Xtant Medical - Earnings Call - Q2 2025

Executive Summary

• Q2 2025 delivered meaningful outperformance: revenue grew 18% year-over-year to $35.4M, gross margin expanded to 68.6%, and the company returned to profitability with net income of $3.6M and adjusted EBITDA of $6.9M.
• Results were well above Wall Street consensus: revenue beat by ~12.9% and EPS swung to a positive $0.02 vs an expected loss of -$0.01; adjusted EBITDA materially exceeded estimates, aided by licensing and royalty revenue and cost discipline. Q2 2025 estimates from S&P Global: revenue $31.35M*, EPS -$0.01*, EBITDA $0.9M* (Values retrieved from S&P Global).
• Guidance raised for FY25 revenue to $131–$135M (from $127–$131M), reflecting 11%–15% y/y growth and strengthening execution in core biologics; management intends to update outlook post the pending divestiture of non-core Coflex/CoFix and international businesses to Companion Spine for ~$19.2M proceeds.
• Stock reaction catalysts: sustained margin expansion from vertical integration and royalty/license revenue; a cleaner portfolio post divestiture, reduced debt and improved liquidity; and validation from sequential guidance raises.

What Went Well and What Went Wrong

What Went Well

• Strong top-line growth and mix: revenue +18% y/y to $35.4M, driven by orthobiologics and licensing; gross margin expanded to 68.6% (from 62.1%) on royalty revenue, lower product costs, and scale.
• Profitability inflection: net income $3.6M vs loss of $3.9M prior-year; adjusted EBITDA $6.9M vs loss of $0.6M y/y; positive operating cash flow of ~$1.2M.
• Strategic focus and portfolio cleanup: definitive agreements to sell non-core Coflex/CoFix and OUS businesses (~$19.2M proceeds) to strengthen the balance sheet and focus on higher-margin biologics; CEO: “We delivered strong financial and operating results… enhancing our focus on our core biologics business… driving operating leverage, consistent profitability, and cash flow”.

What Went Wrong

• Continued reliance on non-GAAP adjustments: adjusted EBITDA excludes separation-related expenses, non-cash compensation, divestiture/acquisition-related costs, fair value adjustments, and FX; methodology recast since Q4 2024, complicating comparability.
• Operating expense still sizable: total OpEx $19.7M, though improved y/y vs $21.5M; sales and marketing remains the largest component ($11.6M), implying ongoing investment needs.
• Execution risks around divestiture financing and timing: transaction subject to Companion Spine funding and customary conditions; if delayed, interim deposits contemplated, and note maturity by year-end adds timing risk.

Transcript

Speaker 4

Good morning, everyone, and welcome to Xtant Medical's second quarter 2025 financial results. At this time, all participants are in a listen-only mode, and the floor will be open for questions following the presentation. If anyone should require operator assistance during this conference, please press star zero on your phone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Kevin Gardner of LifeSci Advisors. The floor is yours.

Speaker 5

Thank you, operator, and welcome to Xtant Medical's second quarter 2025 financial results call. Joining me today are Sean Browne, President and Chief Executive Officer, and Scott Nielson, 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 the Form 10-K filed with the SEC 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 August 12th at approximately 8:30 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 Xtant Medical's President and CEO, Sean Browne.

Speaker 1

Thank you, Kevin, and good morning, everyone. I will cover a few of our second quarter financial and operational highlights in a moment, but I would like to begin this morning with a recap of our recent announcement that we entered into an agreement to sell certain non-core Coflex interlaminar stabilization implant assets and OUS entities of Paradigm Spine to Companion Spine, a French-American company fully dedicated to posterior dynamic stabilization and motion preservation. Companion Spine is a portfolio company of the Vescoliosi Brothers, a family-owned investment firm specializing in the neuromuscular cell space. The proceeds of the transaction are expected to total approximately $19.2 million, consisting of $11 million in cash and $8.2 million in short-term seller financing in the form of an unsecured promissory note to be issued by Companion Spine to Xtant. The promissory note will mature on December 31, 2025.

Upon closing the transaction, we anticipate to occur during the third quarter of 2025. We intend to use the proceeds to reduce long-term debt and provide additional cash liquidity. The sale of these non-core assets will allow us to focus resources on driving growth in our biologics platform. Given the performance of the business and the proceeds of this transaction, we do not expect to require additional capital to fund operations. Now, let's turn to Q2 2025 highlights. I'm pleased to report that we delivered strong financial and operating results. Scott Nielson will cover the financials in detail in a moment, but I'd like to begin by touching on a few highlights. First, our total revenue for the quarter was $35.4 million, which represents growth nearly 18% versus the second quarter of 2024.

