Q4 2023 Xtant Medical Holdings Inc Earnings Call

Participants

Matt Steinberg; IR; Finn Partners

Sean Browne; CEO; Xtant Medical Holdings, Inc.

Scott Neils; CFO; Xtant Medical Holdings, Inc.

Ryan Zimmerman; Analyst; BTIG LLC

Chase Knickerbocker; Analyst; Craig-Hallum Capital Group

Presentation

Operator

Greetings, and welcome to the Xtant Medical fourth-quarter and full year 2023 financial results conference call. (Operator Instructions) As a reminder, this conference call 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 fourth-quarter and full year 2023 financial results conference call. Joining me today is Sean Browne, President and Chief Executive Officer; and Scott Neils, 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 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 meanings.
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 April 1, 2024, and in subsequent SEC reports and press releases. Actual results may differ materially.
The company's financial results press release and today's discussion includes certain non-GAAP financial measures. Please refer to the non-GAAP to GAAP reconciliation and is 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 our replay, this call was held and recorded on Monday, April 1 at approximately 9:00 AM Eastern Time. The company declines any obligations 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 to everyone. 2023 was a transformative year for Xtant Medical. It was a culmination of a multiyear turnaround effort in which we established what we believe is now a robust platform for future growth. Now with the foundation of exceptional market access and a nationwide distribution network established, we have created a scalable business model that resulted in record revenue in 2023 and has generated positive EBITDA -- adjusted EBITDA for the last three consecutive quarters.
For the fourth quarter of 2023, we generated revenue of $28.1 million, an increase of 84% year over year. We're seeing positive returns of our business by achieving annual revenue growth of more than 58% in 2023, with our full year revenue of $91.3 million coming in ahead of our guidance range. Our organic revenue growth for the fourth quarter of 2023 was 9%. This excludes the contributions from our 2023 acquisitions and as adjusted for a reclassification of our GPO fees, as Scott will explain later. Full year fiscal 2023 adjusted organic growth was 17% over full year of fiscal 2022. In summary, full year 2023 was transformative.
As previously mentioned, we grew by over 58% with adjusted organic growth of 17%. In addition to our record revenues, we finished the year with three straight quarters of positive adjusted EBITDA. Secondly, we acquired three separate businesses. Third, operationally, we improved our clean room capacity by over 50%. Fourth, we dramatically improved our margin by 540 basis points through improved operational efficiencies and improved mix of product. And then lastly, we ended the year with an even stronger balance sheet with greater availability through our revolver to help us fund our growth. By driving solid execution of our key growth pillars, we have significantly enhanced our financial position, enabling us to take the next step in capturing greater share of the spine and orthobiologics market.
At this time, I'll provide an overview of how we build a platform that gives us the confidence to execute sustainable long-term growth profile. As a reminder, our four key pillars -- growth pillars are focused on: one, new product introductions; two, distribution network expansion and contract access; three, adjacent market penetration; and four, strategic acquisitions.
Starting with new products like every healthy robust organization, we are continually innovating 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 helped enhanced our profitability profile. These higher margin products comprises, synthetics, viable bone matrix, and growth factor. When added with our legacy demineralized bone grafts and allograft products, we are gaining operating leverage while also building our presence in the $2.4 billion US orthobiologics market.
Additionally, on the hardware side, we have a number of exciting new opportunities. Through the Coflex acquisition, we not only added, but continue to revive two product lines in the fast-growing ambulatory surgery centers and outpatient markets. This acquisition also provides a payer-services component that deepens our longer-term market access capabilities. Through the Surgalign acquisition, we filled in a number of missing pieces to our fixation line.
In addition, we acquired a dynamic international business that is leading the way in motion preservation science systems. We will be looking to bring some of those systems to the US domestic market. Overall, the acquisition of Surgalign has dramatically changed our product offering, which is now comprised of about two thirds' biologics and one third fixation and hardware, compared to where we were before, which was an 85% to 15% split of biologics to hardware.
