Greetings. You're welcome Xtant Medical's Second Quarter 2023 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] 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 Xtant Medical's second quarter 2023 financial results call. Joining meme today is Sean Browne, President and Chief Executive Officer; and Scott Neils, Chief Financial Officer. Today's call is being webcasted 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, intend, 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 on the company's annual report on Form 10-K filed with the SEC on March 7th, 2023, 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 Tuesday, August 1st, at approximately 9:00 AM Eastern Daylight 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 everyone. On today's call, there are a number of key company updates that I'd like to highlight. Most notable, we delivered revenue growth of 32% year-over-year, driven by our core biologics and fixation businesses guided by our mission of honoring the gift of donation so that our patients can live as full and complete a life as possible. And following our four key growth initiatives, we are pleased with the progress that Xtant continues to make on our long-term business strategy. I'd also highlight that we closed the second quarter with adjusted EBITDA. This milestone was achieved faster than our internal expectations, underscoring the continued execution of our strategy. I am thrilled with the performance of our team and thank them for their incredible efforts that made this possible ahead of schedule. Last Friday, we announced that Xtant was the winning bidder for Surgalign's domestic and international biologics and spinal fixation businesses. Needless to say, we are thrilled at this opportunity to expand our footprint with new contract and distributors. We are working on next steps and will update you on status and closing. The financial guidance that we are providing today excludes any impact of this transaction if and when we close this transaction, we plan to update our financial guidance. In breaking out this quarter's performance, I want to first provide a reminder of our four key growth pillars, and they are focused on; one, new product introductions; two, distribution network expansion; three, adjacent market penetration; and four, strategic acquisition. We are pleased that we continue to generate solid demand for our biologics products. We are driving growth across all channels of our business, and we are seeing positive contributions from our newly acquired Coflex interlaminar stabilizer device. The integration that Coflex…

Thank you, Sean and good morning everyone. Total revenue for the second quarter of 2023 was $20.2 million compared to $15.3 million for the same period in 2022. This robust 32% annual increase is attributed primarily to greater independent agent sales and contributions from the recently acquired Coflex and Cofix product lines. Gross margin for the second quarter of 2023 was 61.6% and compared to 54.8% for the same period in 2022. The increase was primarily attributable to the contribution of Coflex and Cofix products, partially offset by higher production costs. Second quarter 2023 operating expenses were $13.9 million compared to $9.7 million in the same period a year ago. As a percentage of total revenue, operating expenses were 68% compared to 63% in the same period a year ago. General and administrative expenses were $5 million for the 3 months ended June 30, 2023, compared to $3.8 million for the same period in 2022. The increase is primarily attributable to the additional expenses related to Coflex acquisition. Sales and marketing expenses were $8.7 million for three months ended June 30th, 2023, compared to $5.6 million for the same period in 2022. This increase is primarily due to additional sales commissions from higher revenues and increased salaries and wages from the Coflex acquisition. Net loss in the second quarter of 2023 was $2.2 million or $0.02 per share compared to a net loss of $1.7 million or $0.02 per share in the comparable 2022 period. Adjusted EBITDA for the second quarter of 2023 was $0.1 million compared to an adjusted EBITDA loss of $0.4 million for the same period in 2022. As of June 30th, 2023, we had $4.4 million of cash, cash equivalents, and restricted cash; $13.7 million of net accounts receivable; $20.4 million of inventory; and $3 million available under revolving credit facility. Subsequent to the end of the quarter, Xtant closed a private placement with credited 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. At this time, we will be conducting a question-and-answer session. [Operator Instructions] And our first question comes from the line of Chase Knickerbocker with Craig-Hallum Capital Group. Please proceed with your question.

Good morning Sean and Scott. Congrats on another good quarter here.

Great. Hey Chase. How are you?

Hey Sean, thanks. I want to start by peeling back the onion a little bit here in hardware. What was the Coflex contribution approximately? And what dynamics are you seeing there, particularly around any improvements you may be trying to drive in reimbursement story there? And I've got 19% organic growth in legacy hardware, just kind of rough numbers in my model. What's driving the strength there? And I guess do you expect it to continue?

