Sanara MedTech Inc. Q2 FY2023 Earnings Call

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, 2023. We issued our earnings release yesterday afternoon, and I would like to 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 Form 10-Q for the quarter ended June 30, 2023, 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 the risk factors set forth in our most recent annual report on Form 10-K as supplemented by the risk factors in our most recent quarterly report on Form 10-Q. Now I would like to turn the call over to Ron Nixon.

Thank you, Callon, and good morning, everyone. In Q2 2023, Sanara generated $15.8 million in net revenue, representing a 63% increase from the prior-year period. The second quarter of 2023 was another record revenue quarter for Sanara, but the company did have a slower growth rate, which Zach will discuss and outline the plan we are implementing to continue our increased year-over-year growth strategy. Our loss before income taxes narrowed from $3.4 million to $1.9 million year-over-year in Q2. We had a net loss of $1.9 million compared to net income of $800,000 for the prior-year period. A higher net income in 2022 was primarily due to a one-time non-cash income tax benefit realized in Q2 of 2022. Turning to our new product pipeline, we continue to prepare for the commercialization of BIASURGE Advanced Surgical Solution. This product, developed by our R&D team at Rochal Technologies, is expected to commercially launch in mid-Q4 of this year. In the first quarter of 2023, we entered into a sales agreement for an ATM offering of our common stock. Stock sales were paused at the end of Q1, and we have no immediate plans to reactivate the ATM offering. We could potentially utilize it if and when management and the board determine it is appropriate. Subsequent to the end of the quarter, we announced the acquisition of certain assets related to our collagen products business. The acquisition includes all rights and ownership for human wound care uses for four 510(k) cleared collagen-based wound care products, including CellerateRX and HYCOL. We believe this transaction was a significant strategic milestone for the company and something the team has been working on for quite some time. Now, Zach Fleming will provide more details on the quarter.

Thanks, Ron. Our surgical sales team continues to work to penetrate deeper into our existing customer base, sell additional non-CellerateRX products, and expand into new geographic areas. During the trailing 12 months ended June 30, 2023, our products were sold in over 950 hospitals and ambulatory surgery centers across 33 states. As of June 30, 2023, our products were contracted or approved to be sold in over 3,000 facilities. There was a significant jump in the number of facilities where our products are approved to be sold between Q1 and Q2, due to an agreement we signed with a major group purchasing organization. We believe this presents a significant opportunity for our team to get our products into new facilities, and penetrating these new facilities will be a priority of ours over the next year. As Ron mentioned, we had a lower sales growth rate in Q2 compared to our historical rates of growth. Our sales growth was impacted by our slower pace of sales manager hiring in late 2022. While this reduced pace of hiring was part of an effort to budget expenses and ensure we were efficient in our hiring based on our analysis of the existing sales team and potential opportunities, it did have a slowdown effect on our sales during this period. As we have mentioned previously, the continued ALLOCYTE supply issues also negatively impacted our sales. At the outset of 2023, we increased our hiring pace and have recently hired and trained a new class of field sales representatives, and we plan to continue hiring through the end of the year. We have greatly improved our training program and vetting process for new hires, which we believe will serve us well as we continue to expand. Additionally, we are conducting significant analysis on our territories, distributors, and field sales representatives and have developed metrics that will help us determine where new hires will be most impactful. In order to address the ALLOCYTE supply constraints, we have identified and secured a secondary sourcing option and expect that source to come online in the near future. Looking at our product sales mix, sales of soft tissue products were $13.2 million, while sales of bone fusion products were $2.5 million in Q2. The sales growth of non-CellerateRX products such as FORTIFY and TEXAGEN and our bone fusion products is very encouraging. Our strategy to integrate Scendia into the national sales strategy is making progress, and we intend to continue focusing on growing the sales of these products. As Ron mentioned, we expect to commercially launch BIASURGE in mid-Q4 of this year. We have scheduled manufacturing runs, and the product is currently being tested by clinical partners to ensure a smooth launch and adoption with key facilities. I would now like to provide a brief update on our value-based post-acute wound care strategy. Earlier this year, we hired Sam Muppalla to lead this initiative. Sam is an experienced wound care executive in the post-acute market, and we are excited to have him on the team. With Sam's leadership, we have developed a detailed value-based strategy and received initial validation from the market. This strategy will include our existing joint venture partner, InfuSystem, and we continue to develop a full complement of products and services required to execute this strategy. Additionally, we have taken the technology assets and developed a platform plan to support the value-based care strategy while exploring accelerators to add to the platform that will allow for quicker entry into the market. Subsequent to the end of the quarter, as Ron discussed earlier, we completed the acquisition of certain assets related to our collagen products business. With this acquisition, we acquired four 510(k) cleared collagen-based wound care products including CellerateRX and HYCOL, and three new collagen-based products that are currently under development; nine patents and all of the sellers' patents pending for collagen products for human wound care uses; and five trademarks. The acquisition gives us control of the manufacturing process for CellerateRX and HYCOL, which is expected to reduce costs. Additionally, we now have full rights to develop new collagen products for human wound care uses based on this acquired technology. Looking at the financial impact, the transaction eliminates the royalty we paid on CellerateRX and HYCOL to the sellers. Total consideration for the acquisition was $15.25 million, consisting of $9.75 million in cash paid at closing; shares of the company's common stock with an agreed-upon value of $3 million; and four equal annual installments of $625,000 in cash. The sellers are also entitled to receive up to $10 million in potential earn-out payments as well as certain royalties and incentive payments on future products that are developed. The cash at closing was funded through a loan provided by Cadence Bank. Now I will turn it over to Mike to discuss our financial results.

