Greetings, and welcome to the Xtant Medical Fourth Quarter and Full-Year 2023 Financial Results Conference Call. A question-and-answer session will follow the formal presentation. Currently, everyone is 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 FINN Partners. Please go ahead.

Thank you, operator, and welcome to Xtant Medical’s fourth quarter and full-year 2023 financial results call. 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 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 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-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 a replay this call was held and recorded on Monday, April 1 at approximately 9:00 a.m. Eastern 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. 2023 was a transformative year for Xtant Medical. It was a culmination of a multi-year turnaround effort in which we establish what we believe is now a robust platform for future growth. Now with the foundation of exceptional market access and a nationwide distribution network established, we have created a scalable business model that resulted in record revenue in 2023 and has generated positive EBITDA -- adjusted EBITDA for the last three consecutive quarters. For the fourth quarter of 2023, we generated revenue of $28.1 million, an increase of 84% year-over-year. We're seeing positive returns of our business by achieving annual revenue growth of more than 58% in 2023 with our full year revenue of $91.3 million coming in ahead of our guidance range. Our organic revenue growth for the fourth quarter of 2023 was 9%. This excludes the contributions from our 2023 acquisitions and as adjusted for a reclassification of our GPO fees, as Scott will explain later. Full year fiscal 2023 adjusted organic growth was 17% over full year of fiscal 2022. In summary, full year 2023 was transformative. As previously mentioned, we grew by over 58% with adjusted organic growth of 17%. In addition to our record revenues, we finished the year with three straight quarters of positive adjusted EBITDA. Secondly, we acquired three separate businesses. Third, operationally, we improved our clean room capacity by over 50%. Fourth, we dramatically improved our margins by 540 basis points through improved operational efficiencies and improved mix of product. And then lastly, we ended the year with an even stronger balance sheet with greater availability through our revolver to help us fund our growth. By driving solid execution of our key growth pillars, we have significantly enhanced our financial position, enabling us…

Thank you, Sean, and good morning, everyone. Total revenue for the fourth quarter of 2023 was a record $28.1 million compared to $15.3 million for the same period in 2022. Our 84% annual increase is attributed primarily to greater independent agent sales contributions from the Coflex and CoFix product lines opportunistic private label sales and product sales from the recently acquired Surgalign hardware and biologics business. During the fourth quarter of 2023, we reclassified all GPO fees incurred during the full year as offsets to revenue from their previous classification as SG&A expense. As a result, organic and total revenue growth rates for the fourth quarter of 2023 were downwardly impacted by approximately 800 basis points to 1,000 basis points, respectively, with fourth quarter 2023 organic growth before the reclassification totaling 9%, our organic growth as reported, totaled 1% in each case over fourth quarter 2022 organic growth. Gross margin for the fourth quarter of 2023 was 61% compared to 54.4% for the same period in 2022. The increase was primarily attributable to greater production efficiencies and favorable product mix partially offset by higher product costs. Fourth quarter 2023 operating expenses were $20.9 million compared to $10 million in the same period a year ago. As a percentage of total revenue, operating expenses were 75% compared to 66% in the same period a year ago. General and administrative expenses were $8.9 million for the three months ended December 31, 2023, compared to $4 million for the same period in 2022. This increase is primarily attributable to additional compensation expense, acquisition-related legal expenses, amortization of intangible assets associated with the Coflex and CoFix product lines and higher consulting fees associated with acquisition-related activities. Sales and marketing expenses were $11.6 million for the three months ended December 31, 2023 compared to $5.8 million for the same period of 2022. This increase is primarily due to additional commission, compensation expense and higher professional service fees. Net loss for the fourth quarter of 2023 was $4.3 million or $0.03 per share compared to a net loss of $2.2 million or $0.02 per share in the comparable 2022 period. Adjusted EBITDA for the fourth quarter of 2023 was $0.7 million compared to an adjusted EBITDA loss of $0.8 million for the same period in 2022. As of December 31, 2023, we had $5.9 million of cash, cash equivalents and restricted cash, $20.7 million of net accounts receivable and $36.9 million of inventory. As Sean mentioned earlier, in March, we increased our availability under our revolving credit facility to $17 million to help fuel our future growth. Operator, you may now open the line for questions.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first questions come from the line of Ryan Zimmerman with BTIG. Please proceed with your question.

Good morning and thanks for taking the questions, and congrats on all the progress, guys.

Thanks, Ryan.

