Xtant Medical Holdings, Inc. (AMEX:XTNT) Q4 2022 Earnings Call Transcript March 7, 2023
Operator: Greetings and welcome to the Xtant Medical Fourth Quarter and Full Year 2022 Financial Results Conference Call . 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.
Matt Steinberg: Thank you, operator, and welcome to Xtant Medical’s fourth quarter and full year 2022 financial results call. Joining me today is Sean Browne, President and Chief Executive Officer; and Scott Niels, 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 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 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 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, March 7, at approximately 9 a.m. Eastern Standard Time. The company disclaims 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. I’m excited to share with you today the significant progress made by Xtant Medical in recent months. We achieved several major milestones centered around our four key growth initiatives that strengthened our long term business prospects. Notably, we announced last week the acquisition of the Coflex product line from Surgicaline. This is Xtant’s first acquisition since 2015 and is critical to our success as it not only adds scale to our business, but also enhances our margin profile. I’ll discuss this acquisition more shortly. But first, turning to our fourth quarter performance. We closed 2022 on a positive note, generating fourth quarter revenue growth of nearly 10%, driven by continued strength of our biologics business which continued to realize robust demand led by our new products.
Biologics grew by 14% in Q4 and 12% year-over-year. Legacy hardware sales declined by 16% for the year, but only down 7% for the fourth quarter showing that our new focus on the ASC markets are starting to make an impact. One of our biggest challenges in the biologics segment for our business throughout fiscal year 2022 was our ability to produce enough product to keep up with demand. More pointedly, we had to walk away from a significant amount of business in fiscal year ’22 because we did not have enough labor to build a product we needed. In order to meet this demand, one of the most impactful things we have done was hiring Mark Schallenberger to be our Chief Operations Officer. Mark is an industry veteran that brings a ton of experience to our company.
Additionally, we focused on ramping up our production workforce. We started this process earlier in 2022, but given the length of onboarding time to recruit and train our processing team, there has been a gradual progression to reach our targeted capacity levels. Supported by these efforts, we are starting to see improvements in our supply chain. Concurrent with these efforts, we are laser focused on managing our costs prudently while enhancing our operational efficiencies. Mark will drive greater efficiencies for our operations, including the modernization of our production, optimization of our processes, and the diversification and development of new product lines. Now that our newly implemented Enterprise Resource Planning, or ERP system has been activated and under Mark’s leadership, we are confident that our business is poised to achieve our key growth and operational objectives.
We look forward to Mark’s contributions. Now, before discussing what Coflex adds to our business in more detail, I’d like to remind you of our four key growth pillars. One, new product introductions; two, distribution network expansion; three, adjacent market penetration and four strategic acquisitions. Adding Coflex to our business touches on all of these items, making it a solid fit with our leading spine brand offering. Specifically, this transaction is highly complementary to our spinal fixation business while enhancing our offering in the ASC and outpatient markets. We purchased the worldwide and intellectual property rights of Coflex and Cofix for $17 million with approximately $14 million in annual revenues, Cofix adds nearly 25% in annual revenue to Xtant.
It has an attractive gross margin profile, making it immediately accretive to our business and positioning us to become a cash flow positive in the near future. Moreover, it bolsters an already impressive non-acute care offering for our spinal fixation business, coupled with our less invasive axle in our spinous device and our Silex Si Fusion product line, the Coflex and Cofix products complete our offering in the fast growing segment of ASC and outpatient procedures. With the Coflex product line we are adding two devices with this acquisition. First, the Coflex Interlaminer Stabilization Device, a posterior nonpedical supplemental fixation device that is the only FDA PMA approved implant with level one clinical evidence for the treatment of moderate to severe lumbar spinal stenosis, or otherwise known as LSS.
Second, we added Cofix a supplemental fixation device that is minimally invasive system intended for use on all levels of lumbar spine. What’s most important about Coflex is that it addresses a serious medical need. LSS is the narrowing of the spinal canal, which puts pressure on the nerves and causes pain. This can lead to pain during physical activity and just everyday living overall. Moreover, this is a motion preservation system versus a spinal fusion. With spinal fusion, a patient’s fluid normal motion is greatly diminished after most spinal fusions in only a few years that same patient has to then have more levels of the spine fused or what’s known as adjacent level fusion. With a Coflex device, a patient could buy many years of healthy living with most of their normal range of motion preserved.
In 2021, the number of patients diagnosed with LSS was approximately 2.4 million and represents the largest single growing patient demographic in spine. In total, the LSS market is expected to reach $5.6 billion this year growing at 8.4% annually is the number one reason a patient over the age of 65 will have lumbar surgery. Coflex is uniquely designed to treat this condition as increasing in popularity for the following reasons. First, Coflex is clinically proven, as is the first and only lumbar spine device with level one evidence from two prospective randomized trials against two different control groups in two different countries. It is widely adopted with over 2000 implementations and is clinically validated with more than 90 peer reviewed publications.
