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spk02: Greetings, and welcome to the Exit Medical Second Quarter 2023 Financial Results Conference Call. At this time, all participants are on a listen-only mode. A question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference call is being recorded. I would now like to turn the conference over to Matt Steinberg of FinPartners. Please go ahead.
spk01: Thank you, Operator, and welcome to XSET Medical's second quarter 2023 financial results call. Joining me today is Sean Brown, 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 XTEN's 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 on 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-gap-to-gap reconciliations which appear in the tables of our press release and are otherwise available on our website. Note that our form 8K, followed 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, August 1st, at approximately 9 a.m. 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 Brown.
spk03: Thank you, Matt, and good morning, everyone. On today's call, there are a number of key company updates that I'd like to highlight. Most notable, we delivered revenue growth of 32% year-over-year, driven by our core biologics and fixation businesses, Guided by our mission of honoring the gift of donations so that our patients can live as full and complete a life as possible, and following our four key growth initiatives, we are pleased with the progress that Xnet continues to make on our long-term business strategy. I'd also highlight that we closed the second quarter with adjusted EBITDA. This milestone was achieved faster than our internal expectations, underscoring the continued execution of our strategy. I am thrilled with the performance of our team, and thank them for their incredible efforts that made this possible ahead of schedule. Last Friday, we announced that Extend was the winning bidder for Surge Alliance domestic and international biologics and spinal fixation businesses. Needless to say, we are thrilled at this opportunity to expand our footprint with new contracts and distributors. We are working on next steps and will update you on status and closing. The financial guidance that we are providing today excludes any impact of this transaction If and when we close this transaction, we plan to update our financial guidance. In breaking out this quarter's performance, I want to first provide a reminder of our four key growth pillars, and they're focused on one, new product introductions, two, distribution network expansion, three, adjacent market penetration, and four, strategic acquisitions. We are pleased that we continue to generate solid demand for our Biologics products. We are driving growth across all channels of our business, and we are seeing positive contributions from our newly acquired COFLEX interlaminar stabilization device. The integration of the COFLEX business continues to progress smoothly. It's important to note that we are aggressively reviving this business, which was previously in decline. It will take time to properly transition this business to growth, but we are well on our way to restoring this highly profitable product. Organically, our OsteoFactor and OsteoVive Plus products have sustained strong demand since their initial product launches. Our current portfolio addresses the entire $2.4 billion U.S. orthobiologics market, and we will remain opportunistic moving forward on future product launches and acquisitions that position us to take greater market share. Now, turning to our distribution network, The addition of our new COFLEX distributors combined with our 24 new distributors against the stated plan of 10 each quarter has us well positioned to increase our distributor revenue by at least 10% annually. Our distribution network now stands at more than 450 total. Going forward, we will continue targeting new expansion opportunities in underserved markets across the U.S. Our adjacent market strategy is performing well, and we further penetrate the foot and ankle, trauma, and orthopedic implant markets. On the OEM front, we delivered on several sales with our recently expanded capacity. We also saw success from the ambulatory surgical center market, which continues to grow nicely and supports the promising trends with our fixation business. We continue to view our ASC market expansion as an important part of our growth strategy. Looking ahead, we will remain diligent in our approach to both tuck-in and transformational acquisitions as the year progresses. Our primary focus will be on the assets that bring the three Cs, capabilities, capacity, and cash flows. With both our COFLEX and surge line deals, we feel we have hit on all three Cs. In recent quarters, the focus of our operations has been to successfully implement key process improvement initiatives designed to increase our production capacity and efficiencies. I'm pleased to share that we have made significant strides in achieving this goal. As I noted earlier, our increased capacity enabled us to fulfill OEM orders with our adjacent markets. All those gains for the past two quarters have come from having full labor capacity at our Belgrade plant. Last year, our growth was hampered by having less than 60% labor capacity for most of the year. So needless to say, we are thrilled to have the people in place to help us drive our mission. Earlier in July, I'm happy to say we opened up roughly 50% of new clean room space in our plant. This project was important to our organization on two fronts. One, the entire organization focused on getting these critical plant additions completed on time and significantly under budget. Two, organizational focus and having a very clear concept of what is most important and focusing on that one main goal is the kind of operational discipline that makes for great companies. And looking back at what our management team started, we had the challenge of turning around a business that we had to fix many broken processes. Today, as the business is now growing and prospering, building in this kind of operational discipline will be the cornerstone of a company that will thrive for years to come. Consequently, we are much better at managing our supply chain and processes today than we were even a year ago. As a result, we are capable of selling and delivering products on a greater scale. That said, given the robust demand of our life-changing products, the work is not done. We continue to explore various strategies to increase our capacity to support our growth initiatives. Finally, in today's press release, we raised our 2023 full-year annual revenue growth range to approximately 29% to 33%, up from our previous range of 26% to 29% year over year. These expectations do not include potential contributions from the surge line transaction if and when it closes. Our strong revenue results for the first six months of 2023 underscore our confidence in achieving this annual growth goal. Now, I'd like to turn the call over to Scott, who will discuss our second quarter 2023 financial results.
