Sanara MedTech Inc. Q2 FY2022 Earnings Call

Good morning, ladies and gentlemen, and welcome to the Sanara MedTech Inc. Second Quarter 2022 Earnings and Business Update. At this time, all participants have been placed on a listen-only mode and the floor will be opened for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Mr. Callon Nichols, Investor Relations. Callon, over to you.

Thank you, and good morning, everyone. I'd like to welcome you to Sanara MedTech's earnings conference call for the quarter ended June 30, 2022. We issued our earnings release yesterday afternoon, and I would like to also highlight that we've posted today's deck on the Investor Relations page of our website. This supplemental deck as well as a copy of the earnings release and the Form 10-Q for the quarter ended June 30 are available on this page. We will reference this information in our remarks today. We expect today's prepared comments from Ron Nixon, Executive Chairman; Zach Fleming, Chief Executive Officer; and Mike McNeil, Chief Financial Officer, to last approximately 15 minutes to allow time for Q&A. Certain statements in this conference call and our press release and in our supplemental deck include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. For more information about the risks and uncertainties involving forward-looking statements and factors that could cause actual results to vary materially from those projected or implied by forward-looking statements, please see our most recent annual report on Form 10-K and our Form 10-Q for the quarter. Now I'd like to turn the call over to Ron.

Thank you, Callon, and good morning, everyone. In the second quarter of 2022, Sanara generated $9.7 million in revenue, representing a 54% increase from the prior-year period. In addition to it being a record revenue quarter, it was also the first quarter during which the company generated $3 million of revenue in all three months of the quarter. The company had a net loss of $3.3 million in the quarter, Mike will go into further detail. But our loss when compared to the same period of the previous year was impacted by higher SG&A expenses, which increased by $3.9 million as well as higher R&D costs, which increased by $1 million, primarily related to our merger with Precision Healing and several other new development projects. In the second quarter, we completed our merger with Precision Healing where we acquired the remaining ownership of the company. Zach will go into more detail later in the call. But we believe that the technology currently under development at Precision Healing will be a key component of our strategy to offer a comprehensive wound and dermatology solution for Medicare Advantage, at-risk payers and other types of healthcare at-risk models. Subsequent to the end of the quarter, we completed our acquisition of Scendia Biologics. Zach will also go into more detail, but we believe this acquisition added a significant portfolio of advanced biologic products that are complementary to our current surgical product offering. In addition, we believe the acquisition will expand our ability to provide new health systems and a more comprehensive suite of surgical products. Now I'll ask Zach Fleming to discuss our accomplishments in more detail.

Thanks, Ron. Our surgical team continues to generate strong sales growth, penetrating further into our existing customer base and also expanding into new geographic areas. At the end of the second quarter, we had a total of 35 field sales managers employed. We continue to see growth in our distributor partnerships and have increased both the number of companies and individuals representing our products. At the end of Q2 2022, CellerateRX was sold in 590 hospitals and ambulatory surgery centers across 27 states during the trailing 12 months and was approved to be sold in 1,580 facilities. As we've discussed before, we believe there are approximately 12,000 hospitals in ambulatory surgery centers in the United States where CellerateRX surgical could potentially be used. As Ron mentioned, in July, we completed our acquisition of Scendia Biologics. Scendia has long been a partner of ours. We saw multiple benefits to bringing them into Sanara. Through this acquisition, we acquired a suite of advanced biologic products that we believe can prove beneficial for physicians using the Cellerate line of products. Scendia markets multiple complementary products, with our primary focus on AMPLIFY Verified Inductive Bone Matrix, ALLOCYTE Advanced Cellular Bone Matrix, BiFORM Bioactive Moldable Matrix and TEXAGEN Amniotic Membrane Allograft. Prior to the acquisition, Scendia generated revenue in eight states at or above $50,000 per year, where Sanara did the same. We believe that there's an opportunity to expand Scendia's sales into the additional 18 states where Sanara generated revenue above that level. Our ultimate goal is to expand the geographic footprint for all Sanara and Scendia's products across all 50 states. Scendia's unaudited full-year 2021 revenue was $8.3 million and unaudited trailing 12-month revenue was $11 million as of May 31, 2022. For the same trailing 12-month period, sales of Sanara products to Scendia were $1.5 million. I would also note that we expect the acquisition to be accretive to Sanara's EPS in Q3 of 2022. The initial purchase price for Scendia was $7.4 million, comprised of $1.4 million in cash and $6 million in stock. In addition, there are two earn-out payments payable in cash or stock at Sanara's election. Those are based upon the achievement of certain sales growth thresholds in years one and two following the acquisition. Now turning to our comprehensive wound and skin strategy. As Ron mentioned earlier, we believe that the Precision Healing multispectral imager and biomarker assay are an important component of our strategy. The imager is intended to be integrated with Sanara's proprietary EMR system and virtual consult capability with the goal of giving the company the ability to diagnose, treat, track, collect, and further analyze data on the healing progression of wounds across the continuum of care. We believe the data collected by the Precision Healing platform will help clinicians rapidly and accurately diagnose the root cause of the patient's wound and develop tailored treatment protocols that can be adjusted as more information is gathered. Additionally, the platform is expected to enable the company to further develop evidence-based treatment algorithms for use in suggested clinical practice guidelines. Sanara expects that this will help improve wound healing efficacy and reduce healing time while lowering the overall cost of healing. The Precision Healing Imager 510(k) is being prepared for submission to the FDA and is expected to be filed early in Q4. As it relates to the complete WounDerm offering, we continue to advance discussions with our potential payer partners that could benefit from the use of our comprehensive offering.