Second, it’s simple to integrate for surgeons, training is quick and easy the Coflex device is a single piece, sterile packed titanium implant that requires minimal instrumentation with only one small tray. Third, patient feedback has been extremely positive with many experienced pain relief in their leg and back and improved physical function. As part of the transaction, we are adding a team of 14 experienced sales reps and support staff from Surgalign, which will enable a seamless transition and ensure we can hit the ground running. Additionally, we have expanded our footprint with more new distributors and a significant number of new physicians/surgeons added to our network. In summary, the Coflex acquisition is a major milestone achievement for Xtant.
We are larger and more diverse, with an improved margin profile with a new product line that brings transformative treatment options to a large and growing patient population. Importantly, it now positioned Xtant on a path to achieve profitability in the near future. Our organization is hitting on each of our pillars that supports our growth objectives, enabling us to achieve scale faster and work towards profitability. This acquisition, combined with the strong demand environment for our new biologic products and actions taken to enhance our operating efficiencies, are all a testament to our early success and a broader goal of maximizing shareholder value. Now I’d like to turn the call over to Scott who will discuss our fourth quarter and full year 2022 financial results.
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Scott Niels: Thank you, Sean, and good morning everyone. Total revenue for the fourth quarter of 2022 is $15.3 million compared to $14 million for the fourth quarter of 2021. For the full year 2022 total revenue was $58 million compared to $55.3 million for 2021, an increase of 5%. This is attributed primarily to revenue from new products introduced during 2021. Gross margin for the fourth quarter in 2022 was 54.4%, compared to 55.1% for the same period in 2021. Gross margin for the full year 2022 was 55.4%, compared to 58.8% for the same period in 2021. These decreases are primarily due to higher production cost with increased charges for excess and obsolete inventory also contributing to the full year decline. Fourth quarter 2022 operating expenses were $10 million, compared to $9.6 million in the same period a year ago.
For the full year 2022, operating expenses were $38.9 million compared to $36.3 million for 2021. As a percentage of total revenue, operating expenses were 65.7% and 67.1% for the 3 and 12 month periods ended December 31, 2022, respectively, compared to 68.8% and 65.8% for the 3 and 12 month periods ended December 31, 2021, respectively. General and administrative expenses were $4 million and $15.5 million for the 3 and 12 months ended December 31, 2022, representing a decrease of 4% and an increase of 7%, respectively, over the prior year periods. The decrease for the quarterly comparison resulted from reduced severance expense, while the increase for the annual comparison is primarily attributable to additional expenses related to various compensation plans, product registrations and costs related to ERP system upgrades partially offset by legal settlement expenses during the prior year.
Sales and marketing expenses were $5.8 million and $22.5 million for the 3 and 12 months ended. December 31, 2022, respectively, an increase of 10% for the 3 months period, and an increase of 7% for the 12 months period. The year-over-year increase included additional independent agent commission expense resulting from higher sales, and a greater mix of independent agent sales and additional expenses associated with trade shows and related travel. Net loss in the fourth quarter of 2022 was $2.2 million, or $0.02 per share, compared to a loss of $2.3 million, or $0.03 per share, in the comparable 2021 period. Net loss for the full year, 2022 was $8.5 million, or $0.09 per share, compared to $4.8 million, or $0.06 per share, in 2021. Adjusted EBITDA for the fourth quarter of 2022 was a $0.8 million loss compared to a loss of $0.9 million for the same period in 2021.
For the full year, 2022, adjusted EBITDA was a loss of $3 million, compared to adjusted EBITDA of $0.3 million for the year ended December 31, 2021. As of December 31, 2022, we had $20.3 million of cash and cash equivalents, $10.9 million in net accounts receivable, $17.3 million of inventory, and $4.6 million available under auto revolver. Now, I’ll turn the call back to Sean for closing remarks.
Sean Browne: Thank you, Scott. In closing, we exited 2022 on a positive note with solid revenue growth supported by strong demand for our leading spine products and started 2023 on an exciting note with the acquisition of the Coflex product line. Adding Coflex provides us with the assets, talent and network we need to add scale and grow profitably. Our enterprise is now 25% larger and we are on a path to achieve profitability in the near term. Looking forward, we plan to continue to be active in acquiring other businesses that align with our strategy, but will remain diligent in our approach. Finally, later this afternoon, I will be presenting at the Canaccord Musculoskeletal Conference at 06:30 PM Eastern Time or 03:30 PM Pacific Time.
A live webcast to my presentation will be available on the Investor Relations section of our website at www.xtantmedical.com. We hope many of you can tune in. Thank you for joining us today and for your continued support. I will now turn it back over to the operator.
Operator: Thank you. That concludes our call. All parties may now disconnect.
End of Q&A:
