Welcome to the Xtant Medical Holdings, Inc. Third 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. Please go ahead, sir.

Thank you, operator. 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 with such words as expect, plan, will, may, anticipate, believes, should, and tends, in 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 of the company's annual report on Form 10-K followed by SEC on April 1st, 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 and GAAP reconciliations, which appear in our press release and are otherwise available on our website. Note that our Form 8-K filed with our financial results press release provide a detailed narrative that describes our use of such measures. For the benefit of those of you who may be listening to a replay, this call was held and recorded on November 12th at approximately 4.30 p.m. Eastern Time. The company declines any obligation to update its forward-looking statements except that it is required by law. Now I'd like to turn the call over to Sean Browne. Sean, the floor is yours.

Thank you, Brett, and good afternoon, everyone. I am pleased to announce a solid growth for the third 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 to $120 million, which we reaffirmed today. This range represents total annual revenue growth of approximately 27% to 31% compared to the full year of 2023. Despite solid year-over-year growth for the quarter, sales were softer than we expected due to slight delays in our launch of two new products, OsteoVive Plus, our new stem cell product, experienced validation delays. In Cortera, our new pedicle screw system was met with supplier issues. 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 positive in Q4 of 2024 as we continue to focus on profitability and self-sustainability. Our operating expenses were lower in the third quarter compared to the three immediate preceding quarters as we continue to rationalize expenses and become more efficient. 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 3Q codes and the corresponding SimpliMax dual-layer amniotic membrane. We received a $1.5 million upfront payment for this in October, and the terms of this agreement provide for full licensing and royalty revenues, aggregating…

Thank you, Sean, and good afternoon, everyone. Total revenue for the third quarter of 2024 was $27.9 million compared to $25 million for the same period in 2023. The 12% increase is attributed primarily to product sales from the recently acquired Surgalign hardware and biologics business, although a reduction in surgical procedures partially offset year-over-year growth. Gross margin for the third quarter 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 of an internally produced stem cell product, which was partially offset by greater scale. Third quarter 2024 operating expenses were $20.1 million compared to $18.7 million in the same period a year ago. As a percentage of total revenue, operating expenses were 71.9% compared to 74.8% in the same period a year ago. Sequentially, operating expenses declined $1.4 million and remained consistent as a percentage of revenue compared to Q2 2024. General and administrative expenses were $7.5 million for the three months ended September 30, 2024, compared to $7.1 million for the same period in 2023. This increase primarily attributable to severance expense, an increase in stock-based compensation partially offset by reductions in various compensation plans. Sales and marketing expenses were $11.9 million for the three months ended September 30, 2024, compared to $11.1 million 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 three months ended September 30, 2024, an increase from $490,000 in the third quarter of 2023. This increase is primarily due to increased headcount related to our increased focus on new product introduction. Net loss in the third quarter of 2024 was $5 million, or $0.04 per share, compared to net income of $9.2 million, or $0.07 per share, in the comparable 2023 period. I'll note that net income during the third quarter of 2023 included a $13.3 million gain on bargain purchase and tax benefit resulting from our acquisition of the Surgalign hardware and biologics business. Adjusted EBITDA for the third quarter 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 $7.1 million of cash, cash equivalents, and restricted cash. Net accounts receivable of $20.5 million, inventory of $41.9 million, and we had $3.8 million available under revolving credit facilities. Operator, you may now open the line for questions.

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

Hi, everyone. This is actually Izzy [ph] on for Ryan, so thanks for taking the question. I just wanted to start out about your commentary on some of the third 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. So I was just wondering if you could provide some more color around that and what trends you've been seeing in fourth quarter so far.

And, Scott, I'll jump in this, and then if you want to add any color. So, Izzy, first of all, thanks for the question. Second 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. 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 in the fourth quarter, we're seeing normal things going back to normal. So if I may add one other element to this, this is the first year since really COVID where we at Xtant have seen this summer, would 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. But when you look at when COVID hit in ‘20 and ‘21, the hospitals and systems and areas of the country were just getting shut down. In ‘22 and ‘23, 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 two, three and four weeks off like we saw in the summer. And so this is the first 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?

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

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?

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

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 Bio will starting to pick up additional revenues such that it will pull away and take on more of our overall revenue share.

Yeah, nothing more to add to that, yeah.

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?

Scott?

Yeah, 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 three to four points in the way of gross margin improvement and then continuing improvement on operating leverage in the way of OpEx.

All right, thanks, guys. Thank you for taking the questions.

Thanks, Izzy [ph]. Appreciate it.

[Operator Instructions] And we'll move next to Chase Knickerbocker with Craig Hallum.

Hi, guys. It's Jake on for Chase. Thanks for taking the questions. I'm just wondering, if we think about Q4 in 2025, what sort of contribution do you think VBN [ph] can have and is this contribution more on the white label side or the distributor side? Maybe talk us through the mix. Thank you.

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

Yeah, I think probably going back to Q3, what we 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, on the private label and white label side. But we'll still see a modest significant pickup on the distributor side.

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

Okay, thank you. That's helpful. And then one more for you guys. How are you thinking about profitability next year and where we should be modeling leverage? Is it going to be largely on the gross margin side or maybe more on the operating line?

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? Improved margins, improved 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.

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

Thanks very much, guys.

And there are no further questions -- I apologize, we do have an additional question that will come from Ankur Sagar [ph]. Please go ahead.

Hey, good afternoon, Sean and Scott. Thank you for taking my questions. I have two. One, 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 – that provides a minimum of north of $5 million in royalty fees. I would appreciate if you can just elaborate on that. What opportunity is that? And when do you expect that?

So we got the first -- upon signing, we had $1.5 million up front. And then we had a minimum of $3.75 million that would be coming 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. The good news is most of that $3.75 million is front-ended in the first half of the year. But we actually 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.

I see. And then already in November -- I mean based on the -- you have kept the guidance pretty much the same. So you expect some ramp in Q4 a top-line, and there is still a delta between 116 and 120. 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?

Yeah, it's both. It's the OEM -- well, first of all, even some of the things that were ordered in the third quarter we couldn't ship and got moved into the fourth quarter, so that's a little bit of what happened. Yes, we will see a nice pickup in our OEM business, so that will help them, but we're also going to see a nice pickup in our Cortera business. And Cortera, if you know anything about pedicle screws, the one thing that's great about it is 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 love to lock it down tighter than that, but I'm going to stay with what we have right there.

Okay, okay. And then just one more for Scott. In terms of, I think Q4, we'll probably have – you mentioned positive cash flow. I think Q1 is where you have the sales and commission, so next year. But beyond that, I think you mentioned in Q2 that the company does expect to be cash flow break-even 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 get the cash flow break-even?

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 would be 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 effective or more efficient revenue from a working capital standpoint in that it's revenue at the faster DSOs going into the OEM channel. And in addition to that rather than putting inventory out on a consignment basis, we're moving it into finished goods and shipping it. So we carry less or much 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.

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

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

Great. Thank you, Operator. We made great progress in the third quarter of 2024. As we close out 2024, we believe there are two key drivers for Xtant to become a self-sustaining, profitable company. First, build our own biologics. 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 manufacturers' 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. 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. Thank you for joining us today and for your continued support.

This concludes today's conference call. Thank you for attending. Goodbye.