Q3 2023 Xtant Medical Holdings Inc Earnings Call
Participants
Matt Steinberg; IR; FINN Partners
Sean Brown; President and CEO; Xtant Medical Holdings Inc
Scott Neils; CFO; Xtant Medical Holdings Inc
Chase Knickerbocker; Analyst; Craig-Hallum Capital Group
Izzy Bandoroff; Analyst; BTIG
Presentation
Operator
Greetings, and welcome to the Xtant Medical third quarter 2023 financial results conference call.
(Operator Instructions)
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 third quarter 2023 financial results call. Joining me today is Sean Brown, President and CEO, and Scott Neils, CFO. 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 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 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 Thursday, November 9, at approximately 9 AM 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 Sean Brown.
Sean Brown
Thank you, Matt, and good morning, everyone. In recent years, Xtant Medical's evolution has featured important value-creating acquisitions. We have refinanced debt, we have lowered our operating cost basi,s and we've done key financing, and we have added new leadership. These critical initiatives have the company poised to achieve sustainable long-term growth and take additional share of the large and growing US, orthobiologics and spine markets.
Our actions are starting to take effect, as demonstrated in our third quarter financial results. Notably, we delivered record quarterly revenue of $25 million -- an increase of 73% year-over-year. The strong growth was driven by our core Xtant business, which includes organic growth of 18% and further bolstered by contributions from our recent acquisitions.
I want to reemphasize our strong organic growth in a quarter when we were in the process of digesting two very complicated acquisitions. So I'm particularly thrilled with Xtant team's continued focus on our core business. Our revenue growth and efficiently-run operations are driving our bottom line as we recorded our second consecutive quarter of adjusted EBITDA. Altogether, our business is clicking on all cylinders, giving us more confidence regarding our future prospects.
During the third quarter, as part of our expanding business, we completed the acquisition of Surgalign's Biologics and Spinal Fixation business for $5 million in an all-cash transaction. We believe Surgalign's business is a perfect complement with Xtant's offerings, primarily with our spinal fusion and motion preservation portfolio.
So far, we've completed the commercial integration of the acquisition ahead of schedule. It has been a great fit that is helping us rapidly expand our commercial footprint with new contracts and distributors. We believe there is significant room for continued upside as we remain focused on streamlining operations and capitalizing on synergistic opportunities.
Turning to a more detailed discussion of the quarter's performance, I first want to remind the listeners that our four key growth pillars are focused on one, new product introductions; two, distribution network expansion; three, adjacent market penetration; and four, strategic acquisitions.
The sustained robust demand for our OsteoFactor and OsteoVive Plus products since their initial launch has been a driving force in our success with the $2.4 billion US orthobiologics market. Our newly expanded comprehensive product portfolio increasingly addresses this market, reflecting our commitment to patients in need.
Looking ahead, we remain opportunistic on future product launches, and acquisitions that position us to take greater market share.
Now turning to our distribution network expansion pillar, with a successful integration of Surgalign's contract portfolio and distributor network, we've added roughly 50 new agreements for a total of over 450 IDN and GPO agreements. Additionally, we picked up 150 new distributors, so now we have a network of more than 650 independent agents and creating a national network.
In the quarters ahead, we will work on getting greater penetration with our current distribution network, and we'll be opportunistic in adding new distributors where it makes sense. For our third pillar of leveraging adjacent markets, we continue to make inroads in penetrating these markets, particularly in the foot and ankle and trauma and orthopedic implant markets. Notably, our expanded capacity has translated into increased OEM sales.
Finally, our fourth pillar focuses on achieving growth through M&A. Our approach to both tuck-in and transformational acquisitions remains a priority going forward. We continue to focus on acquisition targets based on our three C's -- capabilities, capacity, and cash flows.
In terms of capabilities, we target businesses with our immediate needs of stem cells, amnion, motion preservation hardware, and a long-term focus on the higher end regenerative biologics. In terms of capacity, increasing our biologics production capacity that meets the demand we envision in the years ahead. In terms of cash flows, we seek businesses that are profitable, or can become profitable, by producing Xtant's products.