Thank you, Zach. For the quarter ended June 30, 2023, we generated net revenues of $15.8 million compared to net revenues of $9.7 million for the same period in 2022, a 63% increase over the prior-year period. For the six months ended June 30, 2023, we generated net revenues of $31.3 million compared to net revenues of $17.5 million for the same period in 2022, a 79% increase over the prior-year period. Net revenues for the three and six months ended June 30 included $3 million and $6.2 million, respectively, of Scendia revenues. The higher net revenues in 2023 were primarily due to increased sales of soft tissue repair products and, to a lesser extent, bone fusion products as a result of our increased market penetration, geographic expansion, additional revenues from the Scendia acquisition, and our continued strategy to expand our independent distribution network in both new and existing U.S. markets. SG&A expenses for the quarter ended June 30 were $13.8 million compared to SG&A expenses of $10.4 million for the same period in 2022. SG&A expenses for the six months ended June 30 were $26.8 million compared to SG&A expenses of $19.8 million for the same period in 2022. Our SG&A expenses for the three and six months ended June 30 included $0.8 million and $2.0 million of costs, respectively, related to the Scendia operations. The higher SG&A expenses in 2023 were primarily due to higher direct sales and marketing expenses, which accounted for approximately $2.3 million and $5.8 million, respectively, or 69% and 83%, respectively, of the increases compared to the prior year. The higher direct sales and marketing expenses for the three and six months ended June 30 were primarily attributable to an increase in sales commissions of $2.3 million and $5.2 million, respectively, as a result of higher product sales. The six months ended June 30, 2023, also included $0.6 million of increased costs as a result of sales force expansion and operational support. R&D expenses for the second quarter were $1.2 million compared to $1.1 million for the second quarter of 2022. Year-to-date, R&D expenses were $2.5 million compared to $1.3 million for the six months ended June 30, 2022. The higher R&D expenses in 2023 were primarily due to costs related to the Precision Healing diagnostic imager and LFA for assessing patient wound and skin conditions. These expenses also included ongoing development projects for our currently licensed products. We had a loss before income tax of $1.9 million for the second quarter compared to a loss before income tax of $3.4 million for the second quarter in 2022. For the six months ended June 30, we had a loss before income tax of $3.1 million compared to a loss before income tax of $6.5 million for the same period in 2022. The lower loss before income tax in 2023 was due to operating expenses increasing at a slower rate than sales in addition to the benefit recorded as a result of a change in the fair value of current liabilities. For the second quarter, we had a net loss of $1.9 million compared to net income of $0.8 million for the second quarter of 2022. For the six months ended June 30, we had a net loss of $3.1 million compared to a net loss of $2.4 million for the same period in 2022. As Ron mentioned, the higher net income in 2022 was primarily due to a one-time non-cash income tax benefit realized for the company in Q2 2022. Our cash on hand at the end of the quarter was $6.1 million. With that, I'll turn it back to Ron for closing remarks.