Notably, our second quarter 2025 revenue includes nearly $5 million in licensing revenue pursuant to the license agreement for Q-Code and the SimplyMax dual-layer amniotic membrane that we announced in the third quarter of last year. As we indicated last quarter, CMS has extended the local coverage determination for skin substitutes to December 31, 2025, which opens the door for additional royalty income and cash generation during the second half of 2025. Biologics also turned another solid quarter, growing more than 20% over the second quarter of 2024, demonstrating that our sharpened focus on this core part of our business, including recent product launches, is having the anticipated positive effect on our results.

Building on our first quarter results, we again achieved a positive adjusted EBITDA, net income, and cash flow from operations for the second quarter, reflecting both our strong top-line performance and greater contribution from higher margin biologics, as well as our ongoing focus on prudent expense management and driving operating leverage in our business. As for new product launches, the second quarter was also particularly active for us in terms of new biologic product introductions. Recall that during the first quarter, we achieved a significant milestone by becoming the first fully vertically integrated biologics company to manufacture all of our products in-house. This gives us control over our supply chain, ensuring the highest product quality while also driving improved gross margins and at the same time delivering an enhanced customer experience.

In May, we announced the commercial launch of OsteoFactor Pro, a naturally occurring cocktail of allogenic growth factors engineered to improve bone healing and support surgical success across orthopedic and spine procedures. OsteoFactor Pro is an off-the-shelf, ready-to-use solution that is designed to integrate seamlessly with synthetic allograft or autograft scaffolds and provides surgeons with exceptional versatility and biologic performance to support a wide range of bone regeneration approaches. Notably, the launch of this growth factor product, Xtant, now offers solutions across all five major orthobiologic categories: demineralized bone matrix, cellular allografts, synthetics, structural allografts, and now growth factors. Also, during the second quarter, we took a major step forward in bone grafting technology with the launch of Trivium, a premium demineralized bone matrix with three synergistic elements designed to deliver exceptional performance in structure, handling, and biological activity. This advanced composition creates an ideal environment for healing and regeneration.

Early feedback from surgeons has been encouraging, and since DBM comprises greater than 60% of our biologics business, this favorable reception demonstrates the successful execution of our go forward strategy. OsteoFactor Pro and Trivium are just two examples where we developed next-generation biologics products in-house, allowing us to capture higher revenue and margins while in parallel delivering superior patient outcomes. Okay, on to revenue guidance. As we indicated last quarter, 2025 is all about advancing towards self-sustainability, emphasizing our organic revenue growth, profitability, and cash generation. With new products launched, targeted growth opportunities, recent cost-cutting initiatives, and the planned sale of certain non-core assets, we are on a path to restoring the business to a sustainably profitable and cash-generating position, as reflected in our second quarter results.

We are experiencing heightened levels of licensing revenue from the previously noted Q-Code and amniotic membrane agreements, which have enhanced our revenue performance to date, and we anticipate should continue to do so through at least the remainder of this year. Reflecting these licensing contributions, as well as our current outlook for product revenue, we are raising our full-year 2025 revenue guidance to a range of $131 million to $135 million, which represents growth of approximately 11% to 15% over the company's 2024 revenue. This compares to prior revenue guidance of $127 million to $131 million, representing 8% to 11% growth. Note that this updated outlook does not take into account the pending sale of our non-core Coflex and OUS businesses to Companion Spine. We intend to revisit this full-year outlook after closing that transaction.

While the decision to close that transaction and the timing thereof is not solely at our discretion, we anticipate a closing during the third quarter of 2025. For help with modeling in the interim, however, you can assume that the businesses being sold to Companion Spine are currently generating an annual revenue run rate for Xtant of approximately $23.5 million. Beyond the revenue effect, note that these businesses were modestly unprofitable on a standalone basis, so the effect of the sale on our margins and bottom line metrics is anticipated to be neutral to slightly positive. With that, I will turn the call over to Scott Nielson for a more detailed review of our financial results.

Speaker 2

Thank you, Sean. Good morning, everyone. Total revenue for the second quarter of 2025 was $35.4 million, compared to $29.9 million for the same period in 2024. The 18% increase is attributed primarily to year-over-year growth in our biologics product family, as well as the impact of $5 million of licensing revenue during the second quarter of 2025 that Sean alluded to earlier. This increase was partially offset by a 20% or $2.7 million year-over-year decline in our hardware product family. Gross margin for the second quarter of 2025 was 68.6%, compared to 62.1% for the same period in 2024. The increase year-over-year was driven by a favorable sales mix and by greater scale and improved production efficiency. Second quarter 2025 operating expenses were $19.7 million, compared to $21.5 million in the same period a year ago.

