Earnings Call Transcript - XTNT Q2 2025

Operator, Operator

Good morning, everyone, and welcome to the Xtant Medical Second Quarter 2025 Financial Results. Please note this conference being recorded. I will now turn the conference over to your host, Kevin Gardner of LifeSci Advisors. The floor is yours.

Kevin Gardner, Host

Thank you, operator, and welcome to Xtant Medical's Second Quarter 2025 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 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 Xtant's current perspective on existing trends and information and can be identified by such words as expect, plan, will, may, anticipate, believe, should, intends 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 of the company's annual report on the Form 10-K filed with the SEC 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 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 a replay, this call was held and recorded on August 12 at approximately 8:30 a.m. 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 Xtant Medical's President and CEO, Sean Browne.

Sean E. Browne, CEO

Thank you, Kevin, and good morning, everyone. I will cover a few of our second quarter financial and operational highlights in a moment, but I would like to begin this morning with a recap of our recent announcement that we entered into an agreement to sell certain non-core Coflex interlaminar stabilization implant assets and OUS entities of Paradigm Spine to Companion Spine, a French-American company fully dedicated to posterior dynamic stabilization and motion preservation. Companion Spine is a portfolio company of the Viscogliosi Brothers, the family-owned investment firm specializing in the neuromuscular cell space. The proceeds of the transaction are expected to total approximately $19.2 million, consisting of $11 million in cash and $8.2 million in short-term seller financing in the form of an unsecured promissory note to be issued by Companion Spine to Xtant. The promissory note will mature on December 31, 2025. Upon closing the transaction, which we anticipate will occur during the third quarter of 2025, we intend to use the proceeds to reduce long-term debt and provide additional cash liquidity. The sale of these non-core assets will allow us to focus resources on driving growth in our biologics platform. Given the performance of the business and the proceeds of this transaction, we do not expect to require additional capital to fund operations. Now let's turn to Q2 2025 highlights. I'm pleased to report that we delivered strong financial and operating results. Scott will cover the financials in detail in a moment, but I'd like to begin by touching on a few highlights. First, our total revenue for the quarter was $35.4 million, which represents growth of nearly 18% versus the second quarter of 2024. Notably, our second quarter 2025 revenue includes nearly $5 million in licensing revenue pursuant to the license agreement for Q-Codes and the SimpliMax Dual Layer Amniotic Membrane that we announced in the third quarter of last year. As we indicated last quarter, CMS has extended the local coverage determination for skin substitutes to December 31, 2025, which opens the door for additional royalty income and cash generation during the second half of 2025. Biologics also had another solid quarter, growing more than 20% over the second quarter of 2024, demonstrating that our sharpened focus on this core part of our business, including recent product launches, is having the anticipated positive effect on our results. Building on our first quarter results, we again achieved a positive adjusted EBITDA, net income, and cash flow from operations for the second quarter, reflecting both our strong top-line performance and greater contribution from higher-margin biologics, as well as our ongoing focus on prudent expense management and driving operating leverage in our business. As for new product launches, the second quarter was also particularly active for us in terms of new biologic product introductions. Recall that during the first quarter, we achieved a significant milestone by becoming the first fully vertically integrated biologics company to manufacture all of our products in-house. This gives us control over our supply chain, ensuring the highest product quality while also driving improved gross margins, and at the same time, delivering an enhanced customer experience. In May, we announced the commercial launch of OsteoFactor Pro, a naturally occurring cocktail of allogenic growth factors engineered to improve bone healing and support surgical success across orthopedic and spine procedures. OsteoFactor Pro is an off-the-shelf, ready-to-use solution that is designed to integrate seamlessly with synthetic allograft or autograft scaffolds and provide surgeons with exceptional versatility and biologic performance to support a wide range of bone regeneration approaches. Notably, with the launch of this growth factor product, Xtant now offers solutions across all five major orthobiologic categories: demineralized bone matrix, cellular allografts, synthetics, structural allografts, and now growth factors. Also during the second quarter, we took a major step forward in bone grafting technology with the launch of Trivium, a premium demineralized bone matrix with three synergistic elements designed to deliver exceptional performance in structure, handling, and biological activity. This advanced composition creates an ideal environment for healing and regeneration. Early feedback from surgeons has been encouraging. And since DBM comprises greater than 60% of our biologics business, this favorable reception demonstrates the successful execution of our go-forward strategy. OsteoFactor Pro and Trivium are just two examples where we develop next-generation biologics products in-house, allowing us to capture higher revenue and margins, while in parallel, delivering superior patient outcomes. On to revenue guidance. As we indicated last quarter, 2025 is all about advancing towards self-sustainability, emphasizing our organic revenue growth, profitability, and cash generation. With new products launched, targeted growth opportunities, recent cost-cutting initiatives, and the planned sale of certain non-core assets, we are on a path to restoring the business to a sustainably profitable and cash-generating position as reflected in our second-quarter results. We are experiencing heightened levels of licensing revenue from the previously noted Q-Code and amniotic membrane agreements, which have enhanced our revenue performance to date, and we anticipate should continue to do so through at least the remainder of this year. Reflecting these licensing contributions as well as our current outlook for product revenue, we are raising our full-year 2025 revenue guidance to a range of $131 million to $135 million, which represents growth of approximately 11% to 15% over the company's 2024 revenue. This compares to prior revenue guidance of $127 million to $131 million, representing 8% to 11% growth. Note that this updated outlook does not take into account the pending sale of our non-core Coflex and OUS businesses to Companion Spine. We intend to revisit this full-year outlook after closing that transaction. While the decision to close that transaction and the timing thereof is not solely at our discretion, we anticipate a closing during the third quarter of 2025. For help with modeling in the interim, however, you can assume that the business being sold to Companion Spine is currently generating an annual revenue run rate for Xtant of approximately $23.5 million. Beyond the revenue effect, note that these businesses were modestly unprofitable on a stand-alone basis, so the effect of the sale on our margins and bottom line metrics is anticipated to be neutral to slightly positive. With that, I will turn the call over to Scott for a more detailed review of our financial results.