The next pillar is our expanding distribution network in contract access. Our platform offers access to more than 450 IDNs and every major GPO that covers approximately 90% of all beds in the US. In addition, our growing distribution network, which now includes more than 650 independent agents, was further expanded by the Coflex and Surgalign acquisitions. Our vast network of selling our product today across various ASCs, outpatient clinics, and hospitals, which has helped us become a strong national company.
Now turning to our third pillar, leveraging adjacent markets. We continue to build a presence in other markets to drive OEM sales, enabling us to diversify and expand our revenue opportunities beyond our core spine market. We have gained traction within the foot and ankle trauma and orthopedic implant market, and we remain focused on capitalizing within these various segments by leveraging our expanded capacity.
Our final pillar focuses on achieving growth inorganically through targeted acquisitions. We are seeking to become the integrator of enabling technologies. We are targeting companies that are either undercapitalized or sub scaled today. As we have the prior Coflex and Surgalign acquisitions, our focus on acquisition targets is based upon three characteristics:
First, capabilities. We are looking at companies or technologies that gives us greater capabilities, particularly in the regenerative biologics. Additionally, we'll look at businesses that help complete Xtant's offering in the spine fixation and motion preservation offerings.
Second, capacity. Capacity targets that we can expand our longer-term biologics production demand. So as we get bigger, we're going to need more space and more capacity to do that.
Third, cash flows. 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.
Our unique platform and robust distribution network will provide future companies that we acquire, the ability to take advantage of being part of a fast-growing company. Furthermore, we believe will allow the entrepreneurs and other owners of those companies, the ability to win when they are purchased and then win even bigger over time as that Xtant continues to grow, which we believe it will.
As part of our strategy to meet increasingly strong demand and long-term profitability, we have dedicated our operational efforts to implementing crucial process improvement initiatives and expanding capacity. These measures have significantly increased both our production levels and overall efficiencies, enabling us to achieve scale in both product sales and deliveries. Furthermore, with the recent acquisitions of nanOss production operations from RTI Surgical announced in the fourth quarter of 2023, we are now better equipped to produce more of our own biologics in house.
Xtant 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 revolving credit facility with MidCap financial to $17 million from $8 million. Moreover, access to more capital positions us well to further execute on our strategy and capture greater market share within the orthobiologics market.
Finally, we established our full year 2024 revenue range of $112 million to $116 million. This guidance range represents annual revenue growth of approximately 23% to 27% compared to the full year 2023 and includes contributions from the Surgalign transaction in addition to the strength of our organic business.
We anticipate that our growth will accelerate faster starting in the second quarter of 2024, and even more so in the second half of '24. This is driven by normalized supply environment in our stem cell business that was adversely affected by the temporary market shortage in the second half of '23 and the first quarter of 2024.
And revitalizing the Surgalign supply chain. More specifically, as Surgalign went through its financial troubles and eventual bankruptcy, important vendors naturally pulled back from producing products for fear of not getting paid. Some of those supply issues impacted our fourth quarter results, and we expect to continue to see some softness in key product areas such as Coflex and Surgalign for the first half of 2024.
Moving forward, 2024 is focused on self-sustainability. Our goal is to be self-sustaining in our supply chain, where we are less reliant on production outside our control. We believe that 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 to a large and growing patient population. Most importantly, our progress in 2023 positions us well on our path to continue positive adjusted EBITDA. Now I'd like to turn the call over to Scott, who will discuss our fourth quarter and full year 2023 financial results.

