be an OEM product line that we will expect will do well in the second half of fiscal year twenty twenty four. 3rd, the cannibalization of our old X Spine hardware products by Surgeline acquired products dampens our core organic growth rate. However, as I mentioned before, this was part of our broader plan to upgrade our surgeons to the newer, more improved Surgi Line product lines.

Speaker 2

From a profitability perspective, we are adjusted EBITDA positive and despite investments to rebuild the Surgeline infrastructure to support our future growth. So from an operating expense perspective, we expect to see operating expenses decline as a percentage of revenue and combined with improvements to gross margin will drive growth in adjusted EBITDA in Q3 and beyond. At this time, I'll now provide an overview of how we build a platform that will give us sustainable long term growth. As a reminder, our 4 key growth pillars are focused on 1, new product introductions 2, distribution network expansion and greater contract access 3, adjacent market penetration and 4, strategic acquisitions. Starting with new products, like every healthy robust organization, we continually innovate with a deep pipeline of new products.

Speaker 2

During the course of our turnaround, we expanded our biologics product offering from 2 product categories to 5, which enhanced our growth profile. Moreover, we are the only biologics company that offers a complete line of orthobiologics, which include allograft, DBM, synthetics, viable bone matrix, otherwise known as stem cells and growth factor. This past month, Xtant released a 6th new category, amniotic membrane allografts for surgical applications and advanced wound care. Xtant previously sold a distributor product that someone else made that focus on the surgical repair side of our business. This is currently a small product line for us, but with our far superior products, we believe we can profitably grow this Xtant branded product line as well as provide a fantastic solution as an OEM producer.

Speaker 2

Fiscal year 2024 is our year of self sustainability. The second half of this year, we plan to roll out products that we produce to our own standards in a much more profitable way than relying on products from others where we do not control the supply chain. Additionally, on the hardware side, we have several exciting new opportunities. Through the Coflex acquisition, we are reviving a fantastic motion preservation interlaminar stabilization device. This is a PMA based product that is very good reimbursement in the ASC and outpatient settings.

Speaker 2

Also on the hardware side, we are finishing development and the soft rollout of the Cortera posterior fixation system that was started by Surgiline and we are now in the process of completing that rollout, which we anticipate will be fully completed by Q4 of this year. The next pillar focuses on IDNs and GPOs that cover approximately 90% of all beds in the U. S. In addition, our distribution network now includes more than 6.50 distributors. In years past, we focused on continuing to expand the total number of distributors by at least 10 new agents per quarter.

Speaker 2

Today, we plan to look for opportunistic distributor ads, but our primary focus will be to get greater penetration into the distributors we have today. What we have found is that the more product lines and distributors sells of our products, the stickier they become as a distributor for Xtant Medical. Now turning to our 3rd pillar, leveraging adjacent markets. One goal for Xtant is the longer term is to build products that serve other verticals beyond spine and orthopedics. Through our OEM manufacturing, we serve different verticals and learn about the dynamics of those specific markets with an I'm potentially expanding into places where we can have a significant impact.

Speaker 2

We have gained traction within the foot and ankle, trauma and reconstructive joint orthopedic markets. With the addition of our amniotic tissue products, we can now serve both the surgical repair and advanced chronic wound care markets. Our final pillar focuses on achieving growth with targeted acquisitions. By leveraging our growth platform of over 4 50 IDN agreements and 6 50 distributors who are selling our products nationally, we are targeting companies that are either undercapitalized or are subscale. More specifically, similar to acquisitions in 2023, we are targeting companies that either help complete our offering or provide us additional scale.

Speaker 2

For instance, think about taking a company or a technology may have access to say 50 or 100 IDN agreements and maybe only 75 to 100 distributors, take their innovative technologies and get them onto our contracts and give them access to our nationwide distribution network. We believe we can help those companies meet more of their potential similar to what we have done with the Coflex and Surgeline acquisitions. Our focus on acquisition targets is based on 3 key characteristics. First, capabilities. We're looking at companies or technologies that give us greater capabilities, particularly in regenerative biologics.

Speaker 2

Additionally, we will look at businesses that help complete Xtant's offering in spine fixation and motion preservation offerings. 2nd, capacity, targets that can expand our longer term biologics productions demand. And then 3rd, cash flow, businesses that are profitable or can become profitable through cost or margin synergies. We believe that making sound, targeted and strategic acquisitions that fit within our stringent criteria will take us one step closer to achieving our long term goals. We believe our unique platform and robust distribution network will allow future companies that we acquire to take advantage of being part of a fast growing company.

Speaker 2

Furthermore, we believe it will allow the entrepreneurs and other owners of those companies to win when they are purchased and then potentially win even bigger over time as Xtant continues to Xtant is committed to driving long term sustainable revenue growth and maximizing shareholder value. To better support the fast pace of our growth initiatives, we are pleased to increase our long term debt with MidCap Financial to $22,000,000 from 17,000,000 dollars Moreover, access to more capital positions us well to further execute our strategy and capture greater market share with an eye on achieving positive operating cash flow during Q4 of 2024. Finally, we increased our full year 2024 revenue outlook to a new range of $160,000,000 to $120,000,000 This increased guidance range represents annual growth of approximately 27% to 32% compared to full year 2023. Within that, we anticipate our organic growth will accelerate beginning in the Q2 of 2024 and continuing into the second half of twenty twenty four. We expect this will be driven by a normalized supply environment in our stem cell business that was adversely affected by the temporary market shortage in the second half of twenty twenty three and the Q1 of 2024 and by revitalizing the surge line supply chain.

Speaker 2

Moving forward, we are focused on becoming operationally self sustaining by controlling our supply chain and becoming less reliant on production outside of control. We believe this self reliance will allow us to be a larger and more diverse producer of biologics. Moreover, producing our own products should dramatically improve our margin profile, coupled with an expanded product line that brings additional transformative treatment options to a large and growing patient population. Most importantly, we believe these actions will help us get to positive operating cash flow during the Q4 of 2024. Now, I'd like to turn the call over to Scott, who will discuss our Q1 2024 financial results.

Speaker 3

Thank you, Sean, and good afternoon, everyone. Total revenue for the Q1 of 2024 was $27,900,000 compared to $17,900,000 for the same period in 2023. Our 55% increase is attributed primarily to product sales from the recently acquired SurgLine Hardware and Biologics business. Gross margin for the Q1 of 2024 was 62.1% compared to 58.7% for the same period in 2023. The increase was primarily attributable to greater scale and production efficiencies, partially offset by higher product costs from which we expect to start seeing relief as we expand the sale of internally produced biologics.

Speaker 3

Q1 2024 operating expenses were $20,800,000 compared to $12,100,000 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 $7,800,000 for the 3 months ended March 31, 2024, compared to $4,900,000 in the same period in 2023. This increase is primarily attributable to additional employee compensation expense, additional legal and accounting expenses and amortization of intangible assets associated with the Coflex and Cofix product lines. Sales and marketing expenses were $12,500,000 for the 3 months ended March 31, 2024, compared to $7,100,000 for the same period in 2023.

Speaker 3

This increase is primarily due to additional independent agent commissions, additional compensation expense associated with additional headcount to drive continued growth in new products and consulting expenses. Research and development expenses were $500,000 for the 3 months ended March 31, 2024, an increase from $200,000 in the same period of 2020 3. This increase is primarily due to increased headcount related to our increased focus on new product introduction, which Sean highlighted earlier as one of our pillars for growth. Net loss in the Q1 of 2024 was $4,400,000 or $0.03 per share compared to a net loss of $2,100,000 or $0.02 per share in the comparable 2023 period. Adjusted EBITDA for the Q1 of 2024 was $100,000 compared to an adjusted EBITDA loss of $300,000 for the same period in 2023.

Speaker 3

As of March 31, $4,500,000 of cash, cash equivalents and restricted cash, dollars 21,500,000 of net accounts receivable, $38,700,000 of inventory and $6,700,000 available under our revolving credit facility. In addition, on May 14, we closed on an additional $5,000,000 of term debt under our term debt facility with MidCap to provide for additional working capital. Operator, you may now open the line for questions.

Operator

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

Speaker 4

Hey, guys. Thanks for taking the questions. Nice quarter. Start the year here. So I want to start with guidance a little bit, Sean.

Speaker 4

You guys beat consensus by a little less than $1,000,000 excuse me, a little more than $1,000,000 my apologies. You took up guidance $4,000,000 on both the low end and the top end. So just talk to us a little bit of kind of 1, what's driving that? 2, if you can comment a little bit on pacing dynamics through the quarters, kind of what you expect from a seasonal perspective? And then really, the other last part of that question is just what's driving it?

