Xtant Medical Holdings, Inc.

Greetings and welcome to the EXTENT Medical Third Quarter 2023 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief 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 is being recorded. I would now like to turn the conference over to Matt Steinberg of Finn Partners. Please go ahead.

Thank you, operator. and welcome to Extent Medical's third 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 XSEN'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 in today's discussion includes certain non-GAAP financial measures. These 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 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 Thursday, November 9th at approximately 9 a.m. 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.

Thank you, Matt, and good morning, everyone. In recent years, Axtent Medical's evolution has featured important value-creating acquisitions. We have refinanced debt, we have lowered our operating cost basis, and we have 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 U.S. 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 Extant 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 Extant 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 Surgiline's biologics and spinal fixation business for $5 million in an all-cash transaction. We believe Surgiline's business is a perfect complement with Extant's offerings and primarily with their 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 U.S. 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 the successful integration of Surge Alliance 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 in 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 Cs, 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 XStance products. The recent COFLEX, Surgiline, and now Nanos deals have met our acquisition criteria, marking significant milestones that are key for us in achieving our long-term goals. While we believe the Surgiline acquisition will be a long-term growth driver, in mid-July, their largest product line, BiBone, was pulled off the market due to a tuberculosis infection caused by Azeo, a contract manufacturer of Surgiline stem cell products. This not only impacts SurgeLine, but has had a significant impact on the entire stem cell market. Since then, the American Association of Tissue Banks, or AATB, released updated 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 has 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 Nanos 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 Nanos 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 search line 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. Extent 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.

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, contributions from the COFLEX and COFIX product lines, opportunistic private label sales, and product sales from the recently acquired SurgeLine 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 and 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-month sentence 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 COFIX 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 is 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 7 cents per share, compared to a net loss of $2.4 million or 3 cents 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 30th, 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 a revolving credit facility. During the third 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.

Thank you. We will now conduct a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two 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 keys. Once again, that's star one to ask a question at this time. One moment while we pull for our first question. Our first question comes from Chase Nicaragua with Craig Hallam. Please proceed.

Good morning, guys. Thanks for taking the questions, and congrats on the next quarter and the progress here. Great. Thanks, Chase. Just a quick housekeeping one to start. Can we get a breakdown of orthobiologics and hardware revenue in the quarter, and then kind of separate organic growth rates would be helpful if you have them? Scott, I'll throw that over to you.

Sure. Give me one second, Chase. I think for the quarter we had overall orthobiologics revenue of $15.7 million compared to implant revenue of about $9.3 or $9.4 revenue, or $9.3 million, rather. Great. Thanks.

um and if we kind of think about drivers within there i mean what products kind of you know really drove growth within within hardware from you know an organic perspective and then also you know orthobiologics um because again that that organic growth was you know well ahead of our expectations scott i'll throw it back to you as well unless you want me to dive in on that

Yeah, I think, you know, on the orthobiologic side, it was the same products we've seen as in past quarters, our new product offerings, those being the growth factor, the OsteoVive Plus, in spite of some of the challenges we saw from the 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 perspective as it relates to both product families.

And that's the Interspinus product device of Axle and then the SI Fusion product of Silex, which are the two big drivers there.

Yeah, got it. Helpful color, guys. And then maybe just for investors, as we think about kind of 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 kind of that incremental inorganic revenue as far as what you think you can drive from an EBITDA margin on that revenue specifically?

I think that'll 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. You know, we've talked about ultimately working towards an EBITDA margin of 15%. I don't think that'll be the case in the near future. So there will be a ramp associated with that climb.

Got it. Maybe along those lines, you know, what's kind of the learnings that we've had through these last two integrations here? I know you're, you know, 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?

