Xtant Medical Holdings, Inc.

Greetings. Welcome to the Extent Medical Holdings, Inc. first quarter 2024 conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. Anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note, this conference is being recorded. I will now turn the conference over to your host, Brett Maas. You may begin.

Thank you, operator, and welcome to Extant Medical's first quarter 2024 financial results call. Joining me today is Sean Brown, President and Chief Executive Officer, 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 the call, management may make certain forward-looking statements regarding future events and the company's expected future performance. These forward-looking statements reflect Extant's current perspective on existing trends, and information 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 factor section of the company's annual report on Form 10-K filed with the SEC on April 1, 2024, and in the 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. 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 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 May 15th at approximately 4.30 p.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. Sean, the floor is yours.

Thank you, Brett. And good afternoon, everyone. I am pleased to announce another strong quarter for the Extend team with 55% growth over the prior year. In preparing our 2024 outlook for the beginning of the year, we recognized the first two quarters would be difficult due to a couple of significant supply chain challenges. However, after completing our first quarter, We are confident about our progress toward addressing these challenges and consequently are raising revenue guidance from $112 million to $116 million to a new range of $116 million to $120 million. Moreover, we are quite pleased with the growth of the surge line assets we acquired in 2023. Keep in mind, these product lines declined 37% over a period of six consecutive quarters prior to becoming part of Extent Medical. Our first priority was to stem the losses and then start investing and building where it makes sense. Our collective team has done a terrific job of getting the flywheel moving on this business. More specifically, the search line products have helped us transition some of our customers off the old extant hardware lines that were at risk, which was a main theme in our investment thesis for that acquisition. With the SurgeLine business, we saw an affordable way to dramatically improve our growth platform with new IDN contracts, new distributors, an international distribution network, and a nice updated adult degenerative spine fixation business that could help us replace our aging X-spine systems. Moreover, we also saw a significant opportunity in pulling through our best-in-class biologics. From an organic growth perspective, we define as revenue growth excluding contributions from products acquired during the previous 365 days for which were there no comparable sales. First quarter revenue was flat over prior year quarter. And as I mentioned in the last two quarterly conference calls, we anticipated low organic growth in the first half of this year. However, as our supply chain challenges abate and we introduce new products to the market, We anticipate delivering organic growth during the second half of 2024, reaching double digits. Let me reiterate that. We will reach double-digit organic growth in the second half of 2024. There are three key areas that have affected our growth thus far, and we are actively addressing each of them to ensure a robust and sustainable growth trajectory for Extant. The first are stem cells. This product line has been in extremely short supply since August of last year. Happily, as of April, we are back up to a strong inventory levels and are building this business back up again. Second, OEM sales. We had strong OEM sales in the first half of last year due to one of our competitors' supply challenges. This year, as we roll out new product lines like our amniotic membrane allografts, this will primarily be an OEM product line that we will expect will do well in the second half of fiscal year 2024. Third, the cannibalization of our old X-Spine hardware products by Surgiline-acquired products dampens our core organic growth rate. However, as I mentioned before, this is part of our broader plan to upgrade our surgeons to the newer, more improved Surgiline product lines. From a profitability perspective, we are adjusted even to a positive, and despite investments to rebuild the Surgiline infrastructure to support our future growth. So from an operating expense perspective, we expect to see operating expenses decline as a percentage of revenue and, combined with improvements to gross margin, will drive growth and adjusted EBITDA in Q3 and beyond. At this time, I'll now provide an overview of how we build a platform that will give us sustainable long-term growth. As a reminder, our four key growth pillars are focused on, one, new product introductions, two, distribution network expansion, and greater contract access. Three, adjacent market penetration. And four, strategic acquisitions. Starting with new products. Like every healthy, robust organization, we continually innovate with a deep pipeline of new products. During the course of our turnaround, we expanded our biologics product offering from two product categories to five, which enhanced our growth profile. Moreover, We're the only biologics company that offers a complete line of orthobiologics, which include allograft, DVM, synthetics, viable bone matrix, otherwise known as stem cells, and growth factor. This past month, Extant released a sixth new category, amniotic membrane allografts, for surgical applications and advanced wound care. Extant previously sold a distributor product that someone else made that focused on the surgical repair side of our business. This is currently a small product line for us, But with our far