spk05: Thank you, Sean, and good morning, everyone. Total revenue for the second quarter of 2023 was $20.2 million. compared to $15.3 million for the same period in 2022. This robust 32% annual increase is attributed primarily to greater independent agent sales and contributions from the recently acquired CoFlex and CoFix product lines. Gross margin for the second quarter of 2023 was 61.6%, compared to 54.8% 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. Second quarter 2023 operating expenses were $13.9 million compared to $9.7 million in the same period a year ago. As a percentage of total revenue, operating expenses were 68% compared to 63% in the same period a year ago. General and administrative expenses were $5 million for three months ended June 30th, 2023, compared to $3.8 million for the same period in 2022. The increase is primarily attributable to the additional expenses related to COFLEX acquisition. Sales and marketing expenses were $8.7 million for three months ended June 30th, 2023, compared to $5.6 million for the same period in 2022. This increase is primarily due to additional sales commissions from higher revenues and increased salaries and wages from the COFLEX acquisitions. Net loss in the second quarter of 2023 was $2.2 million, or two cents per share, compared to a net loss of $1.7 million, or two cents per share, in the comparable 2022 period. Adjusted EBITDA for the second quarter of 2023 was $0.1 million, compared to an adjusted EBITDA loss of $.4 million for the same period in 2022. As of June 30, 2023, we had $4.4 million of cash, cash equivalents, and restricted cash, $13.7 million of net accounts receivable, $20.4 million of inventory, and $3 million available under a revolving credit facility. Subsequent to the end of the quarter, Extant 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.
spk02: Thank you. At this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. One moment, please. And our first question comes from the line of Chase Knickerbocker with Craig Island Capital Group. Please proceed with your question.
spk04: Good morning, Sean, Scott. Congrats on another good quarter here.
spk02: Great.
spk04: Hey, Chase, how are you? Hey, Sean, thanks. I want to start by peeling back the onions a little bit here in hardware. You know, what was the Coplex contribution approximately, and, you know, what dynamics are you seeing there, particularly around, you know, any improvements you may be trying to drive in reimbursement story there? And I've got 19% organic growth in legacy hardware, just kind of rough numbers in my model. What's driving the strength there, and I guess do you expect it to continue?
spk03: So I'll unpack that little by little. So first things first, when you look at the fixation business overall, we're really thrilled about where that is, especially given where we had been. So when we look at that fixation, just year over year, prior year variants, year over year on the base business was prior years over like 7%, at least on the fixation business. When you throw in the co-flex business, which was another 14% of our overall revenue, you know, that, that it was a very nice, a very good, very good, uh, um, quarter for us. When you look at the, uh, reimbursement story, and this is actually something that, you know, when you think about coflex and coflex, uh, overall as a business, um, this is one that is about a reimbursement story. And so we're getting our guys very, very focused on the Medicare and Medicare advantage markets. Um, those are two extraordinary opportunities for us that, that, um, Just that alone could more than make this a huge winner for us. So that's something, at least from our end, we have the guys, our new sales team, really focused and going after that market as much as possible. And so we're very, very bullish about what that, even just that alone, never mind any kind of commercial pickups that we get along the way. But that is really kind of our starting point. So I hope I answered kind of the questions you were looking for there.