I wanted to start on ‘24 guidance, if you could. Appreciate the color you gave on seasonality. I appreciate some of your comments on the contributions. But can you expand a little bit more, Sean, Scott, just on how you think about the breakdown of the legacy business versus some of the contributions from the Surgalign business and maybe expand a little bit on what you think the growth drivers are for '24? And again, appreciating that the stem cell dynamics kind of come into play beginning in the second quarter.

Okay. I'll jump in first, and Scott, I'll let you add any color to it. So Ryan, to be -- when we think about the contributions of Surgalign, first of all, we had great contributions in the fourth quarter from both the Surgalign domestic business as well as the international business. But as I mentioned, one of the problems we're having is the supply chain of -- they were basically selling things right off the shelf. So we're catching up in getting those supply chains and those suppliers to start filling up our inventories again, which is a good problem to have, and we have -- the demand is there and it's growing. So when I think about, like, for instance, you asked one of the questions is, where do we see growth that is coming from Surgalign in the next year. They -- we released a brand-new product line called Cortera, which has really taken off and done very well. As a matter of fact, one of the first things we did is, we added more sets to that product line and quite frankly, we probably were short on it. We actually should have gone longer than we did. And so, we're going to get some nice growth from that, that will really be coming in the second half of the year from Surgalign's perspective. Another big area for us will be some of the OEM production that we'll be doing specifically on the OEM or I mean, on the Amnion side, and then some of the other base core biologics stuff. We've got a new fiber product that's going to be coming out this year. You're going to see a fair amount of things that just from a stem cell perspective, we are now in a position where -- finally, where we've got enough product on hand where we can actually start meeting the demands and we've never ever been in a position like this. So as we look at the second quarter, we'll start to see a nice pickup with respect to our stem cells. And then just with our overall OEM and other production that's going to take place in the second half of this year, we expect to see things really start to take off both in our own biologics production as well as in what we'll see from the Surgalign hardware side.

Okay. That's very helpful. And Scott, you alluded to a couple of opportunistic OEM orders, I think in the fourth quarter. Talk to me about the environment here, what you think you can do with that business? Wondering, just given our coverage of some of the other companies that are struggling in these areas. I'm curious if there's a read-through here that you're able to capitalize on maybe some other companies that may be struggling there. And just on the OEM side? And then I have a couple of follow-ups.

Yeah. I think early on in the year, we won't necessarily see the contribution we did in Q4 or even Q1 of last year on the OEM side. I do think there is a particular opportunity there in the back half of the year, both on legacy products, but also in a way of new production, both in stem cell and amnion. So we look forward to that but we do expect to be quieter on that front at the initial part of the year.

Okay. Very helpful. And then gross margins have been really nice to see. They've come in a little bit over the past three quarters, but still hovering over the 61% level. Do you expect that to continue in '24 and kind of where do you think you can take those gross margins as we get the stem cells back online?

Yeah. I think our gross margins really trend with the stem cells and also the source of those where we see that coming in from an internal standpoint, that will be a significant driver of gross margin improvement. And then as we also add a little more mix in way of hardware, that should also bump up margins as well. But I think as the product mix goes, so too will gross margin and we'll look for that to improve throughout the course of the year.

Okay. Thanks for taking my questions, guys. Appreciate it. Good answers. Thank you.

Thanks, Ryan.

Thank you. Our next questions come from the line of Chase Knickerbocker with Craig Hallum. Please proceed with your question.

Good morning, guys. Congrats on the good finish of the year here.

Thanks, Chase.

Maybe starting on a couple of financial ones for Scott. GA looks like it was a bit elevated as a percentage of sales in Q4. Can you just kind of walk me through what might have been in that in Q4 and kind of the right way to think about it as a percentage of sales, how it kind of trends through 2024.

Yeah. I think there's probably three main drivers you're seeing there, Chase. The first being acquisition-related expenses, which you'll see or see broken out in the adjusted EBITDA table. The second piece of that is going to be commissions. And then, third, I think we ran a little high just for certain compensation components that should back up or become more normalized going forward. So as a percentage of revenue, I expect that to come back down, but those are really the three main drivers of it.

Got it. Thanks. And then maybe on 2024 guidance, it looks like it assumes something in kind of the mid-single digit range for an organic growth rate perspective. I appreciate those comments that you gave kind of on those two dynamics. But should I think of this as building in quite a bit of conservatism, if we're looking at something in the mid-single digit range from an organic growth perspective or should I think about your business slowing from an organic perspective in 2024?

As I would jump in on this one, is that, yeah, there's a fair amount of conservatism just because there's some unknowns, right? And so, but we feel very good that there's a significant upside. So yes, there's some conservative pieces to this. We do think that eventually, we can get to double-digit on the organic side of things. It's just going to be in the second half of the year.