Thanks, Zach. For the three months ended June 30, 2022, we generated net revenues of $9.7 million compared to net revenues of $6.3 million for the three months ended June 30, 2021, representing a 54% increase from the prior-year period. For the six months ended June 30, 2022, net revenues totaled $17.5 million compared to net revenues of $11.3 million for the same period last year, representing a 55% increase from the prior-year period. The higher net revenues in 2022 were primarily due to increased sales of our surgical wound care products as a result of our increased market penetration and geographic expansion and our continuing strategy to expand our independent distribution network in both new and existing U.S. markets. SG&A expenses for the three months ended June 30, 2022, were $10.4 million as compared to $6.6 million for the three months ended June 30, 2021. SG&A expenses for the six months ended June 30, 2022, were $19.8 million compared to SG&A expenses of $12 million for the same period last year. The higher SG&A expenses in 2022 were primarily due to increased direct sales and marketing expenses. The increase in 2022 SG&A expenses was also partly attributable to increased non-cash equity compensation, higher travel, in-person promotional activity expenses, and higher payroll costs related to the midyear addition of the Rochal workforce in July 2021. We had a net loss of $3.3 million for the three months ended June 30, 2022, compared to a net loss of $1.2 million for the three months ended June 30, 2021. For the six-month period ended June 30, 2022, we had a net loss of $6.4 million compared to a net loss of $2.4 million for the same period last year. The higher net loss in 2022 was due to increased SG&A costs described a few minutes ago, higher R&D expenses, and the recognition of losses on our equity method investment in Precision Healing. Our cash balance at the end of Q2 was $12.7 million. With that, I'll turn it back to Ron for some closing comments.

Thanks, Mike. As we've discussed, we continue to have record revenue quarters at Sanara driven by a surgical wound strategy. In addition to advancing our Surgical division, we are focused on implementing our comprehensive wound and skin offering, continuing to expand the usage of our surgical products, and fully integrating Precision Healing and Scendia into Sanara. That concludes our remarks, and we look forward to answering any questions you may have. Operator, we're ready to open the call for questions, and thank you very much.

I apologize for the technical issue. The floor is now open for questions. Our first question comes from Ross Osborn from Cantor Fitzgerald. Ross, please go ahead.

Hi, good morning. Congrats on the second quarter and thanks for taking my questions. Since starting off, you had really sharp growth in hospital admissions in the second quarter. What do you think drove net add, do you think this is a good way to think about that going forward.

Hi, Ross, I'm having trouble hearing.

We can't hear you.

Hi, is this better.

Yes, very much, much better.

