Xtant Medical Holdings, Inc. (AMEX:XTNT) Q1 2023 Earnings Call Transcript

Xtant Medical Holdings, Inc. (AMEX:XTNT) Q1 2023 Earnings Call Transcript May 6, 2023

Operator: Greetings. You’re welcome 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.

Matt Steinberg: Thank you, operator, and welcome to Xtant Medical’s first-quarter 2023 financial results call. Joining meme 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 expense, 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.

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 us well positioned 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 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 it 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.

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Furthermore, it improved our margin profile and better positions us to achieve profitability in the near future. Integration of Coflex has been progressively — 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 biologics 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 addition of roughly 150 current 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 10 plus distributors per quarter. Driven by our growth strategy, we will continue targeting expansion opportunities in regions of the country where we do not have 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 onetime OEM sales that will most likely not be recurring.

However, that is the nature of 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 cost prudently as we regularly target areas to improve our operational efficiency likewise, as 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 as a partner at the Jones Day law firm and regularly represents clients on complex strategic transactional and corporate governance matters. And it is 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 and the 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 OrbiMed’s 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 the years of service and contributions as well as the OrbiMed organization for support throughout the past several years.

As the year progresses, we plan to continue to look and expanding the Board with additional independent members. In further initiative, 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 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 more 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.

Scott Neils: 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 expense and expenses related to 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. Operator, you may now open the line for questions.

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Q&A Session

Operator: . Our first question today comes from Chase Knickerbocker of Craig-Hallum Capital Group.

Chase Knickerbocker: Good morning, guys. Thanks for taking the questions and congrats on a really nice quarter here.

Sean Browne: Thanks, Chase.

Chase Knickerbocker: Yeah, yeah, so first, just 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 on the go forward? Is it at least a flat organic growth business in future quarters?

Sean Browne: 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’s a couple of things at play here. One is that we have, as I think I’ve mentioned in other meetings, our focus within the hardware world has really changed towards really going after that 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 or these procedures are going over there.

So as I think about moving forward and how you’re modeling it or at least how to be thinking about modeling it, it is something that I don’t believe is going to be a drag on us. Now it’s not going to necessarily be the same kind of growth that we’re going to see in our biologics private stretch. But I do think that we’ve at least shored up what was something that was a declining business. And now with Coflex, we now have even more to talk about. And so we really have a nice offering for that out of patient — out of hospital surgeon.

Chase Knickerbocker: No, but it 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?

Sean Browne: Yeah. So overall distributor was a big driving force for that, but all segments grew. And I’m really very pleased with how everything did. And yeah, so a big part of it was our, as I mentioned, our independent agents. A lot of it comes back to the fact that we have inventory right now. So we could actually start serving to these guys that are waiting for product, so that’s one. But then two, the OEM opportunities. There were several — not several, there were a couple of very big ones, but we’ve been able to revive that. And so that was a business that, we — again, there was a couple of orders that were one-time deals that were substantial. But that again, as I mentioned in my comments, it’s the nature of OEM.