As a percentage of total revenue, operating expenses were 55.5%, compared to 71.9% in the same period a year ago. General and administrative expenses were $7.5 million for the three months ended June 30, 2025, compared to $7.7 million for the same period in 2024. This decrease is primarily attributable to reduced stock-based compensation expense. Sales and marketing expenses were $11.6 million for the three months ended June 30, 2025, compared to $13.2 million for the same quarter last year. The decrease was primarily due to reduced commission expense of $1.5 million resulting from revenue mix and $0.7 million in reduced compensation expense related to headcount, partially offset by $0.9 million of additional consulting fees during the current year period. Research and development expenses were $566,000 for the three months ended June 30, 2025, a decrease from $636,000 in the second quarter of 2024.

Net income in the second quarter of 2025 was $3.5 million, or $0.02 per share on a fully diluted basis, compared to a net loss of $3.9 million, or $0.03 per share in the comparable 2024 period. Adjusted EBITDA for the second quarter of 2025 was $6.9 million, compared to an adjusted EBITDA loss of $0.6 million for the same period in 2024. As a reminder, beginning in the fourth quarter of 2024, we no longer include the exclusion of the phasing of the bargain purchase gain on our sell-through of inventory acquired as part of our purchase of Surgiline Holdings hardware and biologics business in our calculation of adjusted EBITDA. Prior periods have been recast to conform to the current calculation. The related effect on adjusted EBITDA was a reduction of $1.1 million in the second quarter of 2024 to arrive at the recast amount.

As of June 30, 2025, we had $7 million of cash, cash equivalents, and restricted cash. Net accounts receivable was $27 million, inventory was $40.1 million, and we had $5 million available under our revolving credit facilities as of the end of the quarter. As a reminder, our cash balance as of the end of the second quarter does not take into account the anticipated gross proceeds from the sale of certain assets to Companion Spine that Sean discussed earlier. Operator, you may now open the line for questions.

Speaker 4

Thank you very much. We will now be conducting our question and answer session. If you would like to ask a question, please press star one on your phone keypad. A confirmation tone will indicate that your line is in the queue. You may press star two if you would like to remove your question from the queue. If anyone is using speaker equipment, it might be necessary to pick up your handset before you press the keys. Please wait a moment while we poll for questions. Thank you. Our first question is coming from Chase Knickerbocker of Craig Hallum. Chase, your line is live.

Speaker 0

Good morning, guys. Congrats on the quarter and thanks for taking the question. Maybe just first on the licensing revenue, can you just remind us, is that all volume-based or sales-based, you know, royalties or kind of transfer payments, or were there any kind of chunkier milestones within that in Q2?

Speaker 1

No, it's pretty straightforward. It's all revenue-based. What our partners, whatever they sold, is how we get reimbursed for that.

Speaker 0

Got it. Sorry if I missed this, but can you kind of just delineate a little bit as far as how we should think about that line as we go through the remainder of the year with your partner?

Speaker 1

Yeah, you know, we have two partners in particular, and because of the changes that are taking place, you know, again, you saw the latest thing that came out from CMS. We expect that we'll probably see at least another good quarter. After that, it's anybody's guess, quite frankly. I shouldn't say it's anybody's guess, but we definitely are not as confident that things will be as strong in the fourth quarter as they've been so far. Scott, do you want to add anything to that at all?

Speaker 2

I think as we stand, you know, in building out the guidance, we're anticipating approximately another $5 million during the second half of 2025 in wave royalty revenue.

Speaker 0

Helpful. Thanks, guys. Maybe just on broader orthobiologics, can you just kind of help us dig in a little bit on what portion of year-over-year growth was kind of from each of your growth drivers? Call it your new DBM products, VBM, and then growth factor and amnio. Just what kind of portion of growth was being driven by which, if you can kind of just help us dig into that line a little bit more.

Speaker 1

Sure. I guess a couple of things. First of all, the new introductions, they are brand new, right? Especially with one of the product lines, the OsteoFactor Pro, that's a product line that we already sell in OsteoFactor, and that would be replacing that current product line. That in and of itself is our target, to make sure that we have a complete replacement at a minimum of what we sold of that this past year. As for Trivium, literally a brand new product, we expect to see probably more positive, or at least I'd say things that will be contributing more to our bottom line and our top line really in the second half of this year. When we think about what was driving the growth for us this past quarter, you got to look at our BioBuild-On Matrix products or OsteoBio Plus.

Yes, we saw some OsteoFactor Pro in there as well, which helped us a lot. Just kind of around the bend, if you looked at our DBM products, I guess those would be, what else would you say, Scott?

