Xtant Medical Q3 2024 Earnings Call Transcript

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Provided by Quartr
November 12, 2024

There are 7 speakers on the call.

Operator

Welcome to the Xtant Medical Holdings, Inc. 3rd Quarter 2024 Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session. I would now like to turn the call over to your host, Brett Maas, Investor Relations.

Operator

Please go ahead, sir.

Speaker 1

Thank you, operator. Joining me today is Sean Brown, President and Chief Executive Officer and Scott Neals, 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 such words as expect, plan, will, may, anticipate, believes, should, intends and other words with similar meaning.

Speaker 1

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 ks 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 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 ks filed with our financial results press release provide a detailed narrative that describes our use of such measures.

Speaker 1

For the benefit of those of you who may be listening to a replay, this call was held and recorded on November 12 at approximately 4:30 p. M. Eastern Time. The company declines any obligation to update its forward looking statements except as required by law. Now I'd like to turn the call over to Sean Brown.

Speaker 1

Sean, the floor is yours.

Speaker 2

Thank you, Brett, and good afternoon, everyone. I am pleased to announce a solid growth for the 3rd quarter with 12% growth for the quarter and 36% growth year to date. We are on pace to achieve our full year revenue guidance of $116,000,000 to $120,000,000 which we reaffirm today. This range represents total annual revenue growth approximately 27% to 31% compared to the full year 2023. Despite solid year over year growth for the quarter, sales were softer than we expected due to slight delays in our launch of 2 new products, OsteoVibe Plus, our new stem cell product, experienced validation delays and Cortera, our new pedicle screw system was met with supplier issues.

Speaker 2

We have since overcome these challenges and both product lines were released in late September and are well received by our distributors and surgeons. We are bullish on these products and believe they will help us finish strong for fiscal year 2024. From a profitability perspective, our adjusted EBITDA results for Q3, which Scott will cover in a moment, reflect the effect of these product delays I just discussed. Year to date, we remain profitable on an adjusted EBITDA basis with $435,000 In addition, we anticipate being adjusted EBITDA in Q4 of 2024 as we continue to focus on profitability and self sustainability. Our operating expenses were lower in the Q3 compared to the 3 immediate preceding quarters as we continue to rationalize expenses and become more efficient.

Speaker 2

Another important development in October, we signed a licensing agreement with a significant player in the advanced wound care market. The deal includes licensing one of our 3 Q codes and the corresponding SimplyMax dual layer amniotic membrane. We received a $1,500,000 upfront payment for this in October and the terms of this agreement provide for full licensing and royalty revenues, aggregating a minimum of $3,750,000 in 2025. This incremental revenue will bear little to no incremental costs and will therefore carry high margins that will fall directly to our bottom line. As a historical backdrop and this is taking a step back, but to put into context where our business has been and where we are going.

Speaker 2

Remember, at the end of fiscal year 2022, so no less than 2 years ago, we were only a $58,000,000 revenue business. By the end of this year, we expect to have doubled in size with 20.24 revenues between $116,000,000 $120,000,000 The acquisitions we made last year have greatly assisted us in first getting greater scale. Scale is extremely important when it comes to the continued growth of our GPO and IDN agreements. And without access to hospitals, our businesses will not grow. Secondarily, the SurgeLine acquisition has revitalized our X Stand hardware line.

Speaker 2

For instance, our Coflex inter laminar stabilization device is a one of its kind motion preservation alternative that perfectly complements our ASC focused offering. That ASC offering includes our Silex SI fusion device and Axle, our inner spinous process device. Xtant's cervical offering is second to none with a full three sixty degree complement of products, which includes our anterior ServaLine system, our posterior Streamline system and a complete line of interbody devices. With the release of Cortera, we now have a best in class pedicle screw system to complete our hardware offering. From a biologics perspective, our number one priority for fiscal year 2024 was to bring all manufacturing in house.

Speaker 2

The strategic rationale for that was 2 fold. 1st, we've been on the wrong end of supply disruptions with some of our fastest growing products. In the past 3 years, we believe this accounted for approximately $10,000,000 to $15,000,000 in lost revenue. By manufacturing our products in house, we control our supply chain, the production and the availability of our products to sell. Secondly, and more importantly, we are substantially more profitable when making and selling our Xtant branded products.

