Greetings. Welcome to the Xtant Medical Holdings, Inc. First Quarter 2024 Conference Call. Please note, this conference is being recorded.

Thank you, operator, and welcome to Xtant Medical's First Quarter 2024 Financial Results Call. Joining me today is Sean Browne, President and Chief Executive Officer; 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 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, intends and 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 of the company's annual report on Form 10-K 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-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 May 15 at approximately 4:30 p.m. Eastern Time. 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. Sean, the floor is yours.

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 recognized the first two quarters would be difficult due to a couple of significant supply chain challenges. However, after completing our first quarter, we are confident about our progress toward addressing these challenges and consequently, we are raising revenue guidance from $112 million to $116 million to a new range of $116 million to $120 million. Moreover, we are quite pleased with the growth of the Surgalign assets we acquired in 2023. Keep in mind, these product lines declined 37% over a period of six consecutive quarters prior to becoming part of Xtant Medical. Our first priority was to stem the losses and then start investing and building where it makes sense. Our collect team has done a terrific job of getting the flywheel moving on this business. More specifically, the Surgalign products have helped us transition some of our customers off the old Xtant hardware lines that were at risk, which was a main theme in our investment thesis for that acquisition. With the Surgalign business, we saw an affordable way to dramatically improve our growth platform with new IDN contracts, new distributors in international distribution network and a nice, updated adult degenerative 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. From an organic growth perspective, we define as revenue growth, excluding contributions from products acquired during the previous 365 days towards where there are no comparable sales. First 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. We will reach double-digit organic growth in the second half of 2024. There are three key areas that have affected our growth thus far, and we are actively addressing each of them to ensure a 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 strong inventory levels and are building this business back up again. Second, OEM sales. We had strong OEM sales in the first half of last year due to one of our competitor's supply challenges. This year, as we roll out new pick lines like our amniotic membrane allografts, this will primarily be an OEM product line that we expect will do well in the second half of fiscal year 2024. Third, the cannibalization of our old X-spine hardware products by Surgalign acquired products dampens our core organic growth rate. However, as I mentioned before, this is part of our broader plan to upgrade our surgeons to the newer, more improved Surgalign product lines. From a profitability perspective, we were adjusted EBITDA positive despite investments to rebuild the Surgalign 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 four key growth pillars are focused on: one, new product introductions; two, distribution network expansion and greater contract access; three, adjacent market penetration; and four, strategic acquisitions. Starting with new products. Like every healthy, robust organization, we continually innovate with a deep pipeline of new products. During the course of our turnaround, we expanded our biologics product offering from two product categories to five, which enhanced our 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 sixth new category, amniotic membrane allografts for surgical applications in advanced wound care. Xtant previously sold a distributed product that someone else made that focused 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. 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 has very good reimbursement in the ASC and outpatient settings. Also on the hardware side, we are finishing the development and the soft rollout of the Cortera Posterior Fixation System that was started by Surgalign. 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 expanding our distribution network and contract access. Our platform offers access to more than 450 IDNs and GPOs that cover approximately 90% of all beds in the U.S. In addition, our distribution network now includes more than 650 distributors. In years past, we focused on continuing to expand the total number of distributors by at least ten new agents per quarter. Today, we plan to look for opportunistic distributor adds, 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 distributor sales of our products, the stickier they become as a distributor for Xtant Medical. Now turning to our third pillar, leveraging adjacent markets. One goal for Xtant in 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 the aim of potentially expanding into areas where we can have a significant impact. We have gained traction within the foot and ankle, trauma, and reconstruction 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 through targeted acquisitions. By leveraging our growth platform of over 450 IDN agreements and 650 distributors who are selling our products nationally, we are targeting companies that are either undercapitalized or subscale. More specifically, similar to acquisitions in 2023, we are targeting companies that either help complete our offering or provide us additional scale. For instance, think about taking a company or a technology that may have access to, say, 50 or 100 IDN agreements and maybe only 75 to 100 distributors, taking their innovative technologies and getting them onto our contracts, giving 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 Surgalign acquisitions. Our focus on acquisition targets is based on three key characteristics: first, capabilities. We're looking at companies or technologies that give us greater capabilities, particularly in regenerative biologics. Additionally, we will look at businesses that help complete Xtant's offering in spine fixation and motion preservation offerings. Second, capacity. Targets that can expand our longer-term biologics production capacity. And then third, 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. 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 grow. 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 million from $17 million. 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 the fourth quarter of 2024. Finally, we increased our full year 2024 revenue outlook to a new range of $160 million to $120 million. 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 second quarter of 2024 and continuing into the second half of 2024. 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 2023 and the first quarter of 2024 and by revitalizing the Surgalign supply chain. Moving forward, we are focused on becoming operationally self-sustaining by controlling our supply chain and becoming less reliant on production outside of our 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 for a large and growing patient population. Most importantly, we believe these actions will help us get to positive operating cash flow during the fourth quarter of 2024. Now I'd like to turn the call over to Scott, who will discuss our first quarter 2024 financial results.

