Xtant Medical Holdings, Inc. Q1 FY2023 Earnings Call

Greetings. You're welcome to Xtant Medical's Q1 2023 financial results call. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Matt Steinberg of Lazar FINN Partners. Please go ahead.

Thank you, operator, and welcome to Xtant Medical's first-quarter 2023 financial results call. Joining me today are Sean Browne, President and Chief Executive Officer; and Scott Neils, Chief Financial Officer. Today's call is being webcasted 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 management'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 similar meaning. Such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, including those noted in the risk factors section in the company's annual report on Form 10-K filed with the SEC on March 7, 2023, and in 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 the tables of our press release otherwise available on our website. Note that our Form 8-K filed with our financial results' press release provides a detailed narrative that describes our use of such measures. For the benefit of those of you who may be listening to the replay, this call was held and recorded on Thursday, May 4, at approximately 9:00 AM Eastern Daylight Time. The company declines any obligation to update its forward-looking statements except as required by applicable law. Now I'd like to turn the call over to Sean Browne.

Thank you, Matt, and good morning, everyone. We're very proud of the significant progress made by Xtant Medical in the first quarter. During the quarter, we achieved several milestones highlighted by solid revenue growth of 38%, which included strong organic growth of 29% as well as 9% growth from the first sales generated by our recently acquired Coflex and Cofix product lines. Importantly, all market channels of independent agents, OEM, DTH, and the ASC market saw significant growth, which demonstrates that the continued execution against our strategic growth pillars has positioned us well for long-term sustainable growth. As a reminder, our four key growth pillars are focused on one, new product introductions; two, distribution network expansion; three, adjacent market penetration; and four, targeted strategic acquisitions. Now I will share an overview of our first-quarter business performance, starting with an update on the Coflex acquisition and integration. As announced in March, our acquisition of Coflex was our first since 2015. This transaction is highly complementary to our spine offering and positions us to become cash flow positive in the near future. Moreover, it bolstered an already impressive non-acute care offering for our spinal fixation business with the addition of two new products, the Coflex Interlaminar Stabilization device and the Cofix supplemental fixation device. Notably, these new product lines bring transformative treatment options to a large and growing patient population. This deal was an immediate contributor to our top line, as evidenced by the 55% year-over-year revenue growth to our spinal fixation business. Furthermore, it improved our margin profile and better positions us to achieve profitability in the near future. Integration of Coflex has been progressing smoothly. And looking ahead, we plan to remain diligent in our approach to both tuck-in and transformational acquisitions as the year progresses. Demand for our biologic products was robust during the first quarter, enabling us to expand organically, where we saw 33% growth in our biologic products over the same period last year. We have a vital and robust product pipeline that we feel will support the strength of our business and enable us to take market share in the $2.4 billion US orthobiologics market. We are excited about the traction generated to date and look forward to the continued growth of these product lines. Turning to our distribution network, as part of the Coflex transaction, we accelerated our footprint expansion with the addition of roughly 150 new distributors and a significant number of new physicians and surgeons to our network. Unrelated to the acquisition, we secured 17 new distributors in the first quarter, on track with our goal of adding over 10 distributors per quarter. Driven by our growth strategy, we will continue targeting expansion opportunities in regions of the country where we do not have a larger presence today. The third pillar, the adjacent market pillar of our growth strategy continues to track well. This quarter, we achieved success in further penetrating the foot and ankle trauma and orthopedic implant market. For the first quarter, we were able to take advantage of a few one-time OEM sales that will most likely not be recurring; however, that is the nature of the OEM business, and we are glad to have the capacity to handle these new orders. This is an important part of our growth strategy as it allows us to quickly expand the total addressable market for our products. From an operational standpoint, our focus has been on ensuring we can manage costs and scale for profitability. Supported by our proactive efforts, we are realizing improvements and expanding our capacity while better managing our supply chain. We continue to manage our costs prudently, as we regularly target areas to improve our operational efficiency. Likewise, we are making strides towards the modernization of our production, optimization of our processes, and diversification and development of new product lines. Now I'd like to provide an update on the Board. Earlier today, we announced that Jonn Beeson has been appointed to our Board as an independent member. Mr. Beeson is a partner at the Jones Day law firm and regularly represents clients on complex strategic transactional and corporate governance matters. He has advised on transactions with an aggregate value of over $225 billion. In addition to M&A, he also specializes in a multitude of other business development, corporate securities, and governance topics. We look forward to benefiting from Jonn's unique insights, years of capital market experience, and leadership skills. Concurrently, we are announcing today that Michael Eggenberg and Matthew Rizzo, both from OrbiMed Advisors, have stepped down from the company's Board. Since joining the Board in 2018, Michael and Matthew, along with their team from OrbiMed, have provided financial backing and guidance that has been instrumental in the turnaround of Xtant. OrbiMed's exit from the Board reflects their confidence in the strength of our business at this time. It also underscores the success of our management team and the belief that Xtant is now poised to take the next step in our evolution. With the addition of Jonn Beeson to the Board, Xtant now has a majority of independent directors, making Xtant more attractive to long-term institutional and retail investors. On behalf of Xtant, we thank Michael and Matthew for their years of service and contributions, as well as the OrbiMed organization for their support throughout the past several years. As the year progresses, we plan to continue looking to expand the Board with additional independent members. In further corporate governance initiatives, the Xtant Board recently formed a new independent nominating and corporate governance committee, now chaired by Jonn Beeson, to assist the Board in identifying new independent directors to complement our existing Board. Finally, today we introduced annual revenue guidance for 2023. We anticipate generating revenues in the range of $73 million to $75 million for the full year 2023, representing an annual growth of approximately 26% to 29% compared to 2022. We are doing this to provide greater clarity and transparency of our near-term growth projections while demonstrating the significant progress executing on our growth pillars. With the acquisition of Coflex, improving our margin profile, and the leadership of our experienced management team and Board, we are confident that all the pieces are in place to drive long-term sustainable growth. Now I'd like to turn the call over to Scott, who will discuss our first-quarter 2023 financial results.

