Xtant Medical Holdings, Inc. (NYSE:XTNT) Q1 2023 Earnings Conference Call May 4, 2023 9:00 AM ET
Company Participants
Matt Steinberg – IR
Sean Browne – CEO
Scott Neils – CFO
Conference Call Participants
Chase Knickerbocker – Craig-Hallum
Kyle Rose – Canaccord Genuity
Operator
Greetings. You’re welcome Xtant Medical’s Q1 2023 financial results call. [Operator Instructions]. 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. 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 [indiscernible] 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.
Question-and-Answer Session
Operator
[Operator Instructions]. 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 [indiscernible] 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. So yeah, so all segments grew. DTH and ASC are still small, relatively speaking, but when we think about the driver for us. this quarter was, again, the independent agents and those expanding. Again, going back to our four pillars, the expansion of our distribution network, having more distributors out there selling your product helps especially in areas where we’re not today. And so that independent agent is a big part of the growth today.
Chase Knickerbocker
Yeah, then leading into how we’re thinking about the guide. With an additional $2 million or so of revenue into Q2 with a full quarter of Coflex contribution, that would indicate that your organic business comes down a bit sequentially with , which bucks you typical seasonality and with some additional supply in biologics, I guess how should I think about that? It seems like coming off 33% kind of organic growth quarter there and an improving environment that should continue to perform pretty well.
Sean Browne
Yeah, so as I would look at it in a couple of ways. And I know this is — as we come out with this really great quarter, I also want to caution on a couple of things. First of all, Coflex, overall, we’re — this is a business that we’re in the process of digesting, things like implementation. implementation has gone great. It’s almost complete a few dangling things within the regulatory and quality side. But still, this is a business that over the last four years has gone down. And so our job now is to revive it and then ultimately grow.
So on the one hand, the contribution maybe at least from the Coflex side may not be as great. Secondarily, when we think about just the seasonality of things as well as, you know, I still fear about capacity constraints. And so when I think about our broader number, the $73 million to $75 million, that’s still a 26% to 29% growth year over year. So those are some still — some pretty heady numbers for business. Quite frankly, it’s been low- to mid-digits over the last few years.
Chase Knickerbocker
For sure agree there. Yeah, then on Coflex, what do you need to do as a team to return that product to growth or make sure it’s stabilized this year to be positioned to maybe be a modest grower in ’24. I guess what steps do you need to take?
Sean Browne
Sure, you know, in fairness to the surge line folks, first of all, when they got that product line, you think about all the things that took place at RTI, right? They spun out the OEM business, spun out Surgalign, they even bought HOLO. There was a lot going around in that business. And quite frankly, Coflex just got lost. And so from our perspective, the first things first, which is already taking place is just giving it the focus. This is our primary product right now. So this is something that we’re really putting a lot of attention and putting focus into those areas that make more sense, which is in the reimbursement pipe, quite frankly, And reimbursement over that time has actually got really pretty good in the outpatient seaside of thing.
And so our jobs are really simple blocking and tackling and giving focus that needs from sales and marketing side. And then really the reimbursement element of making sure the story is tight. We get the coverage that we need. And quite frankly, that’s the beginning steps of growing.
So when I think about it, it’s kind of a three-stage thing, right? It’s digest this acquisition; two, start reviving what has to be done in way of the basic things that we all knew or we’ve all grown up around and way of how to put focus around a product line and how you get it growing again; and then part three is really getting it growing and really start to tap into those multitude of opportunities.
It is a fantastic product, and it will be incumbent upon us to make sure that we revive those old relationships because a lot of people have used this in the past. And so I do think that there’s a real opportunity, but we’ve got to make sure our organization and our story is tight as we move down that path.
Chase Knickerbocker
And with your expanding distribution network, I mean that should certainly help in reviving the product. I mean, any initial indication on cross placing your core products into the distributors that came over in the Coflex acquisition and vice versa, you know, placing Coflex in the bag as some of your core distributors maybe disturbing your biologics or core products?
Sean Browne
Yes, two things when I answer this. The first part of it is, I would say, being able to sell biologics into the current Coflex distributors, we just brought 150 of them that just came on. That’s a little bit more difficult because we actually have a queue of other distributors that we are agents or I should say that our — we are now just getting out of the woods of our capacity challenges, if you will. So I’ll make sure to take care of those guys first. So first things first, take care of those guys.
But in our core group of 300 plus distributors that don’t have Coflex, by all means we have plenty of inventory and plenty of opportunity there. So there’s actually a fair amount of opportunity that I think is going to take place over time to get those distributors carrying this and getting their surgeons to use it. And so I would tell you that as we expand our capacity, which I think we’ve talked about in the past, where we see that we’re going to have substantially more capacity work with as we look at the third quarter, those are things that as I look to as the points where we can begin to start working more and try to be forward leaning into those new distributors on our biologics.
Chase Knickerbocker
Yeah, certainly an exciting opportunity. Last one for you, Sean, and I’ve got one for Scott. I know we’ve barely gotten Coflex on board here, but if we look at the marketplace, there’s a lot for sale. Walk us through what you’re thinking on the next small tuck-in acquisition we could see, what’s the priority? As you said, capacity constraints you’re just coming off of, is it an ortho biologics production capacity related acquisition to address some of those constraints? Or is it product focus adding some capabilities or additional offerings within biologics?