superior products, we believe we can profitably grow this Extend branded product line, as well as provide a fantastic solution as an OEM producer. Fiscal year 2024 is our year of self-sustainability. The second half of this year, we plan to roll out products that we produce to our own standards in a much more profitable way than relying on products from others where we do not control the supply chain. Additionally, on the hardware side, we have several exciting new opportunities. Through the COFLEX acquisition, we are reviving a fantastic motion preservation interlaminar stabilization device. This is a PMA-based product that is very good reimbursement in the ASC and outpatient settings. Also on the hardware side, we are finishing the development and the soft rollout of the Cortera posterior fixation system that was started by Surgilign. And we are now in the process of completing that rollout, which we anticipate will be fully completed by Q4 of this year. The next pillar focuses on expanding our distribution network and contract access. Our platform offers access to more than 450 IDNs and GPOs that cover approximately 90% of all beds in the US. In addition, our distribution network now includes more than 650 distributors. In years past, we focused on continuing to expand the total number of distributors by at least 10 new agents per quarter. Today, we plan to look for opportunistic distributor ads, but our primary focus will be to get greater penetration into the distributors we have today. What we have found is that the more product lines and distributor cells of our products, the stickier they become as a distributor for XSAT Medical. Now, turning to our third pillar, leveraging adjacent markets. One goal for Extant is the longer term is to build products that serve other verticals beyond spine and orthopedics. Through our OEM manufacturing, we serve different verticals and learn about the dynamics of those specific markets with an IM potentially expanding into places where we can have a significant impact. We have gained traction within the foot and ankle, trauma, and reconstructive joint orthopedic markets with the addition of our amniotic tissue products, we can now serve both the surgical repair and advanced chronic wound care markets. Our final pillar focuses on achieving growth through targeted acquisitions. By leveraging our growth platform of over 450 IDN agreements and 650 distributors who are selling our products nationally, we are targeting companies that are either undercapitalized or are subscaled. More specifically, Similar to acquisitions in 2023, we are targeting companies that either help complete our offering or provide us additional scale. For instance, think about taking a company or a technology that may have access to, say, 50 or 100 IDN agreements and maybe only 75 to 100 distributors. Take their innovative technologies and get them onto our contracts and give them access to our nationwide distribution network. We believe we can help those companies meet more of their potential, similar to what we have done with the COFLEX and Surgiline acquisitions. Our focus on acquisition targets is based on three key characteristics. First, capabilities. We're looking at companies or technologies that give us greater capabilities, particularly in regenerative biologics. Additionally, we will look at businesses that help complete X-Stance offering and spine fixation in motion preservation offerings. Second, capacity, targets that can expand our longer-term biologics productions demand. And then third, cash flow, businesses that are profitable or can become profitable through cost or margin synergies. We believe that making sound, targeted, and strategic acquisitions that fit within our stringent criteria will take us one step closer to achieving our long-term goals. We believe our unique platform and robust distribution network will allow future companies that we acquire to take advantage of being part of a fast-growing company. Furthermore, we believe it will allow the entrepreneurs and other owners of those companies to win when they are purchased and then potentially win even bigger over time as Extant continues to grow. Extant is committed to driving long-term sustainable revenue growth and maximizing shareholder value. To better support the fast pace of our growth initiatives, we are pleased to increase our long-term debt with MidCap Financial, The 22 million from 17 million more over access to more capital positions us well to further execute our strategy and capture greater market share with an eye on achieving positive operating cash flow during fourth quarter of 2024. Finally, we increased our full year 2024 revenue outlook to a new range of 160 million to 120 million. This increased guidance range represents annual growth of approximately 27% to 32% compared to full year 2023. Within that, we anticipate our organic growth will accelerate beginning in the second quarter of 2024 and continuing into the second half of 2024. We expect this will be driven by a normalized supply environment in our stem cell business that was adversely affected by the temporary market shortage in the second half of 2023 and the first quarter of 2024, and by revitalizing the surge line supply chain. Moving forward, we were focused on becoming operationally self-sustaining by controlling our supply chain and becoming less reliant on production outside of control. We believe this self-reliance will allow us to be a larger and more diverse producer of biologics. Moreover, producing our own products should dramatically improve our margin profile, coupled with an expanded product line that brings additional transformative treatment options for a large and growing patient population. Most importantly, we believe these actions will help us get to positive operating cash flow during the fourth quarter of 2024. Now, I'd like to turn the call over to Scott, who will discuss our first quarter 2024 financial results.