Thank you, Sean, and good afternoon, everyone. Total revenue for the first quarter of 2024 was $27.9 million compared to $17.9 million for the same period in 2023. Our 55% increase is attributed primarily to product sales from the recently acquired Surgalign Hardware and Biologics business. Gross margin for the first quarter 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. First quarter 2024 operating expenses were $20.8 million, compared to $12.1 million 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 $7.8 million for the three months ended March 31, 2024, compared to $4.9 million 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 $12.5 million for the three months ended March 31, 2024, compared to $7.1 million for the same period in 2023. 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 $0.5 million for the three months ended March 31, 2024, an increase from $0.2 million in the same period of 2023. This increase is primarily due to increased headcount related to increased focus on new product introduction, which Sean highlighted earlier as one of our pillars of growth. Net loss in the first quarter of 2024 was $4.4 million or $0.03 per share compared to a net loss of $2.1 million or $0.02 per share in the comparable 2023 period. Adjusted EBITDA for the first quarter of 2024 was $0.1 million compared to an adjusted EBITDA loss of $0.3 million for the same period in 2023. As of March 31, 2024, we had $4.5 million of cash, cash equivalents and restricted cash, $21.5 million in net accounts receivable, $38.7 million of inventory, and $6.7 million available under our revolving credit facility. In addition, on May 14, we closed on an additional $5 million of term debt under our term debt facility with MidCap to provide for additional working capital.

Our first question comes from Ryan Zimmerman with BTIG.

It was a strong quarter to kick off the year. I'd like to begin with guidance, Sean. You surpassed consensus expectations by just over $1 million. You also raised guidance by $4 million at both the low and high ends. Could you share what's driving that increase? Additionally, if you could discuss the pacing dynamics for the upcoming quarters and your expectations from a seasonal viewpoint. Lastly, what specific factors are contributing to this growth? Is it primarily the orthobiologics segment within Surgalign or hardware? Most of the assets acquired by Surgalign were more hardware-oriented, so any further insights would be appreciated. I have one more question after this.

Sure. To explain why we raised our guidance significantly, we initially set it lower due to concerns about supply chain challenges affecting both the first and upcoming second quarters. However, we now feel much more optimistic. The first quarter performed better than anticipated, as reflected in the guidance and insights from Craig-Hallum. Looking ahead to the second quarter and beyond, we have new amnio products launching and are excited about the growth of the Surgalign products. While most of the current support has come from the hardware side, these hardware products are also creating opportunities for our Xtant biologic products. Overall, I'm seeing a stronger growth momentum as we enter the year. I had concerns about the first half, but now I'm feeling confident that we will gain good traction in the second half. I hope I addressed your questions, but let me know if there's anything I missed.

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 then I'll just ask my second question. Now it's just around margins that came in termly better than I think we were expecting. Great to see. Talk to me about, one, 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?

Yes. I'll take the seasonality question. I'll throw it over to Scott and I might have an added color to that on the margin side. So we think about seasonality, certainly, in Q2, things typically pick up. Q3, as you can well imagine, normally, our business would flatten to Q2. I think that we're going to see a little more acceleration even in as we think about Q3 and even more so in Q4 because in Q3 and Q4, there'll be more product lines that we'll be releasing from our end that we're manufacturing. And 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.

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 this 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, where 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.

Our next question comes from Chase Knickerbocker with Craig-Hallum.

I have two. I'm going to ask them both upfront. Maybe on the amnio side, how much of the opportunity should we think of as OEM versus your distribution network? And then along those same lines, what should we think of as far as immediate impact from the amnio launch? I mean do you think we could have kind of material revenue as soon as kind of Q3? And 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?

Okay. Let me address those points. First, regarding amnio, we currently have an amnio product that we sell. Its revenue is just under $1 million, and we source it from another provider, which affects our pricing and limits our profit margins. Surprisingly, we developed our own product line not primarily for its own sake but because we saw a significant OEM opportunity, particularly in surgical and wound care applications. We anticipate a modest increase in sales from our internal product, with substantial revenue potential for those product lines expected in the second half of this year. You also asked about the significance of the amnio opportunity relative to our distribution network, but I seem to have forgotten the full details of your second question.

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

When we reached our peak last July or August, our stem cell sales were nearly $800,000 per month. However, this figure drastically fell to about $200,000 monthly due to limited resources and supply issues. We believe our potential was much greater than $800,000, as we were unable to secure enough product. Currently, we are collaborating with one of our suppliers to ensure product availability. We feel optimistic moving forward because we not only have the product now, but we are also planning to develop our own product line, which should be more profitable and of higher quality. Overall, we are confident in our opportunities, which is partly why I’m becoming more assertive and raising our guidance. This is contributing to my positive outlook on our current position.

We have a follow-up coming from Ryan Zimmerman with BTIG.

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, but amniotics are a little bit of a different call point than, say, spine. How do you think about the distribution sales force today, their ability to kind of pick up amniotics, 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 core spine.

Yes. First and foremost, we will be selling this primarily through our existing distributors, but we welcome other distributors to carry it as well since we have an open distribution model. When we developed these products, they were intended for the OEM side of the business. Additionally, we have a $1 million product line that we realized could generate higher margins through our own products. As we rolled this out, I was surprised to find many of our distributors mentioned they were already selling small amounts in this market, like $100,000 or $50,000 here and there. It appears our network is quite active in this area, particularly on the surgical repair side. While we were initially developing this product line as an OEM supplier for both wound care and surgical repair, we possess significant expertise within our company, including valuable contacts in the OEM market. We are actually quite excited because we are seeing a considerable demand beginning to build. Although we created this primarily as an OEM product, we are now recognizing potential for it to become a branded product under Xtant. More updates will follow, but it has turned out to be a valuable addition to our initiatives, exceeding our initial expectations.

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

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 Surgalign business. As the year progresses, we expect to continue to grow organically. So by the end of fiscal year 2024, we anticipate double-digit organic revenue growth. Inorganically, we continued to be very active in looking for companies that provide capabilities, capacity, and cash flows. Driven by taking over the supply chain for both internally produced products and improved vendor management of the acquired Surgalign 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. Without them, our success and achievements would not be possible. Thank you for joining us today and for your continued support.

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