Scott Neils

Thank you, Sean, and good morning, everyone. Total revenue for the fourth quarter of 2023 was a record $28.1 million, compared to $15.3 million for the same period in 2022. Our 84% 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 Surgalign Hardware and Biologics Business.
During the fourth quarter of 2023, we reclassified all GPO fees incurred during the full year as offsets to revenue from their previous classification as SG&A expense. As a result, organic and total revenue growth rates for the fourth quarter of 2023 were downwardly impacted by approximately 800 and 1.000 basis points, respectively, with fourth quarter 2023 organic growth before the reclassification totaling 9%, organic growth as reported totaled 1% in each case over fourth quarter 2022 organic growth.
Gross margin for the fourth quarter of 2023 was 61%, compared to 54.4% for the same period in 2022. The increase is primarily attributable to greater production efficiencies and favorable product mix, partially offset by higher product costs.
Fourth quarter 2023 operating expenses were $20.9 million, compared to $10 million in the same period a year ago. As a percentage of total revenue, operating expenses were 75%, compared to 66% in the same period a year ago.
General and administrative expenses were $8.9 million from the three months ended December 31, 2023, compared to $4 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 $11.6 million should three months ended December 31, 2023, compared to $5.8 million for the same period of 2022. This increase is primarily due to additional commission, the compensation expense, and higher professional service fees.
Net loss for fourth quarter of 2023 was $4.3 million or $0.03 per share, compared to a net loss of $2.2 million or $0.02 per share in the comparable 2022 period. Adjusted EBITDA for the fourth quarter was $0.7 million, compared to an adjusted EBITDA loss of $0.8 million for the same period in 2022.
As of December 31, 2023, we have $5.9 million of cash, cash equivalents, and restricted cash, $20.7 million net accounts receivable, and $36.9 million of inventory. As Sean mentioned earlier, in March we increase our availability under our revolving credit facility for $17 million to help fuel our future growth. Operator, you may now open the line for questions.

Question and Answer Session

Operator

(Operator Instructions) Ryan Zimmerman, BTIG.

Ryan Zimmerman

Good morning and thanks for taking the questions and congrats on all the progress, guys.

Sean Browne

Thanks, Ryan.

Ryan Zimmerman

I wanted to start on '24 guidance, if you could. Appreciate the color you gave on seasonality. Appreciate some of your comments on the contributions, but can you expand a little bit more, Sean, Scott? Just on how you think about the breakdown of the legacy business versus some of the contributions from the Surgalign business and maybe expand a little bit on what you think the growth drivers are for '24. And again, appreciating that the stem cell dynamics kind of come in to play began the second quarter.

Sean Browne

Okay, I'll jump in first and Scott, I'll let you add any color to it. So Ryan, when we think about the contributions of Surgalign, first of all, we had great contributions in the fourth quarter from both the Surgalign domestic business as well as the international business.
But as I mentioned, one of the problems we're having is the supply chain of -- they are basically selling things right off the shelf. So we're catching up in getting those supply chains and those suppliers to start filling up our inventories again, which is a good problem to have, and we have. The demand is there and it's growing.
So when I think about like for instance, you asked one of the questions is, where do we see growth? It's coming from Surgalign in the next year. They re-released a brand-new product line called, Cortera, which has really taken off and done very well.
Matter of fact, one of the first things we did is we added more sets to that product line. And quite frankly, we probably were short on it. We actually should have gone longer than we did. And so we're going to get some nice growth from that. That will really be coming in the second half of the year from Surgalign's perspective.
Another big area for us will be some of the OEM production that we'll be doing specifically on the OEM -- or I mean on the amnio side, and then some of the other base core biologics stuff. We got a new fiber product that's going to be coming out this year. You're going to see a fair amount of things that just from a stem cell perspective, we are now in a position where finally, where we've got enough product on hand where we can actually start meeting the demands. And we've never ever been at a position like this.
So as we look at the second quarter, we'll start to see a nice pickup with respect to our stem cells. And then just with our overall OEM and other production that's going to take place in the second half of this year. We expect to see things really start to take off both in our own biologics production as well is in what we'll see from the Surgalign hardware side.