Speaker 2

We saw growth in synthetics as well.

Speaker 1

Synthetics too. Yeah, that's right. Synthetics as well popped up. I would say across the board we saw nice growth.

Speaker 0

Got it. Scott, one for you and then one final one for you, Sean. Sorry to get so many in here, but Scott, just on gross margins, kind of how we should think about it to the end of the year here, particularly obviously with some of that royalty revenue continuing to come in. Sean, just on hardware, with the decision to kind of divest some of those key pieces, can you just speak to your thoughts on the rest of the portfolio and how you see that business progressing?

Speaker 1

Nielson, you want to go first?

Speaker 2

Yeah, I'll jump on margins. I think we see a somewhat sizable decline in H2, maybe around 5%, just as we see the effects of that royalty revenue coming down, as well as some decline in the hardware growth. That'll be offset to a degree with the continued sell-through of what we're doing with the vertically integrated product, namely the OsteoFactor and the BioBuild-On Matrix, but look for it to come down 4% to 5% in Q3 and Q4.

Speaker 1

To answer the hardware question, yes, selling the non-core assets of both the Paradigm Spine OUS business as well as the Coflex business. Just one little note on both of those businesses. From a business perspective, if you're running your company, that was about 16% of our total revenue, but it took up, off the cuff, 40 to 50% of our time. Certainly from a sales management perspective, it took up well over 50% of our sales manager's time managing just even the Coflex business here domestically. From our side, we were able to really help our business get a lot more focused. When you think about the hardware business, our domestic hardware business is a very, very good product line. It just needs the focus and the love.

That is one of the best things that's going to come out of this, aside from reducing debt and putting cash on the balance sheet. This is going to really help our business get that domestic focus. Not only will it help our biologics business, but also our core hardware will also, I think, see a nice pickup just because, again, being able to focus like we should be. Hopefully that answered your question, Chase.

Speaker 0

Yeah, good to see the focus on orthobiologics for sure. Thanks, guys.

Speaker 1

Yeah.

Speaker 4

Thank you very much. Just a reminder, if anyone has any questions, you can join the queue by pressing star one on your phone keypad. Our next question is coming from Ryan Zimmerman of BTIG. Ryan, your line is live.

Speaker 3

Hi, good morning everyone. This is Izzy on for Ryan. Thanks for taking the question. Just to start out.

Speaker 1

Hi Izzy, how are you?

Speaker 3

Doing well. How are you?

Speaker 1

Great.

Speaker 3

Just to start out, now that manufacturing is entirely in-house, I was curious what kind of margin benefit we should expect from the production of orthobiologics for maybe the remainder of the year, but also, you know, as we start to think about 2026 and beyond.

Speaker 2

I think in the second half of the year, we're probably picking up a point or two, maybe even a hair more than that. What you'll notice though is that'll be overshadowed by the effect of the royalty revenue coming down. Net net, like I said, I think we see overall gross margins coming down 4 or 5 points, but within that, you do see that pickup or that pickup will be present for the effect of that internally produced product.

Speaker 3

Got it, helpful. Of the cash you guys are picking up from the sale of Coflex and Cofix and the OUS business, what are you going to apply to the debt pay down versus just general working capital?

Speaker 1

Right. I'll let you go ahead, Scott Nielson, part way.

Speaker 2

We'll split that 50-50. Of the $19 million and change, half that will go to pay down our long-term debt, and then we'll keep the remainder for working capital purposes.

Speaker 1

That is not reflected in the statement you saw today. If you want to add that into what we have in way of our cash plus what we see for the second half of this year, we think that we'll be in a very, very strong cash position, really propelling our way through into 2026.

Speaker 3

Got it, that's helpful. Last one for me, how would you guys characterize the distributor dynamics when we think about the context of the changes among larger players in the company?

Speaker 1

Yeah, you know, we're seeing some dynamic changes in that, you know, you've got some of the big guys that have, you know, shifted ownership, and that has actually created some opportunities for guys like us. A lot of that is really focused more on the hardware side. Since we have such a strength in biologics, we're not seeing as big of a shift for us, but the opportunities are clearly there. There are a lot of, I think, positive things happening in the market for guys like us. Let me put it that way.

Speaker 3

Got it. Thank you for taking the questions.

Speaker 1

Great.

Speaker 3

Thank you very much.

Speaker 1

Thanks, Izzy.

Speaker 4

Just a reminder, if there are any remaining questions, you can still join the queue by pressing star one on your phone keypad now. We appear to have reached the end of our question and answer session and also the end of the call. We'd like to thank you very much for joining us. This does conclude the conference. You may now disconnect your phone lines at this time and have a wonderful day. We thank you for your participation.