Q3 2021 Xtant Medical Holdings Inc Earnings Call

Ladies and gentlemen, thank you for your patience you are holding for today's extra at medical conference call. At this time, we are gathering additional participants and will begin momentarily. We appreciate your patience and ask that you. Please continue to hold.

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Greetings and welcome to the extent third quarter financial results Conference call. At this time all participants are in a listen only mode. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.

As a reminder, this conference is being recorded.

I'd now like to turn the conference over to your host David carried at Finn partners. Thank you you may begin.

Thank you operator, and welcome to <unk> Medical's third quarter 2021 financial results call.

Joining me today is Sean Brown, President and Chief Executive Officer, and Greg Jensen, Vice President Finance and Chief Financial Officer.

This 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 <unk> 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 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 February 24, 2021, and 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 maybe listening to the replay. This call was held and recorded on Friday November 12 at approximately nine a M Eastern standard time.

The company declines any obligation to update its forward looking statements, except as required by applicable law now ill turn the call over to Sean Browne.

Thank you David and good morning to everyone listening in my comments. This morning, I'm going to address the following one the impact of the Covid Delta variant on our business this past quarter, which was similar to what its impact on other companies in the spine industry.

Our Q3 revenue results, which on a relative basis, we're better than most of the market leaders in the spine industry three our key growth initiatives and progress made on those initiatives and then for changes in our gross margin.

I had hoped to never again bring up COVID-19 in the context of the company's financial performance on a macro level as we have seen with other medical technology companies that have recently reported the Covid Delta wave has had a negative impact on financial results across the board.

Following our solid second quarter, the rapidly expanding delta variant began to severely impact elective spinal procedures and some of our core markets. While July results were good overall, we'd actually met all of our internal financial goals. The months of August and September proved to be challenging despite those challenges.

I'm pleased with our topline results when comparing our topline results against the leading players in the spine market on a relative basis, we outperformed or fared as well as the biggest names in our industry, which we feel it can be attributed to our focus on key growth initiatives that have helped us diversify our revenue stream.

Third quarter, we continued to make great progress against those key growth initiatives, our focus on new product introductions distribution network expansion and penetration into adjacent markets, which will continue to diversify our revenue stream have us poised to leverage our platform for growth.

<unk> the company for long term success in many respects are focused on diversifying our revenue stream has also become a strategic advantage.

Is that diversity that helps stabilize our third quarter revenues as we began to see significant increases in our original equipment manufacturer or OEM channel sales at the same time that we began to see softness in our independent agent or I E channel sales due to the Covid Delta variant, although OEM channel sales typically.

Lower gross margins, they generally have a slightly better operating margins compared to our traditional IAA channel sales OEM channel sales also provides an opportunity to serve adjacent markets, including the foot and ankle cranial maxillofacial oncology joint reconstruction trauma markets. These adjacent market opportunities allow the company.

Further purchase paid and there are $625 million plus U S bone graft market without having to develop new products, which is why we see them as a significant growth opportunity for the company.

As we previously stated we have established a regular cadence of new product releases, which began earlier this year during the third quarter. We continued to execute on this promise with the September launch of Osteo factor, a uniquely processed allograph containing retained growth factors found within the endosteum layer of allograft bone.

This marrow derived growth factor product is very safe highly effective easy to use and customizable more importantly, ostial factor adds to our broad biologics product portfolio and enables us to penetrate a 670 million plus dollar growth factor market.

The steel factor is our third new product introduced this year with our forest product or bone marrow aspirate concentrate set to be introduced during the fourth quarter.

Another critical part of our growth strategy is targeted at expanding our distribution network, both in penetrating existing agents and bringing on new agents at the start of the year, we set out to add 10, new agents per quarter I am pleased to report that through the third quarter. We had brought on 41 new agents.

We are also diversifying the territories, where our agents are selling given our strong market presence in large states, such as Texas, California, Arizona, Georgia, and Pennsylvania, our expansion strategy targets regions, where we historically have not had a robust presence such as in the Midwest, The mid Atlantic and New England with <unk>.

Alta variant impacting our largest revenue contributing states in the third quarter, we believe expanding and diversifying geographically will mitigate risks to our distribution network and ultimately to our revenues moving forward. Our final key growth initiative focuses on pursuing strategic acquisitions designed to enhance and complement our product portfolio.

Needless to say those endeavors take time, however, we continue to explore opportunities that align with our growth platform provide scale fill product or technology gaps expand into adjacent markets or broadened our access to customers now.

The final topic I would like to discuss is the decline in our gross margins during the third quarter, which was due in part to the Covid. The Covid Delta variant and to a more significant degree to the strategic and intentional decisions. We made as a management team the impact of the strategic and intentional decisions on our gross margins.

It can be summarized by the following one about a third of our gross margin softness was related to accidents revenue mix, which showed a greater combination of lower gross margin OEM channel sales versus our higher gross margin independent agent channel sales as mentioned above even though OEM channel sales have a lower gross margin they provide us.

Slightly better operating margin than the IAA channel sales. So we plan on continuing to pursue these opportunities too.

Two thirds of our gross margin softness was intentional and more importantly is expected to be temporary as it was the result of our team's efforts to lower our finished goods inventory and optimize the production of our donors.

Is that our team has taken steps to improve efficiencies through capital investment and optimization of the production of our donors. We determined that there was no need to produce cancellus products. During the third quarter. This reduced our finished goods inventory by over 2 million. However, it also temporarily reduced the overhead absorption rate for the third.