Speaker 2

The gross margins for our distributed stem cell, growth factor, Amneo and Synthetic products range from mid-40s to 60% gross product margins. When we make these products in house, our product margins increase substantially from the mid-eighty percent to the low 90% margins. Moreover, strategically, Xtend is now positioned to grow more profitably as an OEM supplier for companies in the spine market and other adjacent markets. For instance, our new Amnio line, which we expect to sell about $1,000,000 of our Xtant brand this year, is a great addition for us as a surgical barrier for spine procedures. With our new offering, we can now serve more spine customers with a better product and substantially better margins.

Speaker 2

Additionally, we now have OEM customers in the wound care, foot and ankle and sports medicine markets who are now buying this from Xtant and this year will exceed over $2,000,000 in just OEM amnio sales. Similarly, our new stem cell product line has created a terrific OEM opportunity in not only spine, but also in the trauma and foot and ankle markets. The beautiful part about OEM deals are that they do not carry any sales and marketing expenses, thereby carrying 60% to 70% contribution margins. Now shifting over to operational leverage. One important concern that our shareholders have voiced and I would like to address directly is our operational leverage.

Speaker 2

I would like to assure all of you that we continue to find ways to reduce our expense base as we complete the integration of the Surgeline businesses and keenly focus now on profitability. As previously mentioned, the last three quarters, our quarterly operating expenses have decreased over the immediately preceding quarter, and we continue to look for opportunities to cut costs and leverage our substantially increased scale. Rounding out fiscal year 2024. So fiscal year 2024 is shaping up largely as we expected with the second half performing better than the first half as we implemented actions and improvements to address supply chain challenges and gain greater control over the production of our products. We've worked through most of the challenges that have impacted our fastest growing products.

Speaker 2

And in May, we raised our original revenue guidance, if you remember, was $112,000,000 to $116,000,000 when it became clear that many of the issues affecting our surg line hardware line and our distributed non manufactured stem cells have been resolved. We remain on track to deliver the revenue guidance that we established back in May of $116,000,000 to $120,000,000 with what we believe will be a breakout 4th quarter with all of our hard work finally paying off with increased revenues. Now moving to our new product pipeline. Like every healthy, robust organization, we continually innovate with a deep pipeline of new products. During our turnaround, we expanded our biologics product offering from 2 product categories to 5, which helped enhance our growth profile.

Speaker 2

Moreover, we are one of the few orthobiologics companies that offers the complete line of orthobiologics, which includes allograft, demineralized bone matrix, synthetics, viable bone matrix or stem cells as we call them and growth factor. Over the next two quarters, we will be the only orthobiologics company that is vertically integrated where we make our own products and sell them under our own brand. Along with our Amneo products, I also mentioned that we have completed the production of our own viable bone matrix, better known as stem cells. This has been our fastest growing product line for Xtant over the last 3 years. However, our growth of this of this product has been constrained due to outside vendors that we relied on relied upon with the supply chain.

Speaker 2

With now a far superior product available with a significantly improved cost profile, we believe we will be able to profitably grow our Xtant brand in the stem cell market significantly. Moreover, there continues to be a supply shortage of stem cells, and we believe we can become a major OEM provider for other orthopedic companies with this product line. Fiscal year 2025, we expect our OsteoVive plus viable bone matrix will be our largest product line. Lastly, I briefly mentioned earlier the release of our Cortera Pedicle Screw System.

Speaker 3

This new system is

Speaker 2

a next generation posterior system that has a feature rich screw designs with a comparatively low profile and newly designed locking mechanisms. We released Cortera at NASH and we received rave reviews from prospective surgeons. We expect this rollout will help drive nice growth for Xtant in Q4 and beyond. These are just a few of the exciting new products that are coming down the pipe. In short, we have a fantastic product pipeline of short to mid term winnable opportunities for clinically validated, commercially proven products that serve large and growing markets.

Speaker 2

These future products will take advantage of our existing operational and quality infrastructure. Most importantly, they will not require significant investments in new product development or overly big lifts in clinical evidence or regulatory clearances. Moving forward, we are focused on becoming operationally self sustaining by controlling our supply chain and less reliant on production outside our 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 to a large and growing patient population.