Okay. Great, so my first question is just on the hospital additions during the quarter. There's a really strong step-up. Just curious what you thought drove the step-up in new adds. And if this is a good way to think about new hospital additions going forward?

Zach, do you want to take that?

Yes, I'll take that. Just to clarify, are you referring to the 590 approvals that we're selling into or the total of 1,580?

Yes, I'll take that. So just to clarify, you're referring to the 590 approvals that we're selling into or the total 1,580.

Total. Yes, we've long since been working really hard with additions. We've hired quite a few folks as you can recognize. And those people are obviously getting much more active in each of the new markets. So that helps to drive that number up as well as we hired a national accounts manager that's very well-seasoned and he's been able to add several system approvals.

Okay. Got it. That makes sense. And then maybe switching to the Scendia acquisition. Are you able to disclose how their portfolio performed for the balance of 2Q? I think you disclosed revenue through May of this year but just curious how June performed.

We have not disclosed that yet, Ross. So we'd like to hold off on that, if you don't mind.

Okay. Fair enough. Sticking with Scendia, given the acquisition there, and I realize it's supposed to be accretive to 3Q earnings, but how should we think about the operating expense profile of the company going forward?

Nothing is changing at Scendia. They don't actually need to add additional personnel. It's really about adding that product offering to our existing base. So there's a fair amount of leverage that we accomplished by doing so. As you know, they were in a limited number of states, and we continue to expand throughout the other states that we're in, bringing that total to 27. So I think it's going to be a great addition for Sanara.

Okay. Great. And then last one for me, I will back in queue. Looks like Precision slipped a little bit from 3Q filing date to early 4Q. Just curious if there's anything to call out there?

Yes, it started with the supply chain having issues. You've got electronic components in there. You've got software. And as we move into production mode because the 510(k) needs to be filed with the production unit, we experienced some delays just going through all debugging everything that we're working on in order to make it a complete unit so that when we do get through the 510(k), we'll be ready to commercialize.

Okay, understood. Congrats again on the strong quarter and thanks for taking my questions.

Thank you so much, Ross.

Thank you.

Thank you. Your next question is coming from Ian Cassel from IFCM. Ian, please ask your questions.

Yes, I think my question will be directed towards Zach. You've done a tremendous job, growing Cellerate from $10 million to $40 million in annual revenues over the last few years. You have 35 field sales managers out in the field in 27 states. I think on previous calls, you mentioned you think you ultimately need 40 to 50 reps to cover the United States. Do you still think that 40 to 50 is the right number of reps? Or has that changed?

No, that's right in the ballpark. And we continue on the hiring path. We want to build a better distributor network out through the West, and that's an area where we're very focused on. We've got some great starts in those states. And then as we start to gain, we have a couple of business development folks that specifically focus on building out the market and initiating the market, and then we place people into those spaces. So that's where we are right now, identifying the next five or six states that we'll put people in.

And Ian, one of the things that we said early on is that when we were first developing our strategy for the expansion of Cellerate, we thought it would require 50. We said one in every state. We've gotten leverage off of that as well. So I believe what you'll see is more — as we add more people, it will be more penetration into the existing markets where we'll be filling in with territorial managers, which gives us leverage on that cost as well.

Thank you. Maybe a follow-up on Scendia. I think the piece in the presentation you put out there, the fact that really the Scendia products were a bulk of their revenues and Cellerate was a small part of the revenue, I think was a big positive. And looking at those Scendia products that you've brought on, how hard or easy of an upsell are those products to your current surgeons that are purchasing Cellerate? Does it take your sales reps a lot of education and effort? Or is it pretty easy?

Yes. I think it's — we're learning and gaining a lot of traction there. I don't know if you remember, we did a JV with Scendia. We kind of test ran this and recognized that all these surgeons are using these types of products. There is usually an incumbent-type product. What we have are unique, very highly efficacious products priced very well for the market. Our challenge, as no different than when we had Cellerate start off, was we had to find the right selling partners. We have a lot of those that have done very well for us in the Cellerate realm, and they're beginning to pick up these products as well. Likewise, those surgeons tend to listen now that we've earned their trust, and they've started to follow suit with these products, not necessarily all of the products. Our goal is not to have all products used in all cases. We just want to get better fixed cost leverage and gain additional usage, get more efficiency in our sale and have a couple of products used in each case. So to answer your question directly, I wouldn't say it's easy, but the marks are there. We can see exactly where we need to be and those doctors do use these types of products.