Sean Browne
Yeah. So there’s nothing — well, we always have a full funnel of new opportunities, right? And a lot of it comes down to timing, evaluation, all the other pieces to that, but I think you’re hitting on both . I think that as an organization, we absolutely want to find where possible similar deals like we have with Coflex, product lines that quite frankly were forgotten or not forgotten, just couldn’t be given the focus at a bigger organization, we’ll take that. And those are things that from an integration perspective and from the implementation and from, quite frankly, what it means to your revenue and earnings can be accretive fairly quickly. So love, love, love, love those deals, and we’ll seek those wherever possible.
When you talk about some capacity expanding opportunities that also bring us potentially into some other biologics, I see those speakers, again, the size of our business, those are a little more transformational. And so absolutely, those are things that are also on the docket. It’s just a matter of, again, finding the right fit and finding what is the right value and all the pieces that go along with that. So without being too cagey, right, I got it, it’s really a matter of prioritization and the deal that comes forward.
Chase Knickerbocker
Got it, it all makes sense. Then last one for you, Scott. Gross margins were up nicely. Just one month of Coflex benefit, you should be up nicely again with a full quarter. Where does the entire business kind of steady out here over the next, let’s say, a couple of quarters through the end of the year from a gross margin perspective?
Scott Neils
I think we saw coming in about mid-57. I think as we progress through the year, I think we’ll start to make our way into the 60s, the low- to mid-60s on the gross margin front.
Chase Knickerbocker
Helpful. All right, thanks, guys, for taking the questions. Nice quarter again, thanks.
Sean Browne
Great. Thanks, Chase.
Operator
Our next question today comes from Kyle Rose of Canaccord.
Sean Browne
Hey, Kyle. How are you, Kyle?
Kyle Rose
Good morning, everyone. Just two quick questions for me. One, you talked about Coflex opening up in non-acute sector. Just wondering how you could think about that in longer-term, and you touched on it in earlier questions, any changes to the different type of distributors you need for that market? And then I’ll just ask the second question now, can you remind us the new product cadence that you have lined up now for biologics? Thank you.
Sean Browne
Sure. Okay. So how are we thinking about Coflex and how then — let me just repeat the question, how we’re thinking about Coflex moving forward and how that helps us in the ambulatory surgery center market / outpatient market? Is that really your question, Kyle?
Kyle Rose
Yeah. And then just the overall strategy [multiple speakers] different call points.
Sean Browne
Yeah. So when you think about Coflex overall and the fact that it’s really what we’re going after are those — it’s a really robust market and experienced 60,000 plus laminectomies and the 260,000 plus single-level fusions. And so what we have to offer really is a great product that many, if not most of those procedures are moving outside of the hospital. And so we look at Coflex as this great opportunity that not only is a superior product, the fact that’s a superior clinical outcome and that it preserves all alternatives. So if you are somebody who’s about to get a laminectomy, why wouldn’t you get a laminectomy with our Coflex device, which again interlaminar gives you a full range of motion, gives you all the things that you need, and hopefully, stays off fusion for quite some time.
But if fusion is in your future, you’ve been giving yourself a fair number of years to be able to go back to that, if that is a solution. The challenge with going to fusion right away and in fact that, as you know, you start having to have the next level fusions done. And so from our side, when we look at it and where this is positioned and how we can go after it, I think it’s a great opportunity.
Additionally, the reimbursement in the ambulatory surgery center world has actually gone up really nicely. So when you compare it to the other procedures such as laminectomy, this is a very, very profitable procedure, if you will. And clinically, arguably, this is a great, great, great solution for any surgeon who has a patient, and quite frankly wants to stave off any type of infusion for quite some time. And so that’s kind of how we’re positioned. That’s how we’re looking at it.
And then when you look at what we’re rolling out with respect to our pipeline of new products, certainly on the biologic side, so two things. One of the things that we’ve had a challenge with on our side is the supply of our OsteoVive Plus. We cannot make enough of it. We can’t get enough of it out the door. So that’s still a product line that has a fair amount of room left to grow. And so we’re still focused on OsteoVive Plus as well as OsteoFactor, which OsteoFactor factor again is our growth factor product, which again, we can’t sell enough of it. And it’s going very, very well.
And if there are additions, and again, you got to be careful when you’re rolling out products, you don’t want to take any steam out of something that’s working really well. We will have some additions, for instance, the OsteoVive Plus side. We also will have — there’s several other products that are queued up. It’s a matter of when we decide to actually release them because again, we want to make sure we’re getting as much out of these and giving all of our distributors and surgeons the opportunity to grow with these products as far as they can. So that’s within the pipeline right now, and that’s where our focus is. But if — yeah, there’s certainly more to come over the course of the next few years, but that’s where we are today.
Kyle Rose
Thank you.
Operator
There are no additional questions at this time. I’d like to turn the call back to Sean Browne for closing remarks.
Sean Browne
Great. Thank you. We are off to a great start in 2023, highlighted by a robust organic growth, led by continued demand for our leading biologics products and initial contributions from our recently acquired Coflex and Cofix product lines. With our strategic growth pillars beginning to materialize in the form of strong revenues and efficient operations, we are poised to continue building on this upward trajectory as we scale the business.
Moreover, the initiation of annual revenue guidance for 2023 further illustrates our confidence in our business and strategy. And then finally, the success of 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. I would like to thank them for their continued dedication to bringing our life-changing solutions to patients in need. Thank you for joining us today and for your continued support.
Operator
This concludes today’s conference. You may disconnect your lines at this time and thank you for your participation.
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