Speaker 2

Most importantly, we believe these actions will help us to get to positive adjusted EBITDA during the Q4 of 2024. Now, I'd like to turn the call over to Scott, who will discuss our Q3 2024 financial results.

Speaker 4

Thank you, Sean, and good afternoon, everyone. Total revenue for the Q3 of 2024 was $27,900,000 compared to $25,000,000 for the same period in 2023. The 12% increase is attributed primarily to product sales from the recently acquired Surgeline Hardware and Biologics business, although a reduction in surgical procedures partially offset year over year growth. Gross margin for the Q3 of 2024 was 58.4% compared to 61.3% for the same period in 2023. The decrease was primarily attributable to reduced throughput resulting from the delayed launch internally produced stem cell product, which was partially offset by greater scale.

Speaker 4

3rd quarter 2024 operating expenses were $20,100,000 compared to $18,700,000 in the same period a year ago. As a percentage of total revenue, operating expenses were 71.9 percent compared to 74.8% in the same period a year ago. Sequentially, operating expenses declined $1,400,000 remained consistent as a percentage of revenue compared to Q2, 2024. General and administrative expenses were $7,500,000 for the 3 months ended September 30, 2024, compared to $7,100,000 for the same period in 2023. This increase primarily attributable to severance expense and increase in stock based compensation, partially offset by reductions in various compensation plans.

Speaker 4

Sales and marketing expenses were $11,900,000 for the 3 months ended September 30, 2024, compared to $11,100,000 for the same quarter last year. This increase is primarily due to higher commission expenses related to increased sales. Research and development expenses were $701,000 for the 3 months ended September 30, 2024, an increase from $490,000 in the Q3 of 2023. This increase is primarily due to increased headcount related to our increased focus on new product introduction. Net loss in the Q3 of 2024 was $5,000,000 or $0.04 per share compared to net income of $9,200,000 or $0.07 per share in the comparable 2023 period.

Speaker 4

I'll note that net income during the Q3 of 2023 included a $13,300,000 gain on bargain purchase and tax benefit resulting from our acquisition of the SurgeLine Hardware and Biologics business. Adjusted EBITDA for the Q3 of 2024 was a loss of $193,000 compared to adjusted EBITDA of $458,000 for the same period in 2023. As of September 30, 2024, we had $7,100,000 of cash, cash equivalents and restricted cash. Net accounts receivable of $20,500,000 inventory of $41,900,000 and we had $3,800,000 available under revolving credit facility. Operator, you may now open the line for questions.

Operator

Thank you. At this time, we will conduct a question and answer session. And our first question will come from Ryan Zimmerman with BTIG.

Speaker 5

Hi, everyone. This is actually Izzy on for Ryan. So thanks for taking the questions. I just wanted to start out about your commentary on some of the 3rd quarter results. I know you guys noted that some of the product delays impacted the top line, but you also called out some softness in the procedure environment.

Speaker 5

So I was just wondering if you could provide some more color around that and what trends you've been seeing in Q4 so far?

Speaker 2

And Scott, I'll jump in this and then if you want to add any color. So, Eddy, first of all, thanks for the question. 2nd of all, what we saw was actually the summer months of July. July actually was soft. August was very soft and it was actually tied directly to just our doctors going on vacation.

Speaker 2

It's as simple as that and I hate to say it, but as we become more of a hardware company, there's more of that that a hardware doctor is one that's going to be much more impactful both upside and downside. Now good news is we saw it bounce back in September. And so and in the Q4, we're seeing normal things going back to normal. So if I may add one other element to this. This is the 1st year since really COVID where we at Xtant have seen this summer, what I say, slowdown, which was customary in almost all of the other you look at healthcare writ large, but in particular in the world of spine.

Speaker 2

But when you look at when COVID hit in 2020 2021, the hospitals and systems and areas of the country were just getting shut down. In 2022 and 2023, we just saw doctors trying to make up for all of those, even though they may have taken a week off, they weren't taking 2, 3 4 weeks off like we saw this summer. And so this is the 1st summer that we've seen where things actually went back to normal prior to COVID. So that is how I would answer that. Scott, do you have any more that you want to add to that?