Thanks, Mike. As we've discussed, we had another record revenue quarter in Q2 2023. We did experience a lower sales growth rate and have begun hiring additional field sales managers to penetrate the new approvals across the country while finding a solution for our ALLOCYTE stockout, which Zach mentioned earlier. We still see significant growth opportunities for our core business as well as for our new BIASURGE product line. Additionally, as has been our practice in the past, we're looking to hire the very best candidates for our regional sales manager and territory manager positions with proven experience in medtech. Once hired, we'll provide them with high-level training, and we believe this sets us up to quickly and meaningfully contribute to the company's financial performance. In closing, I'd like to again emphasize that the acquisition of assets related to our collagen products business is a strategic win for the company. We believe it will lead to cost savings and aid our ability to develop new impactful products for the future. That concludes our remarks, and we look forward to answering any questions you may have.

Your first question is from Ross Osborn with Cantor Fitzgerald.

Hey, good morning, everyone, and congrats on the progress. So are you starting off with Scendia? I mean, you posted another quarter around $3 million of sales. Should we think about that segment as a pretty steady business, or should we expect growth to inflect higher? And if so, what is the commercialization plan there?

Zach?

Yes, we continue to get adoption of those products, and we think it is steady for sure. However, we do see each doctor is quite valuable. So we keep adding additional surgeons to the uses. As you remember, the ALLOCYTE is back-ordered right now, and that's going to be a big upside for us going forward.

Okay. Got it. And then maybe can you spread some more color on how sales per facility have trended year to date and quarter to date, just thinking about driving further penetration within existing accounts in addition to adding new accounts?

Can you repeat the first part of that? It was kind of jumbled up, sorry.

Yes, apologies. I'm just curious on how sales per facility have trended year to date and quarter to date, and how should we think about that going forward?

Yes, it's very steady. Across the nation, we are not losing ground; we are experiencing growth in each of our facilities on average. This is due to adding new products and specialties. The same-store sales, or the amount we sell in each facility, have increased and will continue to do so as we move forward. Additionally, we expect to see further growth from the addition of approximately 1,200 facilities since last quarter. We had 1,800 approved, and now we have 3,000 approved. Our goal is to bring in more personnel for these facilities, and for those already present, we want to explore deeper and broader product applications in every case.

Got it. Thank you. And then last one for us, and apologies if this has been addressed. We're juggling a couple of calls. Is there any update on or Precision?

Yes, we have been collaborating closely with InfuSystem as they work to establish their billing capabilities in the DME market. They are currently selling negative pressure products, which is paving the way for our offerings. Their sales team is getting organized, and I believe they are in a strong position. We communicate with them regularly and feel positive about the progress, though it's just a standard infrastructure development to ensure everything operates smoothly. Regarding Precision, our imager has been submitted to the FDA, and we are in discussions for a resubmission. We expect to complete that resubmission by November, and we anticipate receiving a decision from the FDA on the imager by the end of the year. As for the LFA, which is a lateral flow assay, we are also in contact with the FDA, and things are progressing as we continue to understand the approval requirements.

Got it. Thank you, and congrats again on the results.

Thank you.

Your next question is coming from Ian Cassel with MicroCap Club.

Thank you. Yes, congrats on signing up a major group purchasing organization. I was wondering, Zach, if you can talk about what it takes to sign up a group of that size? I mean, it looks like it was 1,000 hospitals or more. What does it take to sign up a group like that? And maybe you can talk about how you attack that opportunity.

Yes, I appreciate the question. So first off, it’s kind of a groundswell. As you know in the past, we've had to gain facility approval one by one. As we've grown and gotten greater adoption, better research studies to support the use of the product, and of course, more experience from doctors that tell the product to other doctors, you get the groundswell and then the demand through usage. There's a certain level of usage that needs to happen in member facilities. And then, once those member facilities boil that up into the system and into the GPO, there is a demand from the GPO to contract, and they wanted to contract on a national basis. Once that happens, then you've got the GPO approval, and it puts you in a front-of-the-line situation for each different facility. There may still be some value analysis committee approvals, but those are typically formality with the level of research we have with us, which allows us to present to those value analysis committees. From there, it's doctor adoption, facility by facility. That's where we use our 1099 sales representative network to help us connect into those opportunities. Our regional sales managers and territory managers then flower that out within each facility.