The recent Coflex, Surgalign, and now nanOss deals have met our acquisition criteria, marking significant milestones that are key for us in achieving our long-term goals. While we believe Surgalign acquisition will be a long-term growth driver, in mid-July, their largest product line, ViBone, was pulled off the market due to a tuberculosis infection caused by Aziyo, a contract manufacturer of Surgalign stem cell products.
This not only impacts Surgalign, but has had a significant impact on the entire stem cell market. Since then, the American Association of Tissue Banks, or AATB, released updated guidance guidelines for donor screening requirements. We appreciate the AATB's efforts in proactively addressing these important concerns to ensure patient safety.
However, since this recall, donor availability has been limited and it adversely affected our stem cell business. We anticipate that this current stem cell shortage will adversely impact fourth quarter revenues. We are working tirelessly to mitigate these external constraints and are optimistic that this is a temporary supply issue, and we anticipate that this will normalize by the second quarter of 2024.
As part of our strategy to meet demand and achieve adjusted positive EBITDA, our operational efforts have been dedicated to the implementation of crucial process improvement initiatives and capacity expansion. These actions have successfully boosted both production and overall efficiency. And as a result, we can sell and deliver products on a greater scale.
With the recently-announced acquisition of the nanOss production operation from RTI Surgical, we are even better equipped to produce more of our own orthobiologics products versus having to source these products from outside vendors. Having full control over nanOss enables us to begin the process of reviving and growing this important product line.
Finally, we raised our 2023 full year annual revenue range to approximately $88 million to $91 million, up from the previous range of $75 million to $77 million. This newly revised guidance range reflects annual revenue growth of 52% to 57% from the year ago period. The updated guidance now includes contributions from the Surgalign acquisitions, in addition to the strength of our organic business.
Overall, we have come a long way in a short period of time. Our business is performing exceptionally well, and we are excited about our growth potential, which continues to rise with our continued execution. Xtant is strategically moving forward, and we have solid products, operations, and talent to back it up.
Now I'd like to turn the call over to Scott who will discuss our third quarter 2023 financial results.
Scott Neils
Thank you, Sean, and good morning, everyone. Total revenue for the third quarter of 2023 was a record $25 million compared to $14.5 million for the same period in 2022. This robust 73% annual increase is attributed primarily to greater independent agent sales contribution from the Coflex and Coflex product lines, opportunistic private label sales, and product sales from the recently-acquired Surgalign hardware and biologics business.
Gross margin for the third quarter of 2023 was 61.3% compared to 54.6% for the same period in 2022. The increase was primarily attributable to greater production efficiencies, favorable product mix, and a decrease in charges for excess and obsolete inventory, partially offset by higher product costs.
Third quarter 2023 operating expenses were $18.7 million compared to $9.8 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 $7.1 million for the three months ended September 30, 2023, compared to $3.7 million for the same period in 2022. This increase is primarily attributable to additional compensation expense, acquisition-related legal expenses, amortization of intangible assets associated with the Coflex and Coflex product lines, and higher consulting fees associated with acquisition-related activities.
Sales and marketing expenses were $11.1 million for the three months ended September 30, 2023, compared to $5.8 million for the same period of 2022. This increase was primarily due to additional commission and compensation expense and higher professional service fees.
Net income in the third quarter of 2023 was $9.2 million, or $0.07 per share, compared to a net loss of $2.4 million, or $0.03 per share in the comparable 2022 period. Adjusted EBITDA for the third quarter of 2023 was $0.5 million compared to an adjusted EBITDA loss of $0.9 million for the same period in 2022.
As of September 30, 2023, we had $8.7 million of cash, cash equivalents, and restricted cash; $19.2 million in net accounts receivable; $34.3 million of inventory; and $3.3 million available under our revolving credit facility.
