Xtant Medical Holdings, Inc. (XTNT) Q2 2021 Earnings Report, Transcript and Summary

Greetings and welcome to the Xtant Medical Second Quarter 2021 Financial Results Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to Matt Steinberg of Lazar FINN Partners. Please go ahead.

Thank you, operator and welcome to Xtant Medical's second quarter 2021 financial results call. Joining me today is Sean Browne, President and Chief Executive Officer and Greg Jensen, Vice President, Finance and 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 meaning. Such forward-looking statements are not guarantees of future performance and involve risk 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 February 24th, 2021 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 the tables of our press release and are otherwise 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 the replay, this call was held and recorded on Thursday, August 5th at approximately 9 A.M. Eastern Day Light 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 Browne.

Thank you, Matt and good morning to everyone listening. In the second quarter, we achieved solid revenue growth compared to last year as we took advantage of the rebound in elective spinal procedures and the reopening of the broader economy. With elective procedures now trending closer to pre-COVID levels, we believe our platform for growth, including our exceptional market access, our high quality biologics, our niche fixation products, and improve bio production capabilities puts the company in a position to drive this momentum going forward. Even so, we remain cautious given the rapidly evolving pandemic dynamics. As I've said before, the mission of Xtant is what I feel is one of the keys to our success. In my over 30-year career, I have found that those companies who most embody their mission, tend to view most successful and at Xtant, our mission of honoring the gift of donation so that our patients can live as full and complete a life as possible, drives everything we do. It is our mission that helps to keep the team focused when facing challenges like the one faced approximately 18 months ago, when our manufacturing facility was at maximum capacity and product preference it shifted to Xtant's cortical fiber based products. As a result, the team quickly adapted and increased our manufacturing capabilities to meet the demand for cortical fiber based products, which are significantly more difficult to make and benefit from specific donors. Through the tireless work of our production and donor services teams, we successfully met this challenge by increasing our production capacity by almost 50% and expanding the donor base to include the specific donors needed. These changes will allow us to now serve OEM and adjacent market opportunities in addition to meeting the demands of our core customers. What might not be as obvious is the reengineering of our manufacturing processes, the hiring of additional engineers, the upgrading of our manufacturing equipment, and adjusting our donor procurement process has allowed Xtant to better fulfill its mission by improving the efficiency of how we process our donors, and enabling them to change the lives of even more patients. Aside from the obvious improvements in production yields and the cost benefits from this type of focus, it also speaks to a company that is on the rise and driven by its mission. Alongside our increase in manufacturing capacity, we've been working hard to expand our platform for growth. Personally, I'm thrilled by the future prospects created as a result of the significant investments we've made during the past 18 months and ongoing investments and our four key pillars of growth, which include one, new product introduction; two, expansion of our distribution network; three, adjacent market opportunities; and four, targeted strategic and technology acquisitions. I'll now summarize each of these pillars in more detail starting with new product introductions. If you think about the best companies, they all have a robust and healthy new product pipeline. At Xtant this will be a major driver of new growth. For example, the two new product lines that we launched last year, Matriform SI and OsteoVive PLUS have both performed well and are growing nicely this year. We remain on track this year to release four new biologic products that we believe will contribute to revenue in the second half of the year, including a planned September launch of OsteoFactor, which is our new marrow-derived growth factor product that we are very excited about. Our longer term goal is to introduce four to six new products per year, including the rollout of our next generation of demineralized bone matrix and expansion of our complimentary fixation products. The second pillar of growth is that we are expanding our marketing programs and distribution network to drive greater market penetration. I'm pleased with the progress we've made on this front in the second quarter by making several additions to our commercial team and signing new distributors that have already started contributing to our topline. We also made solid progress by expanding our distribution network into some of the more populated regions where we previously did not have strong coverage, such as in the Midwest and Northeast. Moreover, we believe this geographic expansion will also help diversify and mitigate risk to our distribution network moving forward. As you may recall, Xtant's three largest revenue contributing states were hit particularly hard by COVID in 2020, and in the first quarter of 2021. So, we believe distributor expansion across additional new geographic regions will help grow, diversify, and fortify our topline. Our third pillar of growth is that we are leveraging our new manufacturing capacity and using the new talent on our commercial team to go after adjacent markets. In past years, Xtant had neither the sales focus nor the manufacturing capacity to take advantage of these types of opportunities. These adjacent markets, which include foot and ankle, cranial maxillofacial, oncology, joint reconstruction, and trauma markets are attractive since they do not require new products, just the ones that we already make. For example, we estimate the potential U.S. bone graft market and these adjacent markets is $625 million, making it a significant growth opportunity. Finally, our fourth pillar of growth is that we may pursue strategic acquisitions to enhance and complement our product portfolio. With our recent pipe of transaction and debt refinancing, we now have a strong balance sheet and a public currency. So, we believe there are technologies and companies that are either undercapitalized or subscale that could be added to our growth platform. We believe this will be key for our business moving forward, as will help us gain scale and fill in gaps and Xtant's product offering and customer market access. Now, looking ahead to the second half of 2021, our focus remains on three key areas; number one, under continued execution of our key growth initiatives; number two, improvement in our operational efficiency; and number three, expansion of our manufacturing capabilities. We believe our strong balance sheet positions as well to invest in opportunities across our target and adjacent markets, especially as the number of elective procedures continues to normalize. Overall, we are pleased with our performance for the second quarter as we look to sustain our momentum going forward. Now, I would like to turn the call over to our CFO, Greg Jensen for a discussion of our second quarter 2021 financial results.

Thank you, Sean and good morning everyone. Total revenue for the second quarter of 2021 was $15 million, an increase of 42.2% compared to $10.5 million in the same quarter of the prior year. The revenue increase was largely due to easing of restrictions associated with the COVID-19 pandemic in our key markets, resulting in an increase in the number of elective procedures. Gross margin for the second quarter of 2021 was 63.5% compared to 62.2% for the same period in 2020. The increase was primarily due to greater economies of scale. Operating expenses in the second quarter of 2021 were $10 million, compared to $6.9 million for the second quarter of 2020. As a percentage of total revenue, operating expenses were 66.8% in the second quarter of 2021 compared to 65.9% in the second quarter of 2020. General and administrative expenses were $4.2 million for the second quarter of 2021, compared to $2.9 million for the same period in 2020. The increase was primarily due to illegal settlement expense and an increase in stock-based compensation expense during the current year period, partially offset by expenses during the prior year period for ERP upgrade related expenses. Sales and marketing expenses were $5.6 million for the three months ended June 30th, 2021, compared to $3.9 million for the same period of 2020. The increase was primarily due to additional sales commissions due to higher revenues versus the comparable period in 2020. Net loss in the second quarter of 2021 totaled $0.7 million or $0.01 per share, compared to a net loss of $2.5 million or $0.19 per share in the comparable 2020 period. Adjusted EBITDA for the second quarter of 2021 was $0.9 million compared $0.3 million for the same period in 2020. As of June 30th, 2021, we had $20.5 million of cash and cash equivalents, $7 million of net accounts receivable, $21.1 million of inventory, and $5 million available under our term credit facility. Now, I will turn a call back to Sean for closing remarks.

Thank you, Greg. To recap, Xtant experienced a strong rebound and solid revenue growth during the second quarter of 2021, which was driven by an increase in the number of elective spinal procedures as the broader economy reopened. We believe the execution of our growth strategy has us well-positioned moving forward as investments in our commercial headcount and distribution network will allow Xtant to grow and diversify our customer platform, while the investments in our manufacturing capabilities should allow us to meet additional demand. As we introduce new products to the market and leverage our adjacent market opportunities, we believe we are taking the necessary steps to enhance Xtant's future growth prospects. Additionally, our improved financial position allows us to invest in our long-term growth initiatives, thereby clearing the way for us to bring our innovative products to the patients in need. We remain cautiously optimistic that the elective procedure volumes will continue to normalize over the second half of the year, which will further allow us to fulfill our mission of honoring the gift of donation. Thank you for joining us today and for your continued support. End of Q&A: Thank you. This does conclude today's call. You may now disconnect your line.