Ryan Zimmerman

Okay, that's very helpful. Scott, you alluded to a couple of opportunistic OEM orders, I think in the fourth quarter. Talk to me about the environment here. What you think you can do with that business. I'm wondering just given our coverage of some of the other companies that are struggling in these areas, I'm curious if there's a read-through here that you're able to capitalize on maybe some other companies that may be struggling there. And just on the OEM side, and then I have a couple of follow-ups.

Scott Neils

Yeah, I think early on in the year, we won't necessarily see the contribution we did in Q4 or even Q1 of last year on the OEM side. I do think there is a particular opportunity there in the back half year, both on legacy products, but also in way of new production, both in stem cell and amnio. So we look forward to that. But we do expect to be quieter on that front at the initial part of the year.

Ryan Zimmerman

Okay, very helpful. And then gross margins have been really nice to see. Maybe comment a little bit over the past three quarters, but still hovering over the 61% level. Do you expect that to continue in '24 and kind of where do you think you can take those gross margins to get the stem cells back online?

Scott Neils

Yeah, I think our gross margins really trend with the stem cells and also the source of those. Where we see that coming in from an internal standpoint, that will be a significant driver of gross margin improvement. And then as we also add a little more mix in way of hardware that should also bump margins as well. But I think is, as the product mix goes, so too will gross margin. And we'll look for that to improve throughout the course of the year.

Ryan Zimmerman

Okay, thanks for taking my questions, guys. Appreciate it. Good answers. Thank you.

Sean Browne

Thanks, Ryan.

Operator

Chase Knickerbocker, Craig-Hallum.

Chase Knickerbocker

Good morning, guys. Congrats on the good finish to the year here.

Sean Browne

Thank you, Chase.

Chase Knickerbocker

Maybe starting on a couple of financial ones for Scott. GA looks like it was a bit elevated as a percentage of sales in Q4. Can you just kind of walk me through what might have been in that in Q4 and the right way to think about it? As a percentage of sales, how are kind of trends through 2024?

Scott Neils

Yeah, I think there's probably three main drivers you're seeing their Chase. The first being acquisition related expenses, what you'll see in the or see broken out in the adjusted EBITDA table. The second piece of that is going to be commissions. And then third, I think we ran a little high just for certain compensation components that should back off or become more normalized going forward. So as a percentage of revenue, I expect that's come back down. But those are really the three main drivers of it.

Chase Knickerbocker

Got it, thanks. And then maybe on 2024 guidance. It looks like it assumes something in kind of the mid-single digit range or inorganic growth rate perspective. I appreciate those comments you gave on those two dynamics.
But actually, I think of this building in quite a bit of conservatism, if we're looking at something in the mid-single digit range from inorganic growth perspective. Or should I think about your business slowing from an organic perspective in 2024?

Sean Browne

As I would jump in on this one, is that yes, there's a fair amount of conservatism just because there are some unknowns, right? And so but we feel very good that is a significant upside. So yes, there's some conservative pieces to this. We do think that eventually we can get the double digit on the organic side of things. It's just going to be in the second half of the year.

Chase Knickerbocker

Got it. And I just kind of want to pick up on some of the Seinfeld trends that you kind of talking about a little bit in the previous Q&A. It sounds like you guys are kind of not supply constrained there as far as kind of inventory goes at the moment, kind of winded that inventory kind of improve. And is that something you expect to kind of continue to the year? And your conversations with your suppliers.

Sean Browne

Literally last week, is when it improved. So yeah, so one of our main suppliers, the main supplier for whom we work with. We had started providing donors that they could start processing, which was new, and that started in the beginning part of this year.
And so those donors are now just recently been cleared. We had some very high yielding donors with. Yeah, so we're very flush and we plan to be flush with inventory throughout the year of this.
And so within literally the last days of the quarter, we had the inventory that we can now start to sell. So our guys are really starting to gin up, what was the demand we previously had? And then of course, demand that we've had to walk away from over the course of last few years.