Okay. And when you look out over the next 18 months, maybe through the end of 2023, what new products that are in development are you most excited about?

Zach, do you want to talk about BIASURGE and stuff.

Yes, I was going to say BIASURGE is right at the top. It's a very unique product. It has a couple of qualities that other products in the space don’t have. And the market is extremely primed for it because there are a lot of surgeons that are very in tune with reducing healing complications, infections specifically. This type of product can help do that by washing the wound out post-surgical and leaves behind a biofilm resistant and antimicrobial kill. So that's exactly what you're going to do. And it's non-cytotoxic, meaning it doesn't kill the good tissue.

In addition to that, I think that you're — we are seeing that as it normally takes with new products, if you go look at BIAKOS and our other products that we're introducing into the market. We're gaining an understanding of the efficacy of those products and how well they're performing. We've got studies coming out to assist us in that regard. I think there's nothing that is more compelling to a surgeon or a caregiver when you've got clear evidence of how your product works and why it works, and that it is working. That last component that it is working and working very well is a key component to getting that success of getting them to start using that.

Okay. Thank you. And maybe another two questions I have. This might be more directed towards you, Ron. But you spent a lot of time, effort and money bringing together the strategic, when they first were investments or partnerships and now you've acquired the important ones to build out your next-generation wound care ecosystem. You're obviously playing a longer-term game. We're seeing the expenses of that kind of going through the P&L currently. The first question I have as it relates to the ecosystem itself is what are the critical milestones that we should be looking for between now and the launch? I know Precision Healing obviously needs to be filed and then approved. Are there payer announcements that we should be looking for or other things that we'd be looking for leading up to the launch?

A key component is, clearly, if we don't have payer contracts, we're not going to be able to go prove our model. We believe that the traction will be there for the payers. They've been looking for this solution for quite some time, in my view. There are a number of areas that we can go on that we will be announcing as we begin to find partners for that area, and when I say partners, customers, because when they're at risk, they become your partner. We think that's a really key component differentiating us from the traditional fee-for-service. If you are there to help them lower their overall cost, improve the healing rates, et cetera, they are your real partner because they are at risk, and we'll see how all that works out. But we're very positive about it. We would not be going after this and spend the amount of time and effort on this that we are if we didn't believe in it for the long-term.

Yes. Then the last question I have for you, Ron, is how should investors think about the end game and the potential of this ecosystem when you look out three to five years? I mean what's the potential of this? Obviously, you think it's significant given the time and capital you're spending?

Well, Catalyst's initial partnership that started out with 30 years, and that was in 1990. I don't believe in determining an end game. I think it goes into perpetuity, and you grow this thing and grow this thing. The end game for me is to just keep getting more and more market share, keep building this company and look for the next area around our focus on wound and skin and say, how else can we continue to improve it to stay ahead of the competition and make our customers happy. So I don't think of an end game. I think of it as a constant build and build and build and satisfy your customers' needs.

Thank you very much. I just have a couple of questions that have come in via the webcast. Could you discuss the timeline of utilization in surgeries versus hospitals sold into for Cellerate? And what percentage of cases are value-add for hospitals to use Cellerate?

Zach, do you want to take that?

Can you repeat the first question? Could you repeat that first question? I just want to make sure I understood it.

Could you discuss the timeline of utilization in surgeries versus hospitals sold into for Cellerate?

Okay. I think I understand what they're saying. So if I understand correctly, the timeline. So in terms of use in surgeries, I think it was the way they're asking it. Ron, do you understand that question? I'm not sure if I understand exactly what they're looking for.

No, I'm actually not sure on that first one. So can you read that again for us, if you wouldn't mind, operator.

I think maybe what they're asking is like how quick does it get utilized is what I'm guessing that just maybe misunderstand that, but essentially, we go out.