During the third quarter, Xtant closed a private placement with accredited investors for gross proceeds of $15 million. The company expects to use the net proceeds from the private placement for working capital and other general corporate purposes.
Operator, you may now open the line for questions.
Question and Answer Session
Operator
Thank you. We will now conduct a question and answer session.
(Operator Instructions)
Chase Knickerbocker, Craig-Hallum.
Chase Knickerbocker
Morning, guys. Thanks for taking the questions and congrats on the nice quarter and the progress here.
Sean Brown
Great. Thanks, Jason.
Chase Knickerbocker
Yes, just quick housekeeping one to start. Can we get a breakdown of the orthobiologics and hardware revenue in the quarter? And then separate organic growth rates would be helpful if you have them?
Sean Brown
Scott, I'll throw that over to you.
Scott Neils
Sure. Give me one second, Chase.
I'd say for the quarter, we had overall orthobiologics revenue of $15.7 million compared to implant revenue of about $9.3 million and $9.4 million -- or $9.3 million rather.
Chase Knickerbocker
Great, thanks. And if we kind of think about drivers within there, I mean, what products kind of really drove growth within hardware from an organic perspective, and then also orthobiologics? Because again that organic growth was well ahead of our expectations.
Sean Brown
Scott, I'll turn it back to you as well, unless you want me to dive in on that?
Scott Neils
Yes, I think on the orthobiologic side, it was the same products we've seen as in past quarters, earning product offerings, those being the growth factor, the OsteoVive Plus, in spite of some of the challenges we saw from a supply chain standpoint, and then also on the private label and OEM front.
And then on the implant side, really those ASC-related products that have driven growth in past quarters as well. So it's really the same story as past quarters from a growth rate perspective as it relates to both product families.
Sean Brown
And that's the interspinous product device of Axle, and then the SI Fusion product of Silex, which are the two big drivers there.
Chase Knickerbocker
Got it. Helpful color, guys. And then maybe just for investors, as we think about incremental EBITDA margin as you have this inorganic revenue kind of flowing into the model, is there a target that you guys have as far as what you're looking to drive from tenant incremental inorganic revenue, as far as what you think you can drive from an EBITDA margin on that revenue specifically?
Scott Neils
I think that will take us some time to get there. We had envisioned a number of synergies as part of the transaction. However, those will take time to get there. We've talked about ultimately working towards an EBITDA margin of 15%. I don't think that will be the case in the near future. So there will be a ramp associated with that climb.
Chase Knickerbocker
Got it. And maybe along those lines, what's kind of the learnings that we've had through these last two integrations here? I know you're still very much in the middle of one. How do you feel about how you've trained your muscles as an organization to make these integrations successful and successful consistently as we look for more accretive deals in the future?
Sean Brown
And Scott, I'll jump on this. You know, I think about each of these businesses, all of them were businesses that were in tough shape, quite frankly, from neglect. When you think about Surgalign overall, it was really betting on Holo. And so these businesses were ones that -- they were not being fed, if you will.
And so for us, we saw great value because we saw product lines like Coflex product lines, like just the hardware and the biologics businesses, and never mind the nanOss business, which is something we've always liked.
We saw those as businesses that if they were given the right kind of focus, and in some cases a little bit of investment, good things can happen. And we still we still believe that that's the case. And we're just even right away on the core Surgalign business that we brought over, I've been very, very pleased with what our funnels look like, what our -- just the commercial integration that's taking place.
Which is quite frankly, that's the bigger one right. That's the big one. That's that's the one that has the biggest impact to what we do. So I would say that, I think, you know, focusing on those small things of what I think we do really well, which is on execution, and making sure that we do the first things first, when it comes to not only reviving a product, of making sure that we get the right people in place to do things they need to do. So I would tell you that those are the things that we're working on to make sure that these become successful.