Scott C. Neils, CFO

Thank you, Sean, and good morning, everyone. Total revenue for the second quarter of 2025 was $35.4 million, compared to $29.9 million for the same period in 2024. The 18% increase is attributed primarily to year-over-year growth in our biologics product family, as well as the impact of $5 million of licensing revenue during the second quarter of 2025 that Sean alluded to earlier. The increase was partially offset by a 20% or $2.7 million year-over-year decline in our hardware product family. Gross margin for the second quarter of 2025 was 68.6% compared to 62.1% for the same period in 2024. The increase year-over-year was driven by favorable sales mix and by greater scale and improved production efficiency. Second quarter 2025 operating expenses were $19.7 million compared to $21.5 million in the same period a year ago. As a percentage of total revenue, operating expenses were 55.5% compared to 71.9% in the same period a year ago. General and administrative expenses were $7.5 million for the three months ended June 30, 2025, compared to $7.7 million for the same period in 2024. This decrease is primarily attributable to reduced stock-based compensation expense. Sales and marketing expenses were $11.6 million for the three months ended June 30, 2025, and compared to $13.2 million from the same quarter last year. The decrease was primarily due to reduced commission expense of $1.5 million resulting from revenue mix and $0.7 million of reduced compensation expense related to headcount, partially offset by $0.9 million of additional consulting fees during the current year period. Research and development expenses were $566,000 for the three months ended June 30, 2025, a decrease from $636,000 in the second quarter of 2024. Net income in the second quarter of 2025 was $3.5 million or $0.02 per share on a fully diluted basis, compared to a net loss of $3.9 million or $0.03 per share in the comparable 2024 period. Adjusted EBITDA for the second quarter of 2025 was $6.9 million compared to an adjusted EBITDA loss of $0.6 million for the same period in 2024. As a reminder, beginning in the fourth quarter of 2024, we no longer include the exclusion of the phasing of the bargain purchase gain on our sell-through of inventory acquired as part of our purchase of Surgalign Holdings, hardware and biologics business in our calculation of adjusted EBITDA. Prior periods have been recast to conform to the current calculation. The related effect on adjusted EBITDA was a reduction of $1.1 million in the second quarter of 2024 to arrive at the recast amount. As of June 30, 2025, we had $7 million of cash, cash equivalents and restricted cash. Net accounts receivable was $27 million. Inventory was $40.1 million, and we had $5 million available under our revolving credit facilities as of the end of the quarter. As a reminder, our cash balance as of the end of the second quarter does not take into account the anticipated gross proceeds from the sale of certain assets to Companion Spine that Sean discussed earlier.

Operator, Operator

Our first question is from Chase Knickerbocker of Craig Hallum.

Chase Richard Knickerbocker, Analyst

Can you remind us if the licensing revenue consists of all volume-based or sales-based royalties, or is it made up of transfer payments? Were there any significant milestones included in that?

Sean E. Browne, CEO

No, it's quite simple. It's entirely based on revenue. We get reimbursed based on what our partners sold.

Chase Richard Knickerbocker, Analyst

Got it. And sorry if I missed this, but can you kind of just delineate a little bit as far as how we should think about that line as we go through the remainder of the year with your partner?

Sean E. Browne, CEO

Yes. We have two partners in particular. Due to the recent changes from CMS, we anticipate at least another solid quarter. However, beyond that, the outlook is uncertain. We aren't as confident that the fourth quarter will be as strong as the previous ones. Scott, do you have anything to add?

Scott C. Neils, CFO

Yes. I think as we see in building out the guidance, we're anticipating approximately another $5 million during the second half of 2025 in way of royalty revenue.

Chase Richard Knickerbocker, Analyst

Helpful. Maybe just on broader orthobiologics. Can you just kind of help us dig in a little bit on what portion of year-over-year growth was kind of from each of your growth drivers, call it, your new DBM products, VBM, and then growth factor and Amnio? Just what kind of portion of growth is being driven by which? If you can kind of just help us dig into that line a little bit more.

