Greetings. You're welcome to Xtant Medical's 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 is being recorded. I would now like to turn the conference over to Matt Steinberg of FINN Partners. Please go ahead.

Thank you, operator, and welcome to Xtant Medical's second quarter 2023 financial results call. Joining me today is 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 Xtant'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 on the company's annual report on Form 10-K filed with the SEC on March 7th, 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 and are 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 Tuesday, August 1st, 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. On today's call, there are a number of key company updates that I'd like to highlight. Most notably, we delivered revenue growth of 32% year-over-year, driven by our core biologics and fixation businesses guided by our mission of honoring the gift of donation so that our patients can live as full and complete a life as possible. Following our four key growth initiatives, we are pleased with the progress that Xtant continues to make on our long-term business strategy. I would also highlight that we closed the second quarter with adjusted EBITDA. This milestone was achieved faster than our internal expectations, underscoring the continued execution of our strategy. 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 Xtant was the winning bidder for Surgalign's domestic and international biologics and spinal fixation businesses. Needless to say, we are excited about this opportunity to expand our footprint with new contracts and distributors. We are working on next steps and will update you on the status of the closing. The financial guidance that we are providing today excludes any impact of this transaction; if and when we close this transaction, we plan to update our financial guidance. In breaking out this quarter's performance, I want to first provide a reminder of our four key growth pillars, which are focused on; one, new product introductions; two, distribution network expansion; three, adjacent market penetration; and four, strategic acquisitions. 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 interlaminar stabilizer device. 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. We are well on our way to restoring this highly profitable product. Organically, our OsteoFactor and OsteoVive Plus products have sustained strong demand since their initial product launches. Our current portfolio addresses the entire $2.4 billion 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 10% annually. Our distribution network now stands at more than 450 total. Going forward, we will continue targeting new expansion opportunities in underserved markets across the US. Our adjacent market strategy is performing well as we further penetrate the foot and ankle, trauma, and 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. We continue to view our ASC market expansion as an important part of our growth strategy. Looking ahead, we remain diligent in our approach to both tuck-in and transformational acquisitions as the year progresses. Our primary focus will be on the assets that bring the three Cs; capabilities, capacity, and cash flows. With both our Coflex and Surgalign deals, we feel we have hit on all three Cs. 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. 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. This project was important to our organization on two fronts. One, the entire organization focused on getting these critical plant additions completed on time and significantly under budget. Two, organizational focus and having a very clear concept of what is most important in focusing on that one main goal is the kind of operational discipline that makes for great companies. 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 will be the cornerstone of a company that will thrive for years to come. 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 for 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. These expectations do not include potential contributions from the Surgalign transaction, if and when it closes. Our strong revenue results for the first six months of 2023 underscore our confidence in achieving this annual growth goal. Now, I'd like to turn the call over to Scott, who will discuss our second quarter 2023 financial results.

Thank you, Sean, and good morning everyone. Total revenue for the second quarter of 2023 was $20.2 million compared to $15.3 million 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 lines. Gross margin for the second quarter 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. Second quarter 2023 operating expenses were $13.9 million compared to $9.7 million in the same period a year ago. 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 million for the three months ended June 30, 2023, compared to $3.8 million for the same period in 2022. The increase is primarily attributable to the additional expenses related to the Coflex acquisition. Sales and marketing expenses were $8.7 million for the three months ended June 30th, 2023, compared to $5.6 million for the same period in 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 second quarter of 2023 was $2.2 million or $0.02 per share, compared to a net loss of $1.7 million or $0.02 per share in the comparable 2022 period. Adjusted EBITDA for the second quarter of 2023 was $0.1 million compared to an adjusted EBITDA loss of $0.4 million for the same period in 2022. As of June 30th, 2023, we had $4.4 million of cash, cash equivalents, and restricted cash; $13.7 million of net accounts receivable; $20.4 million of inventory; and $3 million 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 million. The company expects to use the net proceeds from the private placement for working capital and other general corporate purposes. Operator, you may now open the line for questions.

Thank you. At this time, we will be conducting a question-and-answer session. And our first question comes from the line of Chase Knickerbocker with Craig-Hallum Capital Group. Please proceed with your question.

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

Great. Hey Chase. How are you?

Hey Sean, thanks. I want to start by peeling back the onion a little bit here in hardware. What was the Coflex contribution approximately? And what dynamics are you seeing there, particularly around any improvements you may be trying to drive in the reimbursement story? 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?