Speaker 4

No, I think that's a pretty comprehensive account of kind of the new development in what historically or of late has not existed in the way of seasonality.

Speaker 5

Got it. That's helpful. And then just shifting gears a little bit. Do you guys mind speaking to the revenue mix this quarter between orthobiologics and spinal implants. I was just curious if as you guys transition to in house manufacturing, you expect to see a change in this mix and kind of what a steady state may be going forward?

Speaker 2

Scott, I'll let you take that, then I'll add my color.

Speaker 4

Sure. I think during the course of 2024, we'd see it splitting out roughly 55%, 45%. I think as we move into future years, we'll see bios starting to pick up additional revenue such that it will pull away and take on more of our overall revenue share.

Speaker 2

Yes, I have nothing more to add to that. Yes.

Speaker 5

And then I know we're not going to get any guidance today, but I was just wondering if you guys have any early considerations for us to keep in mind as we start to think about 2025?

Speaker 2

Scott?

Speaker 4

Yes. I mean, as it comes to 2025 guidance, we'll provide formal guidance when we release Q4 earnings in March. But I think broadly speaking, it is still early yet of course. But I think on the revenue side, we'll look for revenue growth approaching double digits. I think we'll look for perhaps maybe 3 to 4 points in way of gross margin improvement and then continuing improvement on operating leverage in the wave OpEx.

Speaker 5

All right. Thanks guys. Thank you for taking the questions.

Speaker 2

Thanks, Stacy. Appreciate it.

Operator

And we'll move next to Chase Knickerbocker with Craig Hallum.

Speaker 6

Hi, guys. It's Jake on for Chase. Thanks for taking the questions. I'm just wondering, if we think about Q4 and 2025, what sort of contribution do you think VBM can have? And is this contribution more on the white label side or the distributor side?

Speaker 6

Maybe talks through the mix. Thank you.

Speaker 2

Scott, you want to jump in on this? I'll add my color.

Speaker 4

Yes. I think probably going back to Q3, what we've laid out during the course of Q4, we expect minimal impact on the distributor side. I think the pickup in Q4 will be on the white label side. And then as we get into 2025, we'll see predominantly more again in the private label and white label side, but we'll still see a modest significant pickup on the distributor side.

Speaker 2

And a lot of that is tied to the fact that we're still working through the inventories of our distributor products. That's why we won't see it as much or even at all from our own product in the Q4, but we will start to see it definitely in the Q1 of 2025.

Speaker 6

Okay. Thank you. That's helpful. And then one more for you guys. How are you thinking about just profitability next year and where we should be modeling leverage?

Speaker 6

Is it going to be largely on the gross margin side or maybe more on the operating line?

Speaker 2

I'll jump in here, then Scott, I'll let you dive in. So more broadly, it's going to be a little bit of both, right? Improve margins, improve leverage on our expenses. And then I think just also the top line sale of hopefully higher margin products. So from a profitability perspective, we think that's a pretty good mix.

Speaker 4

Yes. I'll just add to that. If we continue the trend that we've seen during the course of 2024 with sequential improvement in operating leverage, I think that helps significantly in way of profitability. And I think within gross margin, we see something similar where we can pick up maybe to 3 to 4 points during the course of 2025.

Speaker 6

Thanks very much, guys.

Operator

And there are no further questions. I apologize. We do have an additional question that will come from Ankur Segarh. Please go ahead.

Speaker 3

Hey, good afternoon, Sean and Scott. Thank you for taking my questions. I have 2. 1, I think I caught a there was a mention of some licensing agreement in the press release for the earnings release, something regarding the Q codes that can actually provides a minimum of north of $5,000,000 in royalty fees. I would appreciate if you can just elaborate on that, what opportunity is that?

Speaker 3

And when do you expect that?

Speaker 2

Yes. So we get the first upon signing, we had $1,500,000 upfront. And then we have a minimum of $3,750,000 that would be coming in this in fiscal year 2025. Those are minimums. A lot of it depends on what goes on within that wound care and the LCDs that are sitting out and people are waiting for.

Speaker 2

The good news is most of that $3,750,000 is front ended in the first half of the year. And but we actually we expect that this could be significantly more if the company we're working with does what we think it can do. So that's really just kind of what the minimum of that deal is.