Sean E. Browne, CEO

Sure. I guess a couple of things. First, the new introductions are completely new. For instance, the OsteoFactor Pro is a product line that will replace the current OsteoFactor line. Our goal is to ensure we have a full replacement that at least matches last year's sales. Regarding Trivium, it's a brand-new product, and we anticipate it will positively impact our bottom line and top line more in the latter half of this year. When considering what drove our growth in the last quarter, we must highlight our Viable Matrix products and OsteoFactor Plus, along with some contributions from OsteoFactor Pro. Additionally, we also saw growth from our DBM products. What else would you add, Scott?

Scott C. Neils, CFO

We saw growth in synthetics as well.

Sean E. Browne, CEO

Yes, right. Synthetics as well popped up. So yes, I would say across the board, we saw nice growth.

Chase Richard Knickerbocker, Analyst

Got it. And Scott, one for you and then one final one for you, Sean. Sorry to get somebody in here. But Scott, just on gross margins, kind of how we should think about it through the end of the year here, particularly, obviously, with some of that royalty revenue continuing to come in? And then, Sean, just on hardware, with the decision to kind of divest some of those key pieces, can you just speak to kind of your thoughts on the rest of the portfolio and kind of how you see that business progressing?

Sean E. Browne, CEO

Scott, do you want to go first?

Scott C. Neils, CFO

Yes. I think we see a somewhat sizable decline in H2, maybe around 5 points just as we see the effects of that royalty revenue coming down as well as some decline in the hardware growth. That will be offset to a degree with the continued sell-through of what we're doing with the vertically integrated product, namely the OsteoFactor and the Viable bone matrix but look forward to come down 4 to 5 points in Q3 and Q4.

Sean E. Browne, CEO

And then to answer the hardware question, so yes, selling the non-core assets of both the Paradigm OUS business as well as the Coflex business. Now just one little note on both of those businesses. From a business standpoint, just running this year, that was about 16% of our total revenue, but it took up 40% to 50% of our time, certainly from a sales management perspective, it took up well over 50% of our sales manager's time managing just even the Coflex business here domestically. So from our side, we were able to really help our business get a lot more focused. So when you think about the hardware business, our domestic hardware business is a very, very good product line. It just needs the focus and the love. And so that's one of the best things that's going to come out of this aside from reducing debt and putting cash on the balance sheet. This is going to really help our business get that domestic focus. So not only will it help our biologics business, but also our core hardware will also, I think, see a nice pickup just because, again, being able to focus like we should be. So hopefully, that answers your question, Chase.

Chase Richard Knickerbocker, Analyst

Yes, good to see the focus on Orthobiologics for sure. So, yes.

Operator, Operator

Our next question is coming from Ryan Zimmerman of BTIG.

Unidentified Analyst, Analyst

This is Izzy on for Ryan. So just to start out, now that manufacturing is entirely in-house, I was curious what kind of margin benefit we should expect from the production of orthobiologics for maybe the remainder of the year, but also as we start to think about 2026 and beyond.

Scott C. Neils, CFO

I think in the second half of the year, we're probably picking up 1 point or 2, maybe even a hair more than that. What you'll notice, though, is that will be overshadowed by the effect of the royalty revenue coming down. So net-net, like I said, I think we see overall gross margins coming down 4 or 5 points. But within that, you do see that pickup or that pickup will be present for the effect of that internally produced product.

Unidentified Analyst, Analyst

Got it. Helpful. And then of the cash you guys are picking up from the sale of Coflex and CoFix and the OUS business, what are you going to apply to the debt paydown versus just general working capital?

Sean E. Browne, CEO

I'll let you go ahead, Scott, fire away.

Scott C. Neils, CFO

We'll split that 50-50. So of the $19 million of change, half of that will go to pay down our long-term debt, and then we'll keep the remainder for working capital purposes.

Sean E. Browne, CEO

And again, that's not included in the statement you saw today. If you want to consider that along with our cash and what we anticipate for the second half of this year, we believe we will be in a very strong cash position, helping us progress into 2026.

Unidentified Analyst, Analyst

Got it. That's helpful. And then last one for me. How would you guys characterize the distributor dynamics when we think about the context of the changes among larger players in the company?

Sean E. Browne, CEO

Yes. We're seeing some dynamic changes in that you've got some of the big guys that have shifted ownership and that has actually created some opportunities for guys like us. And so a lot of that is really focused more on the hardware side. And since we have such strength in biologics, we're not seeing as big a shift for us, but the opportunities are clearly there. And so yes, so there's a lot of, I think, positive things happening in the market for guys like us. So let me put it that way.

Operator, Operator

We have now concluded our question and answer session and the call. Thank you very much for joining us. This wraps up the conference. You may disconnect your phone lines now, and have a great day. We appreciate your participation.