spk04: Nope. Yep. That all makes sense. In orthobiologics, you know, what was the impact of those OEM orders and how do you kind of strike a balance between, you know, supporting those OEM orders and, you know, also fully shipping to that independent distributor channel? Are you kind of caught up in demand in that independent distributor channel now? Or I guess, how should we think about kind of how you make the decisions between the two channels?
spk03: Yeah, happily, we're caught up, which is not where we were a year ago. So as we mentioned, the access to capacity, both in labor and now, we're really excited about with actually the plan expansion that we've had. So right now, when you look about the OEM business, it's about 8.6% of our overall revenue. So, you know, again, like anything, you always want to promote your own brand. And so right now, the fact that our Our XTAN brand continues to be about 91% of what we do. We want to keep that going, right? So that's always a good thing. Certainly, it looks like higher margins. The one thing I will say is our OEM business nets out about the same from an operating income perspective. So it doesn't help the gross margins when you look at it. However, from a bottom-line perspective, it's still a very nice business. And so, yeah, so we're – we have not had to make those big decisions between those businesses. I mean, there are some, there are some product lines, for instance, when we talk about putty putty is one of the things that is a high OEM demand. We could fill up our whole, our whole facility with just OEM demand on that. However, that's not an optimal use of a donor. And so we want to make sure that we're, we're controlling how much of that we're going to, it's going to go out the door. And so, so again, if you think, and you go back to our mission, and that's the thing about our business, which is one of the most, not only the most mission-driven organization I'll ever meet, but it's also one that is most congruent or at least has the same goals that our shareholders have, is that if we're doing the right thing by the donor and we're doing the right thing in honoring that gift, we're going to be producing the best possible products. And so certainly our putty product is one that's outstanding. It's a 510K product. We really like it. However, we think that there's better ways uses of that donor for a higher end, um, use products. And so, so we'll, we'll always keep an eye on making sure we're not making too much of that. But, uh, but for the most part, our OEM business is something that, uh, that's, we, we enjoy. And, and, you know, if there's anything that we, we, uh, we put any kind of control on, it will be on the potty side.
spk04: Got it. And then maybe stay in there. Um, you know, capacity expansion is good to hear that those clean rooms are, our bill, you had said 50%. How much of that's online now? And I guess is it kind of staffed up already? And then, you know, if that's coming online in second half, talk me through why, you know, that orthobiologics growth rate would not increase in the second half, you know, relative to the first half if that kind of increased, you know, capacity is going to be met, you know, pretty quickly with either that OEM demand or, you know, independent channels as well.
spk03: Yes. Okay, good question. I'll break that down or unpack that. First and foremost, not all of the clean rooms are online. We're still ramping up some of the training that has to take place, but some of it is. So it's about a third of it is right now. There's still another two-thirds that we would have. But still, it's more than enough of what we need with respect to the demand that we've got coming in. And that's the immediate demand, right? We're not talking about, you know, what we do with cross-selling, even our CoFlex distributors, nevermind what will take place with our surge line distributors. So, so we expect that the rest of that will be on up and running here in the next month. So, so we should have the, we should have the capacity to be able to manage the demand that comes from that. So I hope, and then to get to your question about how would we look at moving forward? And I think that's part of the reason why we raised our, guidance, you know, from 73 to 75 million to 75 to 77 million is that we do see that, you know, we will have an increase and we believe that our biologics business is looking really strong right now.