Scott, I'll jump on this. 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 SurgeLine overall, 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 nevermind the nanos 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, you know, just even right away on a core surge line business that we brought over. I've been very, very pleased with what our funnels look like, what are just the commercial integration that's taking place. So, so 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, 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 uh and and making sure that we do you know the first things first when it comes to not only reviving a product of of you know making sure that we get the right people in place to do the things they need to do so so i would tell you that that's those are the things that we're working on to make sure that these become successful got it um and maybe on nanos um you know synthetics a nice growth area for you guys it's really greenfield at this point it's you know a fairly large market

both in the U.S. and outside. 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 going to them with Nanos and trying to get them to start to market it and potentially switch some of their surgeons?

Yeah, and to answer the first part of that, or the last part of that question first, yes, that's the hope here, right? But one of the challenges that Nanos 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 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 and Um, 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. It's actually, it's, it's one of the most studied products that's out there in the synthetic world. Um, so a, we think we 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. Uh, but then answering your first question, which was really getting into how do we feel about the next generation? Um, they had worked on at RTI a couple of different variations. Um, we are evaluating those variations as well as some of the things that we, you know, we've got a, just a really, really strong over the last year we've, we've brought on, uh, you know, some of the best R and 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, so, um, so yeah, so that's when we look at nanos, you know, the next generation. That's what's in the offing.

Got it. Helpful. I'm sorry to take so much time here, guys, but a lot's going on with the business, so I want to make sure we kind of hit all the points. Maybe kind of an update on where ColdFlex sits today, progress with incremental coverage, you know, how have the prior authorization and approval rates kind of trended, and just overall kind of what you're driving there. Good, good, good. Yeah, thanks for asking.

So as I said, these are all three businesses that have had You know, we're neglected. 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, you know, we bought it. It had 10 territories of which five were open. 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 a commercial side. So places like Pennsylvania and upstate New York and in New York in general or Michigan, areas that we had one guy covering all of those states, we now have essentially three people. So putting people in the right places, getting our people in place. And so with that, I'm really excited. um that you know 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 surge line had the business our funnels look really really strong um but this is a business though that that still is taking a little more time for us to get the kind of traction we expected um you know it's relatively when you think about our overall business it's it's relatively small it's 10 to 12 percent of our overall revenue but it has a high margin it has a high contribution element to it so So as that climbs up more, we're going to see more of a positive EBITDA pickup.

Got it. And then just last for me, you know, there's quite a few products that came over with the surge line asset purchase, right? I mean, maybe just kind of hit the highlights as far as what you're most excited about as far as, you know, the individual SKUs that came over with that asset purchase.

Sure, sure. You know, a couple things. Corterra was a product line that they were in the throes of rolling out, which is a new 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 are on the European side. One of them, I mean, again, I'd like to say that this was, you know, part of our great due diligence that we saw this terrific DCI product, 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. 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 up some time to bring here to America. But there's, you know, just a slew of other product lines that that Where the great thing about SurgeLine, 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 is that, 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 X-Stand 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 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.

Great. Thanks for taking the question, Gus.

Thank you. Our next question comes from Ryan Zimmerman with BTIG. Please proceed.

Hey, Ryan. This is Izzy on for Ryan. Just congratulations, guys.

Izzy, Ryan, your voice has gotten a lot higher there. Wow, okay.

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 net near or medium term yeah you know great question um so yes we have a very robust uh m a pipeline um 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 if you looked at our like for instance our hardware line there's there's areas You know, 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 I mean by capabilities, today Extant makes, you know, DBM and Allograft products. We source things like stem cells. We source things like, you know, 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, you know, 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, you know, I call it the three C's of capabilities, capacity, and cash flows. And 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 waver under some of these debt obligations. So I think that 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 not only how they can win in way of getting an exit, but then having hopefully a substantial win as they hopefully take more of our stock as it goes up as well.

Great. That's really helpful. Thanks for taking the question, and congrats on the quarter again.

Great.

Thank you.

Thank you. At this time, I would like to turn the floor back over to Mr. Sean Brown for closing comments.

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.

Thank you. That concludes our call today. All parties may now disconnect and have a great day.