So, I'll unpack that a little by little. So, first things first, when you look at the fixation business overall, we're really thrilled about where that is, especially given where we have been. So, when we look at that fixation just year-over-year, prior year variance, year-over-year on the base business, prior year, it was over like 7%, at least on the fixation business, when you throw in the Coflex business, which was another 14% of our overall revenue, net-net. It was a very nice -- a very good quarter for us. When you look at the reimbursement story, and this is actually something that when you think about Coflex and Coflex overall as a business, this is one that is about a reimbursement story. And so we're getting our guys very, very focused on the Medicare and Medicare Advantage markets. Those are two extraordinary opportunities for us that just that alone could more than make this a huge winner for us. So, that's something, at least from our end, we have the guys -- our new sales team really focused and going after that market as much as possible. And so we're very, very bullish about what that even just that alone never mind any kind of commercial pickups that we get along the way. But that is really kind of our starting point. So, I hope I answered kind of the questions you were looking for there.

No. Yes, that all makes sense. In orthobiologics, what was the impact of those OEM orders? And how do you kind of strike a balance between supporting those OEM orders and also fully shipping to that independent distributor channel? Are you kind of caught up in demand in that independent distributor channel now? Or I guess, how should we think about kind of how you make the decision between those two channels?

Yes. Happily, we're caught up, which is not where we were a year ago. So, as we mentioned, the access capacity both in labor and now, we're really excited about with actually the planned expansion that we had. So, right now, when you look about the OEM business is about 8.6% of our overall revenue. So, again, like anything, you always want to promote your own brand. And so right now, the fact that our Xtant brand continues to be about 91% of what we do, we want to keep that going, right? So, that's always a good thing. Certainly, it looks like higher margins, the one thing I will say is our OEM business nets out about the same from an operating income perspective. So, it's -- it doesn't help the gross margins when you look at it. However, from a bottom line perspective, it's still a very nice business. And so yes, so we're -- we have not had to make those big decisions between those businesses. I mean there are some product lines, for instance, when we talk about Putty. Putty is one of the things that is a high OEM demand, and we can fill up our whole facility with just OEM demand on that. However, that's not an optimal use of a donor. And so we want to make sure that we're controlling how much of that is going to go out the door. And so again, if you think -- and you go back to our mission, and this is the thing about our business, which is one of the most not only the most mission-driven organization for me, but it's also one that is most congruent or at least has the same goal that our shareholders have. So, if we're doing the right thing by the donor, and we're doing the right thing and honoring that gift, we're going to be producing the best possible products. And so certainly, our Putty product is one that's outstanding. It's a 510(k) product. We really like it. However, we think there's better uses of that donor for a higher end use products. And so we'll always keep an eye on making sure we're not making too much of that. But for the most part, our OEM business is something that we enjoy. And if there's anything that we put any kind of control on it will be on the Putty side.

Got it. And then maybe staying there. Capacity expansion, it's good to hear that those clean rooms are built, you had said 50%. How much of that is online now? And I guess, is it kind of staffed up already? And then if that's coming on line in second half, talk me through why that orthobiologics growth rate would not increase in the second half relative to the first half, is that kind of increased capacity is going to be met pretty quickly to see that OEM demand or independent channel as well?

Yes. Okay. Good question. I'll break that down or unpack that. First foremost, the -- not all of the clean rooms are online because we're still ramping up some of the training that has to take place, but some of it is. So, it's about a third of it is right now. There's still another two-thirds that we would have that. But still, it's more than enough what we need with respect to the demand that we've got coming in. And that's the immediate demand, right? We're not talking about what we do in cross-selling even our Coflex distributors never mind what will take place with our Surgalign line distributor. So, we expect that the rest of that will be up and running here in the next month. So, we should have the capacity to be able to manage the demand that comes from that. So, I hope -- and then to get to your question about how would we look at moving forward. And I think that's part of the reason why we raised our guidance from $73 million to $75 million to $75 million to $77 million, is that we do see that we will have an increase and we believe that our biologics business is looking really strong right now.