Chase Knickerbocker
Got it. And maybe on nanOss, synthetics is a nice growth area for you guys, it's really green fields at this point -- it's you know, a fairly large market -- both in the US and outside, and in the deal you kind of mentioned next-gen potential products. Could you kind of discuss what those might look like? And then also kind of second part to that, I assume many of your distributors sell a synthetic today, right? Do you see this pretty low-hanging fruit to go into them with nanOss and trying to get them to start to market it, potentially switch some of their surgeons?
Sean Brown
Yes. And to answer the first part of that -- the last part of that question, first?
Yes, that's the hope, you're right. But one of the challenges that nanOss has had is the economics for the business hasn't been great. And so by buying the product from RTI, and a product line that had been going down, again, it's just a little bit of a challenge within that market because it does require high commission.
And so if you don't have high margins in there, it's hard to be able to compete. So by us owning the facility, essentially buying two years of inventory -- all of that, all of those economics are in our hands, right?
So we think that we have A, it's a very good product. Actually, it's one of the most studied products that's out there in the synthetic world. So A, we think we've got a great product. We think we can get the economics right. So B, we think that it should lead to hopefully some some growth.
But then answering your first question, which was really getting into how do we feel about the next generation, they had worked on, at RTI, a couple of different variations. We are evaluating those variations as well as some of the things that we -- we've got a really, really strong -- over the last year we've brought on some of the best R&D guys going when it comes to the biologics world.
And so I'm going to give Mark Schallenberger and his guys a chance to take a look at it and say, is there something better we can do?
And so yes, so that's when we look at nanOss, the next generation, and that's what's in the offing.
Chase Knickerbocker
Got it. Helpful. I'm sorry to take so much time here guys, but last one on the business, I want to make sure we kind of hit all the points. Maybe kind of an update on where Coflex sits today? Progress with incremental coverage, how have the prior authorization and approval rates kind of trended, and just overall kind of what you're driving there?
Sean Brown
Good, good good. Yes, thanks for asking. So as I said, these are all three businesses that have had -- and this is probably a great example of a great asset that we saw that we thought we could get a lot of value out of.
So when we got this business, and this is probably a good example, we bought it. It had 10 territories, of which five were open. So we had half of the country that was open. And then within two months, we lost three more guys.
And so our job now has been really reviving this thing. So we got our people in place, territories are filled, and we started putting them in territories even moving the territories to territories where the reimbursement is stronger on the commercial side. And so in places like Pennsylvania, and upstate New York, and in New York in general, in Michigan -- areas that we had one guy covering all of those states, we now have essentially three people, right?
So putting people in the right places, getting our people in place. And so with that, I'm really excited that when you look at the new surgeon sign-ons that we're getting are higher, are up certainly up even from a year ago when Surgalign had the business. Our funnels look really, really strong, but this is a business, though, that still is taking a little more time for us to get the kind of traction we expected.
And it's relatively -- when you think about our overall business -- it's relatively small, it's 10% to 12% of our overall revenue, but it has a high margin and has a high contribution element to it. So as that climbs up more, we're going to see more of a positive EBITDA pickup.
Chase Knickerbocker
Got it. And then just last for me. There's quite a few products that came over with the Surgalign asset purchase, right? I mean maybe just kind of hit the highlights as far as what you're most excited about? As far as the individual SKUs that came over with that asset purchase?
Sean Brown
Sure. Sure. A couple of things. You know, Cortera was a product line that they were in the throes of rolling out, which is a new kind of pedicle screw system that had a number of surgeon advisors helping with that. And so when that got slowed down, some of that momentum for them stopped. And so what we've been doing is really reinvigorating that. And so we're starting to see that happen right already.
So that Cortera line -- outstanding. There is a couple of other product lines that actually on the European side. One of them, I mean, again, I'd like to say that this was part of our great due diligence that we saw this this terrific DCI product, which is which is a dynamic cervical implant, and it's a fantastic product.
It's basically a Coflex for the cervical area. So that's something that's in Europe today doing very well. And there's another product which we were aware of that's doing also really well in Europe. It's called the HPS system. Again, both of these are motion preservation systems that are just fantastic. So those are a couple of gems that will take us some time to bring here to America.