Thank you, Sean. Good morning, everyone. Total revenue for the first quarter of 2023 was $17.9 million compared to $13 million for the same period in 2022. The strong 38% annual increase is attributed primarily to greater independent agent sales and sales from the recently acquired Coflex and Cofix product lines. Gross margin for the first quarter of 2023 was 58.7%, compared to 58.3% 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. First quarter 2023 operating expenses were $12.1 million compared to $9.4 million in the same period a year ago. And a percentage of total revenue, operating expenses were 68% compared to 72% in the same period a year ago. General and administrative expenses were $4.9 million for the three months ended March 31, 2023, compared to $4 million in the same period in 2022. This increase is primarily attributable to additional employee compensation expenses and expenses related to the Coflex acquisition, partially offset by costs related to our enterprise resource planning system upgrades last year. Sales and marketing expenses were $7.1 million for the three months ended March 31, 2023, compared to $5.2 million for the same period of 2022. This increase is primarily due to additional sales commissions from higher revenues and increased salaries and wages from the Coflex acquisition. Net loss in the first quarter of 2023 was $2.1 million or $0.02 per share compared to a net loss of $2.2 million or $0.03 per share in the comparable 2022 period. Adjusted EBITDA for the first quarter of 2023 was a loss of $0.3 million compared to an adjusted EBITDA loss of $0.9 million for the same period in 2022. As of March 31, 2023, we had $5.4 million of cash and cash equivalents, $11.9 million of net accounts receivable, $18.5 million of inventory, and $5 million available under our revolving credit facility.

You may now open the line for questions.

Good morning, everyone. Thanks for taking the questions and congratulations on a really nice quarter here.

Thanks, Chase.

Starting on the quarter itself, on hardware. We modeled an organic decline there excluding Coflex contribution; segment grew 16% organically in my model, so nice outperformance there. What dynamics were at play? Was it a procedure volume recovery with implanting physicians? How should we be modeling this going forward? Is it at least a flat organic growth business in future quarters?

Scott, I'll take that. Chase, when I think about what happened this past quarter, first of all, let's talk about the hardware and how it performed. I think there are a couple of things at play here. One is that we have, as I think I've mentioned in other meetings, focused within the hardware world has really changed towards really going after the ASC and outpatient markets. We happen to have a really terrific offering for that. And so when I think about where that business is today compared to where it was, it's a year or two years ago, we're definitely positioned in a much better way, especially as you think about the demographics of how the world is switching more and more towards outpatient procedures. So as I think about moving forward and how you're modeling it or at least how to be thinking about modeling it, I don't believe this will be a drag on us. Now it's not going to necessarily grow at the same rate as our biologics, but I do think that we've shored up what was something that was a declining business. And now with Coflex, we have even more to talk about. And so we really have a nice offering for that outpatient surgeon.

No, that makes sense. Yeah, then on ortho biologics, 33% organic growth there, a much larger number, really great to see. Maybe help me understand the moving pieces, how much of the revenue there in the quarter was that OEM contribution? How much DTH and then versus distributor?

Overall distributor was a big driving force for that, but all segments grew. And I'm really very pleased with how everything did. So a big part of it was our independent agents. A lot of it comes back to the fact that we have ample inventory right now. So we could actually start serving those guys that are waiting for product, that's one. But then two, the OEM opportunities. There were a few very big ones, but we've been able to revive that. And so yes, there were a couple of orders that were one-time deals that were substantial. But again, that's in the nature of OEM. All segments grew. DTH and ASC are still small, relatively speaking, but the driver for us this quarter was, again, the independent agents and their expansion. Going back to our four pillars, the expansion of our distribution network is key; having more distributors out there selling our products helps, especially in areas where we are not represented today.

Then leading into how we're thinking about the guide. With an additional $2 million or so of revenue into Q2 with a full quarter of Coflex contribution, that would indicate that your organic business comes down a bit sequentially, which bucks typical seasonality and with some additional supply in biologics. How should I think about that? It seems like coming off 33% kind of organic growth quarter there in an improving environment should continue to perform pretty well.