Speaker 4

Is it orthobiologics within Surgeline? Is it hardware? I think most of the assets you picked up at Surgeline were more hardware related. So just a little more color there would be helpful as well. And then I have one follow-up.

Speaker 2

Sure. Okay. Just to start off with why we bumped our guidance so much. Part of our starting out relatively low because we're concerned about both this Q1 and the Q2 coming up with respect to just the supply chain challenges. There's a number of things that I've outlined here.

Speaker 2

But we now feel really good. The Q1 came out a little bit better than what we expected. Again, you saw from the guidance that you had set as well as the Craig Hallum folks. When I look at Q2 and beyond, I start to see that we've got our new Amneo products that's starting to come out, the Surgeline products that we have really been excited about their growth are going nicely. You're right, it's mostly been in the hardware side where they've been helping us, but also the opportunities that the hardware products open up for our Xtant Biologics products.

Speaker 2

So all in general, there's just a mix of a lot more I see a better velocity of growth than we're coming into the beginning of this year. I was really worried about this first half. And so right now, I'm starting to feel pretty good about where we are in this first half, so that in the second half, we should really start to get some really nice good traction. I hope that answered I don't know if it answered all your questions.

Speaker 3

Yes. What did I miss?

Speaker 4

No, no. That's great. I guess, just in part of that, it's just kind of from a pacing perspective, how you think about seasonality? Given the results this quarter, how just to think about kind of the pace through the rest of the year? And I'll just ask my second question.

Speaker 4

Now it's just around margins. They came in certainly better than I think we were expecting. Great to see, talk to me about, 1, the sustainability of your margin gains, kind of what your expectations are over time for margins and kind of where you think you can kind of exit maybe this year?

Speaker 2

Yes. I'll take the seasonality question. I'll throw it over to Scott and I might have a color an added color to that on the margin side. So when I think about seasonality, certainly in Q2, things typically pick up. Q3, as you can well imagine, normally our business would flatten to a Q2.

Speaker 2

I think that we're going to see a little more acceleration even in Q as we think about Q3 and even more so in Q4 because in Q3 and Q4 there will be more product lines that we'll be releasing from our end that we're manufacturing. So I do believe that those products will have a nice pickup, specifically because they really address OEM opportunities. And then I'll throw it back to Scott with respect to how he sees margins and progressing throughout the year.

Speaker 3

Sure. I guess speaking to gross margins, I see Q2 and Q3 being largely consistent with what we've seen here in Q1. And a big driver of that is even as we start these new product rollouts, as we start selling into that from an amnio side in Q3, that won't necessarily help our gross margin all that much. We'll see the benefit from that will be on the contribution margin side, where we'll really start to see a pickup from a gross margin perspective, I think will be in Q4 where we'll start selling into that stem cell and we could see that increase by as much as 2 to 3 points within Q4. Okay.

Speaker 4

Very nice. Thank you.

Speaker 5

Very helpful.

Operator

Okay. Our next question comes from Chase Knickerbocker with Craig Hallum. Please proceed.

Speaker 5

Good afternoon, guys. Thanks for taking the questions. I have 2. I'm going to ask them both upfront. Maybe on the Amneo side, how much of the opportunity should we think of as kind of OEM versus your distribution network?

Speaker 5

And then along those same lines, what should we think of as far as immediate impact from the Amneal launch? I mean, do you think we could have kind of material revenue as soon as kind of Q3? And then just last for me, any way to quantify the impact of what the supply chain issues were on orthobiologics from the stem cell side as far as what could you have done if not for those headwinds?

Speaker 2

Okay. Let me I'll jump into those. Okay. So first things first on the amnio We make an amnio product or I should say we sell an amnio product today. There's a little bit less than $1,000,000 but we buy that from another source.

Speaker 2

We don't get great pricing and quite frankly, we can't give out a lot of margin. With our own product line, we were actually surprised because this is now why we really built this. We actually built it because there seemed to be such a significant OEM opportunity, especially in the surgical side and particularly in the wound care side. But what we'll see is that we do think that we're going to get a nice little pickup, but again, it's not a huge pickup on the our own internal product. But where we do see significant revenue that could be coming in is in the second half of this year for those product lines.