Chase Knickerbocker

It seems like it's kind of a supply-constrained kind of market at the moment. Do you expect that to get filled pretty shortly, or do you think there is constant chasing down of volume you need to do? And then second, as it relates to that kind of trend with the stem cell business. Should we think of gross margins kind of showing improvement year over year, not quite as much as in 2023, but still meaningful kind of year-over-year improvement kind of as you have a more favorable product mix?

Sean Browne

Yeah. So here's what I'd say is, that the initial demand is still really, very tight. This is actually part of why for us providing donors to our supplier was a big part of it, right? So that's one of the things that at least helped us get out.
But many of the guys that are out there today who or one selling this is still struggling to get enough product out there. So there is still some supply constraints. We just happened to be in a much better position than we were even, gosh three months ago, never mind the last half of 2024.
And then when we think about margins for that product line, specifically the margins for this product line, because we are supplying donors, is going to be a little bit tighter in the first part or half of the year. But in the second half of the year, we'll get substantially better.

Chase Knickerbocker

Thanks. And maybe just last, the Coflex update. Kind of talk about how that product did in Q4 and kind of --

Sean Browne

Sure.

Chase Knickerbocker

You're taking to improve reimbursement and kind of the updates there.

Sean Browne

Sure. Yeah, so I'm really pleased with where that business is today. Again, this was a complete revival project. This is one that the focus that we've put towards both the clinical and the reimbursement side. This is just something quite frankly, from Surgalign's perspective, there's so much going on that this was really a hard thing to focus on.
And so we have done that. And so I'm really excited about what we've been able to at least stabilize the business. And now we're starting to win some new plan, like we just got coverage for a great plan, original plan in New York that gives us basically almost full coverage in New York. So having the fourth-largest state in the union fully covered. This is really kind of a nice milestone for us.
So we believe that we've seen the bottom of that business. And we believe that we're now getting started to grow it. So we're really excited about where the prospects for that business, especially because it is such a great technology. Like everybody on this call. If I just rationally explain to you the beauty of what Coflex does and way of motion preservation and just again, what it does for people clinically or therapeutically. It's just a great product. So we're really excited about its prospects.

Chase Knickerbocker

Got it. And last one and I'll hop back in the queue, sorry guys. Scott, just kind of good sequential improvement in adjusted EBITDA, that margins started to tick up. I mean, just kind of speak to your confidence in 2024 continuing to improve that adjusted EBITDA margin even despite some of these kind of internal investments you guys are making.

Scott Neils

Yeah, I think it gets back to Sean's initial comment as it relates to our product offering. I think all of those things in addition to the improvements we've made in way of yield improvements and scrap reduction, et cetera, will all provide nice sequential improvements to gross margin, both during the course of 2024 and beyond. So we feel really good about that.

Chase Knickerbocker

Great. Thanks, guys.

Operator

Thank you. And at this time, we have no more questions. I'll turn the call back over to Sean Browne for any closing remarks.

Sean Browne

Thank you, operator. Overall, I'm very pleased with the progress we have achieved in '23. In short, we almost doubled our revenue with both strong organic growth and the assistance of three newly acquired businesses, which dramatically improved our margin by over 540 basis points, resulting in positive adjusted EBITDA for three consecutive quarters.
Our efforts in expanding our capacity and distributor network have allowed us to meet the increasing demand for biologics and fixation products, enabling scalability. We are enthusiastic about leveraging this momentum to further our overarching goal of maximizing shareholder value.
We have laid revenue growth guidance of between 23% and 27% for full year 2024, driven by Xtant taking over the supply chain for both internally produced products and improved vendor management of the acquired Surgalign products. We see solid growth in the first half of the year with increasing velocity as we introduce more of our own and goods in the second half of this year.
In closing, I want to reiterate our mission of honoring the gift of donation by allowing our patients to live as full and complete a life as possible. I appreciate the dedication of our valuable employees. Without them, our success and achievements would not be possible. Thank you for joining us today and for your continued support.

Operator

Thank you. That does conclude our call. All parties may now disconnect. Enjoy the rest of your day.