So, I'll unpack that a little bit by little bit. First things first, when you look at the fixation business overall, we're really thrilled about where that is, especially given where we have been. So, when we look at that fixation just year-over-year, prior year variance, year-over-year on the base business, prior year, it was over 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 quarter for us. When you look at the reimbursement story, and this is actually something that when you think about Coflex overall as a business, this is one that is about a reimbursement story. And so we're getting our team very focused on the Medicare and Medicare Advantage markets. Those are two 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 our new sales team really focused and going after that market as much as possible. We're very bullish about that alone, never mind any kind of commercial pickups that we get along the way. But that is really kind of our starting point. So, I hope I answered the questions you were looking for.

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 caught up in demand in that independent distributor channel now? Or how should we think about the decisions between those two channels?

Yes, happily, we're caught up, which is not where we were a year ago. The access capacity both in labor and now, we're really excited about the planned expansion that we had. Right now, when you look at the OEM business, it is about 8.6% of our overall revenue. So, again, you always want to promote your own brand. The fact that our Xtant brand continues to be about 91% of what we do, we want to 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, it's still a very nice business. Our OEM business is something that we enjoy. If there's anything that we put any kind of control on, it will be on the Putty side.

Got it. And then maybe staying there. Capacity expansion, it's good to hear that those clean rooms are built. You had said 50%. How much of that is online now? And is it staffed up already? If that's coming online in the second half, how would that impact the orthobiologics growth rate in the second half relative to the first half? Will the increased capacity be met quickly to meet the OEM demand or independent channel?

Yes. Good question. Not all of the clean rooms are online because we are still ramping up some training, but some of it is. About a third of it is right now. There's still another two-thirds that we would have coming on line. But still, it’s more than enough as we need with respect to the demand coming in. And that's the immediate demand, right? We're not talking about what we do in cross-selling even our Coflex distributors, never mind what will take place with our Surgalign line distributor. We expect that the rest of that will be up and running here in the next month. I hope this helps answer your question about moving forward. That’s part of the reason why we raised our guidance from $73 million to $75 million to $75 million to $77 million, is that we do see that we will have an increase and we believe that our biologics business is looking really strong right now.

Got it. Thanks. Six months now since the Coflex acquisition, those distributors that you brought on selling Coflex, can you talk through any success you've had growing your wallet share there? Is six months enough time to know how quickly you can grow that wallet share after you acquire those distributors?

Actually, it’s really since - if you remember, we got that in March. So, it’s really we've been at it for four months now. We are starting to get a good indication; the first thing first, with this group. It goes back to that organizational discipline and focus. We need to make sure that the sales team that we inherited was in ten territories, in which five were open when we got it; two people stepped out. So, we really need to fill seven different spots. We need our Coflex distributors to understand the full value proposition. There was one fairly significant opportunity on the Coflex side that the distributors didn’t understand the reimbursement story at all. Because of that, we’ve been very disciplined in where we are focusing our efforts to grow. So, as we get them going where they need to go, we'll start introducing more of our other products because we have plenty to work with in way of both the biologics and fixation opportunities. We’re still probably a few months away from being able to start to cross-sell to those distributors because we want to get the fundamentals in place first.

And then just last one for me if I could sneak one more in. On Surgalign, what liabilities would you be assuming if that deal does close? Was there any hollow revenue at Surgalign? Should we be thinking that a substantial amount of the revenue you’re acquiring is directly tied to those assets?

Yes. We're having nothing to do with hollow at all. Everything we're going to get is all from the base instrument business. I don’t want to jinx the deal, anyway; so we're holding off all questions on Surgalign until that closes. The judge is expected to give that a nod on the 8th of August, and we will then be closing hopefully soon after. At that point in time, I’d like to start answering questions about 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, I’d like to hold off on all of that to let the dust settle, because I hate to get in front of that if in fact something were to go askew.

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

Thanks, Chase. Appreciate it.

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

Thank you, operator. Before closing, I'd like to reiterate a few key points. First, our second quarter revenue growth of 32% year-over-year demonstrates the encouraging returns of our four key growth pillars. Two, we achieved these results through a diligent approach of increasing our capacity, thereby fulfilling the high order demand of our biologics and fixation products. Three, we are financially strong as illustrated by our second quarter positive adjusted EBITDA that we achieved faster than we originally planned. Our latest infusion of cash through fundraising earlier this month has us with a really strong balance sheet. Four, strategically, we are leaning forward, exploring other roll-up and bolt-on acquisitions. Five, the increase of our annual revenue guidance to $75 million to $77 million 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. 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.

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