spk04: Got it. Thanks. You know, six months now since the COFLEX acquisition, you know, those distributors that you brought on then that were selling COFLEX kind of talk through any success you've had you know, growing your wallet share there, you know, particularly obviously with biologics, you know, it's six months enough of a kind of time period to kind of know, you know, how quickly you can kind of grow that wallet share after you, you know, acquire those distributors essentially.
spk03: You know, actually it's really since, if you remember, we got that in March. So it's really, we're at, you know, four months now. So it was July. So it's, we're getting a good indication, you know, the first things first with this group, and this is, you know, again, priority number one, two, and three, and it goes back to that organizational discipline, organizational focus. We need to make sure that, that first of all, the sales team that we have and that we inherited, there were 10 territories in which five were open when we got it. Two people stepped out. And so we really had to fill seven different spots. And so, so getting the sales team right on that, first and foremost. Second, making sure our COFLEX distributors that are there understand really the full value proposition. I guess if there was one fairly significant opportunity, I would say on the COFLEX side is that the distributors didn't understand the reimbursement story at all. And so it was catch as catch can. And so that's one of the things is that I will say that we're very, very disciplined in how we're focusing in on where the best opportunities lie. And because of that, we're starting to get some more traction. And so then as we start thinking about how do we grow and how do we get more out of that, I really want to make sure that, first and foremost, we get those guys focused on what they have in front of them. And then the more we get an opportunity to get them going where they need to go is that then we'll start introducing more of our other products. Because, quite frankly, we've got plenty to work with with our base extant business. And we have both the biologics and fixation opportunities. But those coflex distributors are there. We're probably a few months still away from being able to start to cross sell to them. Because quite frankly, I really want to get first things first with them. any more questions or I, there's a deadline here. I hope I didn't get turned off.
spk04: I think it cut out there for a second, Sean. I got you back now.
spk03: Okay, good.
spk04: Okay, good. Oh, good. And then just last one for me, if I could sneak one more in. On Surgiline, you know, what liabilities would you be assuming there if that deal does close? And, you know, was there any holo revenue at Surgiline? You know, or we should be thinking kind of the substantial amount of the revenue that was at Surgiline is what you're kind of you're acquiring those assets that were the substantial amount of revenue there.
spk03: Yeah. So we're having, we have nothing to do with Holo at all. So everything we're going to get is all from the base instrument business. Now, overall, I'm also, you know, I don't want to jinx the deal in any way. So we're holding off all questions on the surge line until that closes. That closes access to the judge, uh, sprinkles the holy water, if you will, on that, on the 8th of August. And then we will, um, We will then be closing hopefully soon after. And what I'd like to do at that point in time is really start, you know, answering and potentially even having a call at that time with respect to what that will mean for us. Because it is certainly very material, and that will also mean that we'll be changing our guidance based on that acquisition. So if I may hold off on all that to let the dust settle, because I'd hate to get in front of that if, in fact, you know, something were to go askew.
spk04: Yeah, totally fair. Thanks, and congrats again on a good quarter. Thanks, Chase. Appreciate it.
spk02: And at this time, we have no more questions. I'll turn the call back over to Sean Brown.
spk03: Thank you, Operator. Before closing, I'd like to reiterate a few key points. First, our second quarter revenue growth of 32% year-over-year demonstrates the encouraging returns of our four key growth pillars – Two, we achieve these results through a diligent approach of increasing our capacity, thereby fulfilling the high order demand of our biologics and fixation products. Three, we are financially strong, as illustrated by our second quarter positive adjusted EBITDA that we achieved faster than we originally planned. And our latest infusion of cash through the fundraising we did earlier in the month has us with a really strong balance sheet right now. Four, strategically, we are leaning forward, exploring other roll-up and bolt-on acquisitions, And five, the increase of our annual revenue guidance to $75 million to $77 million further illustrates our confidence in our business and strategy. With the strong demand and growth across our major product lines, we look forward to building upon this momentum and our broader goal of maximizing shareholder value. Finally, 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 support.
spk02: Thank you. That concludes our call. All parties may now disconnect.
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