Speaker 3

I see. And then with already in November, I mean, based on that you have kept the guidance pretty much same. So you expect some ramp in Q4 top line and there is still a delta between $116,000,000 $120,000,000 What is your confidence level on that achieving that guidance probably even coming on the high end. Is it just the new products that can probably add to it? I mean, is that the OEM portion of it?

Speaker 2

Yes, it's both. It's the OEM. Well, first of all, even some of the things that were ordered in the Q3, we couldn't ship and got moved into the Q4. So that's a little bit of what happened. Yes, we will see a nice pickup in our OEM business, so that will happen.

Speaker 2

But we're also going to see a nice pickup in our Corteva business. And Corteva, if you know anything about pedicle screws, the one thing that's great about it, it pulls through a lot of other biologics too. So in general, we're feeling good about the 116 to 120, and I'd love to lock it down tighter than that, but I'm going to stay with what we have right there.

Speaker 3

Okay. Okay. And then just one more for Scott. In terms of I think Q4 will probably have you mentioned positive cash flow. I think Q1 is where you have the sales and commission, so next year.

Speaker 3

But beyond that, I think you mentioned in Q2 that the company does expect to be cash flow breakeven or generate positive on cash. Is that predicated on the revenue growth and the gross margin improvement or even without that the model can we can get the cash flow breakeven?

Speaker 4

Well, it reflects a few things, maybe starting first with Q4. I think given the timing of some of the Q3 revenue that will threaten cash flows from operations within Q4 just because we had anticipated that revenue being on the balance sheet as receivables that we collected during Q4. But in turn, we'll see more of that remaining in receivables in Q4. But looking forward into 2025, it's not only the revenue growth, it's the type of revenue, it's more effect or more efficient revenue from a working capital standpoint in that it's revenue at the faster DSOs selling into the OEM channel. And in addition to that, rather than putting inventory out on consignment basis, we're moving it in finished goods and shipping it.

Speaker 4

So we carry less much or much or less capital within the inventory line item on our balance sheet and we expect that to speed up our cash flows and be more efficient from a working capital standpoint.

Speaker 3

Okay. All right, great. Thank you for taking my questions.

Operator

And there are no further questions at this time. I'd like to turn the conference back to management for closing remarks.

Speaker 2

Great. Thank you, operator. We made great progress in the Q3 of 2024. As we close out 2024, we believe there are 2 key drivers for Xtant to become a self sustaining profitable company. 1st, build our own biologics.

Speaker 2

This is a big quarter for our internal development team. The more we produce of our highly profitable biologics, the less we rely on other manufacturer supply chains. We believe this one step alone will help us get to positive adjusted EBITDA in Q4. Secondly, optimizing the integration of the businesses we bought last year. We see great growth opportunities, many of which we have not been able to leverage due to supply constraints.

Speaker 2

However, we feel we have fixed most of these challenges. Additionally, there are still more opportunities to leverage costs as the businesses come together. In closing, I want to reiterate our mission to honor 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.

Speaker 2

Thank you for joining us today for your continued support.

Operator

This concludes today's conference call. Thank you for attending. The host has ended this call. Goodbye.

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Key Takeaways

  • Revenue growth: Q3 sales rose 12% year-over-year to $27.9 million, with year-to-date growth of 36%, and the company reaffirmed its full-year 2024 guidance of $116 million to $120 million (27%–31% growth).
  • Product launch resolution: Delays in the launches of OsteoVibe Plus stem cell product and Cortera pedicle screw system weighed on Q3 but were cleared in late September and are expected to drive strong Q4 performance.
  • High-margin licensing deal: In October, Xtant signed a licensing agreement for its SimplyMax dual-layer amniotic membrane, receiving a $1.5 million upfront payment and a minimum of $3.75 million in royalties in 2025, with little incremental cost.
  • In-house biologics manufacturing: Bringing biologics production internally is boosting gross margins from mid-40s/60% to mid-80s/90% and opening OEM opportunities with 60%–70% contribution margins.
  • Profitability trajectory: Adjusted EBITDA loss narrowed to $0.2 million in Q3, and the company targets positive adjusted EBITDA in Q4 2024 through expense rationalization and operational leverage.
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Xtant Medical Q3 2024
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