Got it. Thanks. Six months now since the since the Coflex acquisition, those distributors that you brought on, then that were selling Coflex, kind of talk through any success you've had growing your wallet share there, in particular, obviously, with biologics, is six months enough of a kind of time period to kind of know how quickly you can kind of grow that wallet share after you acquire those distributors essentially?

Actually, it's really since -- if you remember, we got that in March. So, it's really we're at four months now, so July. So, we're getting a good indication, the first thing first with this group. And this is, again, priority number one, two and three, and it goes back to that organizational discipline, organizational focus. We need to make sure that, first of all, the sales team that we have that we inherited, there were 10 territories in which five were open when we got it, two people stepped out. And so we really to fill seven different spots. And so getting the sales team right on that, first and foremost. Second, making sure our Coflex distributors that are there understand really the full value proposition. I guess if there was one fairly significant opportunity, I would say, on the Coflex side is that the distributors didn't understand the reimbursement story at all. And so it was catch us catch can. And so that's one of the things that I will say that we're very, very disciplined in how we're focusing in on where the best opportunities lie and because of that, we're starting to get some more traction. And so then as we start thinking about how do we grow and how do we get more out of that, I really want to make sure that, first and foremost, we get those guys focused on what they have in front of them. And then the more we get an opportunity to get them going where they need to go, is that then we'll start introducing more of our other products because quite frankly, we've got plenty to work with, with our base Xtant business in way of both the biologics and fixation opportunities. But those Coflex distributors are there. We're probably a few months still away from being able to start to cross-sell to them because, quite frankly, I really want to get first thing first with that. Any more questions or I am -- there's a deadline here. I hope I didn't get turned off.

I think it cut out there for a second, Sean. I got you back now.

Okay, good.

And then just last one for me if I could sneak one more in. On Surgalign, what liabilities would you be assuming there if that deal does close? And was there any hollow revenue at Surgalign? We should be thinking kind of the substantial amount of the revenue that with Surgalign is what you're -- kind of you're acquiring those assets that were the substantial amount of revenue there?

Yes. So, we're having -- we have nothing to do with hollow at all. So everything we're going to get is all from the base instrument business. Now, overall, I'm also -- I don't want to jinx the deal, anyway so we're holding off all questions on the Surgalign until that closes. That closes actually, I should say, the judge sprinkles the Holy Water, if you will, on that on the 8th of August, and then we will then be closing, hopefully, soon after. And what I'd like to do at that point in time is really start answering and potentially even having a call at that time with respect to what that will mean for us because it is certainly very material, and that will also mean that we'll be changing our guidance based on that acquisition. So, if I may hold off on all that, to let the dust settle because I hate to get in front of that if, in fact, something were to go a skew.

Yes, totally fair. Thanks and congrats again on the good quarter.

Thanks Chase. Appreciate it.

And at this time, we have no more questions. I'll turn the call back over to Sean Browne.

Thank you, operator. Before closing, I'd like to reiterate a few key points. First, our second quarter revenue growth of 32% year-over-year demonstrates the encouraging returns of our four key growth pillars. Two, we achieved these results through a diligent approach of increasing our capacity, thereby fulfilling the high order demand of our biologics and fixation products. Three, we are financially strong as illustrated by our second quarter positive adjusted EBITDA that we achieved faster than we originally planned. And our latest infusion of cash through the fundraising we did earlier in the month has us with a really strong balance sheet right now. Four, strategically, we are leaning forward, exploring other roll-up and bolt-on acquisitions. And five, the increase of our annual revenue guidance to $75 million to $77 million further illustrates our confidence in our business and strategy. With the strong demand and growth across our major product lines, we look forward to building upon this momentum and our broader goal of maximizing shareholder value. Finally, our mission of honoring the gift of donation by allowing our patients to live as full and complete a life as possible, it's 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 support.

Thank you. That concludes our call. All parties may now disconnect.