Quarter, Greg will provide greater detail on the gross margins when he reviews the financials, but the good news is that we expect to see gross margins improve as the demand for electric procedures return to pre COVID-19 levels. The improvement will be driven by an increase in the IAA channel sales combined with an increase in the overhead absorption rate from higher production levels.

That said given the current state gross margins will likely remain soft during the fourth quarter and into the first half of 2022.

Now looking to the fourth quarter and beyond we intend to focus primarily on executing our four key growth initiatives. We realized that the pandemic has caused adverse effects on general commercial activity and the global economy that could linger into 2022. However, we believe steps we are taking to grow our distribution network expand into <unk>.

Jason markets improve our operational efficiency and increased capacity will help us improve our growth potential. In addition by operating with a healthy balance sheet, we are well positioned to invest and leverage our growth platform for future value creation now.

Now I'd like to turn the call over to our CFO, Greg Jensen to discuss our third quarter 2021 financial results.

Thank you Sean and good morning, everyone total revenue for the third quarter of 2021 was $13 8 million compared to $14 million in the same quarter of the prior year.

Sean mentioned earlier the revenue decrease was attributed to significantly lower sales from the distributor sales channel because electric procedures across our key markets were significantly impacted by COVID-19. However on a positive note. We saw significant increase in our OEM revenue during Q3, which we believe is an.

Acacia and that our initiatives to expand into other vertical markets are showing early signs of success, we remain focused on future growth opportunities by expanding into other adjacent markets.

Gross margin for the third quarter of 2021 was 52, 2% compared to 66% for the same period in 2020. The decrease in gross margin was attributed to three key factors, which include the shift in the sales channel mix lower absorption of labor and overhead expenses and finally.

An increase in the excess and obsolete inventory expense.

The shift in the sales channel mix was evidenced by the significant increase in OEM and private label sales combined with a corresponding decrease in the distributor sales channel since OEM and private label sales carry lower gross margins the impact on gross margin was $500000 or three 4%.

Of the total gross margin percentage decline.

The lower absorption of labor and overhead expenses totaled $800000 or five 6% of the total gross margin percentage decline.

Some of our inventory reduction efforts have decreased our finished goods inventory by $2 million in.

<unk>, because we have reduced our production lead times from eight weeks to three weeks. It has enabled us to improve our working capital and equally as important has reduced our time to ship OEM customer orders from 90 days to 45 days. Finally, we saw an increase in excess and obsolete inventory expense.

Totaling $300000 or two 2% of the gross margin decline.

Operating expenses in the third quarter of 2021 were $8 6 million compared to $8 5 million for the third quarter of 2020.

As a percentage of total revenue operating expenses were 62, 9% in the third quarter of 2021 compared to 66% in the third quarter of 2020.

General and administrative expenses were $3 1 million for the third quarter of 2021 compared to $3 million for the same period in 2020 the.

The increase was primarily due to additional salary expenses and the write down of product registration fees for the South American market, partially offset by reduced employee performance based compensation expense.

Sales and marketing expenses were $5 3 million for the three months ended September 32021, relatively flat compared to the same period of 2022.

The three months comparison included reduced commissions expense, resulting from a greater mix of original equipment manufacturer sales, partially offset by increased salary expenses marketing expenses and finally travel expenses.

Net loss in the third quarter of 2021 totaled $1 8 million or <unk> <unk> per share compared to a net loss of $1 4 million or <unk> 10 per share in the comparable 2020 period.

Adjusted EBITDA for the third quarter of 2021 was $500000 loss compared to a $1 $6 million gain for the same period in 2020.

As of September 32021, we had $18 2 million of cash and cash equivalents $6 3 million of net accounts receivable $19 $7 million of inventory and $5 million available under our credit facility now I will turn the call back to Sean for closing remarks.

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Thank you Greg to summarize we are pleased that our dedicated team continues their strong execution against the persistent backdrop of the ongoing pandemic. Despite the broader market challenges we plan to stay the course with our strategy because we believe the pandemic related headwinds are temporary and we are confident in the opportunities and benefits of our leading spy.

Brand with positive momentum from our actions earlier this year to increase our manufacturing capabilities and invest in our key growth initiatives. We believe we are putting the company in a position to grow topline revenues over the long run on a parallel track, we continue to optimize our manufacturing capabilities, which will allow us to meet additional demand.

While optimizing inventory levels as we look beyond COVID-19 and elective procedures begin to normalize we feel extent is poised to benefit from the combination of the increased market access newly introduced differentiated products and ability to achieve scale.

And finally I'd like to end on a positive note with a story that reinforces our mission as we announced last month, we honored Samuel <unk> Becker of donor hero as part of our sponsorship of the 2020 to donate life float at the Rose Bowl parade in Pasadena on New year's day, Sam was a person who gave freely and frequently had every.

Intention of making the world a better place for everyone. Sam gave us time money smile humor, compassion empathy and ultimately himself census, passing through bone and tissue donation part of Sam lives on and the patient recipients, whose lives are greatly improved thanks to Sam's gift we are proud to celebrate the life a sandbagger.

Extraordinary gift enables others to have a full life our support of Sam donate life encourage to hub, which is the title of the 2020 to donate life Rose Bowl parade float closely aligned with our mission of honoring the gift of donation by allowing our patients to live as full and complete a life as possible our thoughts prayers and.

<unk> are with the Sam and the Becker family.

That concludes our call. Thank you for joining us today and for your continued support.

Thank you.

This concludes today's conference. Thank you for your participation you may now disconnect your lines.

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