But there's just a slew of other product lines that -- the great thing about Surgalign, what they do for us, if you think about X-Spine, we didn't invest in that over the course of time. It was actually one of the dictates that I had gotten from when I first got going at it. Listen, if we do anything in hardware, we better buy something because we just weren't going to invest in that.
So what that's been able to do to our Xtant, or the old X-Spine product line, it's completely reinvigorated it. And quite frankly, we now have some offerings like our interspinous process device, the Axle, as well as our Silex product, the SI fusion product. These are products they didn't have, and so we now give them some products that they can sell. So it is actually a nice a melding of what we can offer and what they can offer to us, and so we're really very excited about that and what they're bringing to us.
Chase Knickerbocker
Great. Thanks for taking the questions, guys.
Operator
Ryan Zimmerman, BTIG.
Sean Brown
Hey, Ryan.
Izzy Bandoroff
This is Izzy on for Ryan. Just congrats on the quarter, guys.
Sean Brown
Alright. Izzy -- Ryan, your voice has gotten a lot higher there. Okay.
Izzy Bandoroff
Well, just a little bit. So I wanted to follow up on your comments about the recent M&A activity in your product portfolio. So how are you guys thinking about the general size of that product portfolio? Do you think it's sufficient? Are you going to look for additional targets over, say, the near or medium term?
Sean Brown
Yes. You know, great question. So yes, we have a very robust M&A pipeline. I will say we have been a little bit more focused on digesting what we have. But there's a number of really great opportunities that are sitting out there as we speak.
We have some areas of specific need, iIf you look at our like, for instance, our hardware line, there's areas -- the expandable offering needs to greatly improve. I mean, there's other things that we can be doing within our hardware side.
Certainly from a biologics perspective, we are always looking for ways in which we can increase our capabilities. So what we mean by capabilities today, Xtant makes DBM and allograft products. We source things like stem cells. We source things like our growth factor products. So where we can find opportunities to expand our capabilities? By all means we're going to be doing that.
We also see anytime we can get greater capacity within our biologics production, that's also going to be really, really important to what we're going to be chasing after. So I call it the three Cs -- capabilities, capacity and cash flows.
So those are the things that we seek, as we look at deals, and happily, there's a lot of deals out there. And quite frankly, I think both valuations are finally starting to come down, but then the other part of it is the fact that I do think that a lot of these companies that are capital constrained are starting to waiver under some of these debt obligations. So I think there's more and more opportunities that are going to be coming our way, especially for those companies that are in a strong financial position like we are, and companies that can show to potential companies now and how they can win in way of getting an exit. But then having hopefully a substantial win as a hopefully take more of our stock as it goes up as well.
Izzy Bandoroff
Great. That's really helpful. Thanks for taking the question and congrats on the quarter again.
Sean Brown
Great. Thank you.
Operator
Thank you. At this time, I would like to turn the floor back over to Mr. Sean Brown for closing comments.
Sean Brown
Great. Thank you, operator.
Overall, we are very proud of the tremendous strides that we have made as an organization in recent years. Our record quarterly revenue demonstrates that we are successfully executing on each of our four strategic growth pillars. And by raising our revenue guidance and delivering positive adjusted EBITDA for two consecutive quarters, these accomplishments further demonstrate the progress that we are making. We believe this is just the beginning of what we are working towards -- long-term sustainable growth.
Through our diligent approach of increasing our capacity and our distribution network, we are filling the higher order demand of our biologics and fixation products, and achieving scale. We are realizing this demand not just organically, but also for our newly acquired businesses.
We look forward to building upon this momentum, and delivering on our broader goal of maximizing shareholder value. In closing, I'd like to reiterate that 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. We thank them for their continued work and dedication.
Thank you for joining us today and for your continued support.
Operator
Thank you. That concludes our call today. All parties may now disconnect and have a great day.