From when they buy it to when they use it maybe, when they first buy it?

Potentially or maybe when they adopt it. The sales cycle can be fairly short once we gain approval. So it's a value analysis committee approval. That usually takes a while to get on the schedule with the VAC analysis committee. Usually, they're looking at both efficacy as well as cost. Of course, the doctors have to request it. At that point, once it's approved, it's almost immediate and the product can get into the surgeries. Our representatives are there to make sure the product is available. So I think that may be what you're looking for on that answer, but I apologize if that wasn't what you were asking. The approval can take up to six to nine months. So maybe that's another part of what you're asking there too. I apologize if that's not what you're looking for.

Zach, this is Callon. We had some clarification come in from that question.

Okay. Thank you.

Cellerate, does that mean it's immediately used in surgeries? And is there a ramp to maturity. So I think you kind of covered that.

I was pretty close. It's immediately available just a matter of getting it ordered in stock, which takes no time at all once we've gained approval. As far as the ramp to maturity, it's ongoing. This product can be used across many specialties. So it's not just orthopedics. You have to talk to all the orthopedic folks and you're done. In fact, it spans every surgical specialty that does surgery. This means you have potentially 30 to 40 targets maybe in every hospital or more. So it's endless. Those conversations continue and adoption continues. We still have very longstanding accounts that are continuing to grow now today. I’ve been in this since 2017. That kind of gives you an idea it takes a while to fully mature.

I think the other part also is what percentage of cases actually see the added value of using Cellerate?

We try to really approach the surgeon in the space where we're talking about at-risk patients, folks that are maybe not likely to heal or could have some sort of healing difficulty. Those are the patients we target. I'd say that it's probably something like, and I don't have an exact number, but I would guess in the 30% of all surgeries that are at risk, maybe a little higher than that, depending on the surgical type. Certainly, surgeries that involve the groin and abdomen tend to be dirtier and more dangerous and more difficult for healing. So that would be probably a little higher number just as an example.

One of the key thoughts on that is that if you look at the aging demographics, as we age, we have more challenges in healing and more high comorbidities. I just saw a recent stat on the people that have chronic kidney disease, and that's like 38 million, which is a very large percentage of the population. People with these comorbidities are growing. It's not shrinking. Diabetes, et cetera, all the things that cause the surgeon to say, I've got a patient that could be compromised. Therefore, let's use Cellerate on it.

Okay. Great. Another question we have is, is Cellerate pricing stable, increasing or decreasing?

Yes. I'll just say the supply chain is seeing increases across the board. We mentioned some supply chain things that are going on in the world. As a result, you'll see most companies have taken price. We are considering all factors to determine what our plan is. As of right now, we've been stable. I think that's been in our favor and built relationships given our growth rate and penetration with our hospitals. We believe that's a good strategy for us to date is to be stable in terms of pricing and make sure that we become good partners to these facilities. Of course, we do see some of the supply chain impacts. And so we are taking a look at that from a business impact.

Great. Thank you very much. We have another question. Just to level set expectations going forward for the back half of this year and next year's earnings, consensus are supposed to be positive. This seems surprising as you are an investment model. Directionally, should SMTI continue generating losses in the end to medium term?

No. We have stated previously that we anticipate that we will be the losses will decrease significantly and potentially cash flow neutral by the end of the first quarter. So we have a high expectation to decrease those. Most of the costs, though, have not been generated by the surgical division. It's been the fact that we don't have significant revenue yet off of our comprehensive strategy because we have been building out all the component pieces. As we get those contracts, you immediately get fixed cost leverage off of that. We've got a heavy abundance of R&D, which we know is really valuable to us. We have our plan. None of our increases in SG&A are a surprise to us. They are all very much planned and so is our planned turnover to become neutral or positive in our cash flow.

Thank you very much. We don't have any further questions in queue at the moment. So now I will hand it back over to Ron for any closing remarks.

We just want to thank everybody for being on the call with us this morning. Thank you for being loyal supporters of Sanara. We're very positive about where we're going at Sanara, and we thank you for your continued support. So thank you everyone for participating in the call.

Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time, and have a wonderful day. Thank you for your participation.