I would look at it in a couple of ways. And as we come out with this great quarter, I also want to caution on a few things. First of all, Coflex, overall, this is a business that we're in the process of digesting; implementation has gone great. It's almost complete with a few remaining items within the regulatory and quality side. But still, this is a business that over the last four years has gone down. Our job now is to revive it and ultimately grow it. So the contribution from the Coflex side may not be as great. Secondly, when we think about the seasonality of things, I still have concerns about capacity constraints. The broader guidance of $73 million to $75 million still represents a growth of 26% to 29% year-over-year. These are some pretty high numbers for our business; quite frankly, it's been low to mid-digits over the last few years.

For sure, I agree there. Then on Coflex, what do you need to do as a team to return that product to growth or ensure it's stabilized this year to be positioned to be a modest grower in '24? What steps need to be taken?

In fairness to the surge line folks, when they got that product line, you think about all the things that took place at RTI: they spun out the OEM business, spun out Surgalign, and even bought HOLO. There was a lot going on in that business, and quite frankly, Coflex just got lost. From our perspective, the first thing is to provide it with the focus it needs. This is our primary product right now that we're putting a lot of attention into, focusing on areas that make more sense, especially when considering reimbursement. Reimbursement has improved significantly in the outpatient side. Our job is straightforward: blocking and tackling while putting the focus needed on sales and marketing, and ensuring our story is tight for securing the necessary coverage. These are essential steps to growing that product again. It is a fantastic product, and we have a real opportunity, but we need to ensure our organization is aligned and our story is strong as we move forward.

With your expanding distribution network, that should certainly help in reviving the product. Any initial indication on cross-selling your core products into the distributors that came over in the Coflex acquisition, and vice versa, placing Coflex in the bag with some of your core distributors?

Yes, when we look at selling biologics into the new Coflex distributors, that's a bit more difficult because we have a queue of other distributors we are getting out from our past capacity challenges. So first and foremost, we need to take care of those existing distributors. However, in our core group of over 300 distributors who do not yet have Coflex, we have plenty of inventory and opportunity. So as we expand our capacity, we will work to introduce Coflex to those distributors. We're anticipating significant opportunities that will arise as we enhance our capacity in the third quarter.

Certainly an exciting opportunity. Last one for you, Sean. I know we've barely gotten Coflex on board here, but if we consider the marketplace, there's a lot for sale. Could you walk us through your thoughts on the next small tuck-in acquisition? What is the priority? Is it an ortho biologics production capacity-related acquisition to address some of those constraints, or should we be focusing on additional offerings within biologics?

We have a full funnel of opportunities. Timing and evaluation are key. We want to find similar deals to Coflex—product lines that have not received proper focus at a larger organization. These types of integrations can be accretive quickly. We also view acquisitions that expand our capacity into other biologics as transformational. Both types are on the docket; it’s a matter of finding the right fit and value.

Got it, that all makes sense. Last one for you, Scott. Gross margins were up nicely. Just one month of Coflex benefit; you should be up nicely again with a full quarter. Where does the entire business kind of steady out here over the next couple of quarters through the end of the year from a gross margin perspective?

We saw our margins coming in around mid-57%. As we progress through this year, I think we'll move into the low- to mid-60s on the gross margin front.

Helpful. Thank you, guys, for taking the questions. Nice quarter again, thanks.

Great. Thanks, Chase.

Good morning, everyone. Just two quick questions for me. One, you talked about Coflex opening up in the non-acute sector. Just wondering how you could think about that in the longer-term, and any changes to the different type of distributors you need for that market? And then I’ll just ask the second question now: can you remind us of the new product cadence that you have lined up now for biologics? Thank you.

Sure. So when considering Coflex, it's a robust opportunity targeting 60,000 plus laminectomies and over 260,000 single-level fusions. Our offering is a great product as many of those procedures move outside of the hospital setting. Coflex presents a notable opportunity with superior clinical outcomes. The outpatient reimbursement has improved significantly; from our perspective, this is a solution any surgeon can advocate for, extending treatment timelines without needing to rush into fusion procedures. Regarding new products for biologics, we are focused on our OsteoVive Plus and OsteoFactor products. We're currently limited by supply but have room for growth, and there are indeed additions queued up, though we want to ensure we maximize performance before rolling them out.

There are no additional questions at this time. I'd like to turn the call back to Sean Browne for closing remarks.

Great. Thank you. We are off to a strong start in 2023, highlighted by robust organic growth led by continued demand for our leading biologics products and initial contributions from our recently acquired Coflex and Cofix product lines. With our strategic growth pillars beginning to materialize in the form of strong revenues and efficient operations, we are poised to continue building on this upward trajectory as we scale the business. Moreover, the initiation of annual revenue guidance for 2023 further illustrates our confidence in our business and strategy. Finally, the success of our mission to honor 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. I would like to thank them for their continued dedication to bringing our life-changing solutions to patients in need. Thank you for joining us today and for your continued support.

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