Got it. And I just kind of want to pick up on some of the stem cell trends that you kind of talked about a little bit in the previous Q&A. It sounds like you guys are kind of not supply constrained there as far as kind of inventory goes at the moment. Kind of when did that inventory kind of improve? And is that something you expect to kind of continue through the year and your conversations with your suppliers?

Literally last week is when it improved. So yeah, so with one of our main suppliers -- the main supplier for whom we work with, we had started providing donors that they could start processing which was new, and that started in the beginning part of this year. And so those donors have now just recently been cleared. We had some very high-yielding donors with -- yeah, so we're very flush and we plan to be flush with inventory throughout the year of this. And so within literally the last days of the quarter, we had the inventory that we can now start to sell. So our guys are really starting to gin up what was the demand we previously had and then, of course, demand that we've had to walk away from over the course of the last few years.

I mean it seems like it's kind of a supply constraint kind of market at the moment. Do you expect that to get billed pretty shortly or do you think there is kind of some chasing down of volume that you need to do? And then second, as it relates to that kind of trend with the stem cell business, should we think of gross margins kind of showing improvement year-over-year, not quite as much as in 2023, but still meaningful kind of year-over-year improvement kind of as you have a more favorable product mix?

Yeah. So here's what I'd tell you is that the initial demand is still really very tight. This is actually part of why for us providing donors to our supplier was a big part of it, right? So that's one of the things that at least helped us get out, but many of the guys that are out there today who are on selling this are still struggling to get enough product out there. So there is still some supply constraints. We just happen to be in a much better position than we were even, gosh, three months ago, never mind the last half of 2024. And then when we think about margins for that product line specifically, the margins for this product line because we are supplying donors is going to be a little bit tighter in the first part -- first half of the year, but in the second half of the year will get substantially better.

Thanks. And maybe just last kind of the Coflex update, kind of talk about how that product did in Q4 and kind of steps you're taking to kind of improve reimbursement and kind of the updates there?

Sure. Yeah. So really pleased with where that business is today. Again, this was a complete revival project. This was one that the focus that we've put towards both the clinical and the reimbursement side is this just something quite frankly, from Surgalign's perspective, it's so much going on that this was really a hard thing to focus on and so we have done that. And so I'm really excited about what we've been able to at least stabilize the business and now we're starting to win some new plans like we just got coverage for a great plan, regional plan in New York that gives us basically almost full coverage in New York. So having the fourth largest state in the union fully covered, this is really kind of a nice milestone for us. So we believe that we've seen the bottom with that business, and we believe that we're now going to be starting to grow it. And so we're really kind of excited about where are the prospects for that business, especially because it is such a great technology. I think everybody on this call, if I just rationally explain to you the beauty of what Coflex does in a way of motion preservation, and just, again, what it does for people clinically or therapeutically. It's just a great product. So we're really excited about its prospects.

Got it. And last one, and then I'll hop back in the queue. Sorry, guys. Scott, just kind of good sequential improvement in adjusted EBITDA, that margin started to tick up. I mean, just kind of speak to your confidence in 2024 continuing to improve that adjusted EBITDA margin, even despite some of these kind of internal investments you guys are making?

Yeah. I think it gets back to Sean's initial comment, as it relates to our product offering. I think all of those things, in addition to the improvements we've made in way of yield improvements and scrap reduction, etc., will all provide nice sequential improvements to gross margin both during the course of 2024 and beyond. So we feel really good about that.

Great. Thanks, guys.

Thank you. And at this time, we have no more questions. I'll turn the call back over to Sean Brown for any closing remarks.

Thank you, operator. Overall, I'm very pleased with the progress we have achieved in '23. In short, we almost doubled our revenue with both strong organic growth and the assistance of three newly acquired businesses. We dramatically improved our margin by over 540 basis points, resulting in positive adjusted EBITDA for three consecutive quarters. Our efforts in expanding our capacity and distributor network have allowed us to meet the increasing demand for our biologics and fixation products, enabling scalability. We are enthusiastic about leveraging this momentum to further our overarching goal of maximizing shareholder value. We have laid revenue growth guidance of between 23% and 27% for full year 2024 driven by Xtant taking over the supply chain for both internally produced products and improved vendor management of the acquired Surgalign products. We see solid growth in the first half of the year with increasing velocity as we have produced more of our own goods in the second half of this year. In closing, I want to reiterate our mission of honoring 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.

Thank you. That does conclude our call. All parties may now disconnect. Enjoy the rest of your day.