Speaker 2

And then the other question that you just asked, it was Amneo and then it was how significant is that what you're I'm sorry, I forgot what the second question was to It was Amneal or something. Yes, along

Speaker 5

the lines as far as what the impact was from a dollar perspective and kind of what you could have done. Is there any way to kind of quantify that as far as it relates to kind of the go forward?

Speaker 2

Yes. So when we were at our peak in, say, July of year, JulyAugust of last year, we were doing just about $800,000 a month in stem cell sales. That dropped off to I mean, it literally dropped off the table to around $200,000 a month because that's about all the resources we get, all the supplies we could get. What we see and the thing of it is, is that our opportunity, what we looked at was substantially higher than even the 800,000 because we never could get enough product. Right now, we've been working with one of our suppliers to help us get that product.

Speaker 2

And so we are set for a while. And it is something that we feel really, really good moving forward having not only the product in hand, but then eventually our own product line as well. That will be significantly more profitable and we think a better product too. So overall, we feel very good about what the opportunity sits out. And it's a little bit of why I'm stepping forward and coming out a little bit harder, a little bit higher on our guidance.

Speaker 2

And so that's part of why I'm feeling good about where we are.

Speaker 3

Got it. Thanks for the questions, guys.

Speaker 2

Thanks,

Operator

Okay. We have a follow-up coming from, let's see here, Ryan Zimmerman with BTIG. Please proceed, Ryan. Thanks.

Speaker 4

I couldn't get enough guys. I want to ask one more question. Just on the amniotic products a little bit. I mean, your 650 distributors that you have now, I appreciate you're going to go deeper into those. I mean, being Amnioxx are a little bit of a different call point than, say, Spine.

Speaker 4

How do you think about the distribution sales force today, their ability to kind of pick up the ambiotics, your need to pick up maybe new distributors or those that are maybe focused outside of spine. Just if you could talk a little bit about that, Sean, and kind of how you balance that dynamic of having this new product category outside of maybe course signs?

Speaker 2

Yes. Just first things first, we are only going to be selling this within and again, if other distributors want to carry it, by all means, we got it, right? So we have an open distribution model. But this when we built these products, it was really built for the OEM side of things. And by the way, we had this $1,000,000 product line that we knew that we could sub it out and have our own products, right, for basically twice the margins.

Speaker 2

And so that in of itself, A, pick up there. But then B, as we've gone down the path and we rolled this out, I was surprised to see the number of our distributors said, Oh, yes, I sell a little bit here and there. I sell 100,000 here, 50,000 there. And so it turns out that our network actually does a fair amount in this market as it is, all primarily all on the surgical side, right, the surgical repair side. And then when we were building this product line, we were really building it as an OEM supplier through both the wound care and the surgical repair side.

Speaker 2

And so we have deep actually expertise within our company of guys that have contacts in this OEM market. And so we actually, we're really excited because we have quite a bit of demand that's starting to build up. And so it is something that we when we built this was really more as an OEM product. But as we're looking at it now, it turns out there may be more there as our own Xtamp branded product. So more to follow on that.

Speaker 2

But it's actually been a nice add to what we're doing more so than what we expected.

Speaker 4

Thanks, Sean.

Operator

Okay. We have no further questions in the queue. I'd like to turn the floor back to management for any closing remarks.

Speaker 2

Great. Thank you, operator. Overall, I'm very pleased with the progress we have achieved in our Q1. Our overall revenue growth of 55% is a testament to the outstanding work our team has done in turning around and growing the acquired Surgeonline business. As the year progresses, we expect to continue to grow organically.

Speaker 2

So by the end of fiscal year 2024, we anticipate double digit organic revenue growth. Inorganically, we continue to be very active in looking for companies that provide capabilities, capacity and cash flows. Driven by Xtant taking over the supply chain for both internally produced products and improved vendor management of the acquired Surgeonline products, we see solid growth in the first half of the year with increasing velocity as we produce more of our own goods in the second half of the year. In closing, I want to reiterate our mission, honoring the gift of donation by allowing our patients to live as full and complete a life as possible. I appreciate the dedication of our valuable employees.

Speaker 2

Without them, our success and achievements would not be possible. Thank you for joining us today and for your continued support.

Operator

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

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