Thank you. And I see that BIASURGE is planned to launch in mid-Q4. Zach, can you talk about the market opportunity for BIASURGE and how it's differentiated from any competitors in the marketplace?

Sure. We're really excited about that product. That product is a new set of products that you probably recognize; medicated washes that help to complement outcomes by reducing bacterial burden. Historically, doctors would typically use their own potential antimicrobial cocktail that they might make in the in-house pharmacy. In recent years, a few companies have come out with these kinds of washes. We think that's a good market with the potential for consistent results. Our differentiation is that we are a leave-in product. In other words, they don't have to do a saline rinse post-use, and it is non-cytotoxic to healthy cells, meaning it won't kill good tissue as you're trying to heal the wound. It also helps keep the area free from biofilm. To put it scientifically, it breaks down the protective barrier that bacterial colonies use, thereby allowing wounds to heal properly. We believe this fits well in a prophylactic sense for surgeries and can also be used in high-risk patients before procedures.

So the market itself is kind of fully aware of the product category. Is that the right way to think about this?

Yes, I think it is a burgeoning market. It's very similar to what we started with Cellerate; everyone knew there was a need and demand. There has been some sort of status quo, typically the doctor's cocktail. A few companies have begun forming that market, but we're entering at a compelling moment with a strong value proposition due to our pricing and evidence, alongside our sister product, the BIAKŌS, which has notable evidence of its own. We believe this product will be a strong competitor in that market space.

Thank you. Maybe a last question; I'll get back in the queue. When you look at the company, you have two sides of the business, the surgical side and the value-based post-acute wound care strategy. Obviously, a lot of the growth and revenue is coming from the surgical side of the business, while the acute wound care strategy is mainly reflected in the SG&A line. I'm curious, Ron, in past conversations, at least during the last earnings call, you mentioned your goal to maybe get this monetized by the end of this year. I was wondering if you could speak to that and what the division looks like going forward over the next 12 months.

Yes, when Sam Muppalla came on board, he brought a level of detail and understanding, particularly in the post-acute market. He previously led one of the largest wound care companies in skilled nursing facilities, plus he has extensive experience on the value-based side. We have refined our strategy, gaining better visibility on the components needed, how contracts should look, and where to target for securing those contracts. We're moving forward and have several initiatives in place, despite delays with both the imager and LFA, which are critical to our value-based strategy. We aim to have everything ready to go, which we believe should be by the beginning of next year–that is our goal.

Okay, thank you.

Okay, just one moment. We have a question from the webcast. You mentioned that sales per facility are increasing, and now you're looking to expand both depth and breadth within each facility. However, this quarter we observed about 1% to 2% sequential growth. Can this figure be attributed directly to those efforts, or is there more complexity involved? Thank you for any insight on this.

Yes, sure. So growth isn't linear in any sales company. As we pursue the strategy of going deeper, wider, and adding more products per case, we face normal product competition and loss from time to time. That's typical in sales growth as we gain notoriety. We expect additional growth from our efforts, but our recent growth hasn't met our expectations. Part of that is the learning curve we face in hiring and training new representatives. We recently hired two additional national sales directors to help fill territories with growth opportunities related to new approvals. We focus on strategic locations, leveraging metrics to support our hiring and deployment efforts. By analyzing operations in areas with surgeons and surgeries, we align our resources to maximize impact. So that would be my answer to that question.

Yes, and Zach, just to add to that. One of the things to consider is this company's data-driven nature. We employ metrics to analyze our business. We aim for high efficiency because this is not just a revenue strategy for Sanara; it’s a build-a-business strategy, creating income for our shareholders to support our ongoing growth.

Okay, your next question is a follow-up from Ian Cassel with MicroCap Club.

Ron, you sort of answered that question already, but I'll ask it again. The acquisition of the collagen asset is impressive. I know what that brings to the company, but also the way you acquired it with the bank debt from Cadence. Obviously, you showed them that you’re going to be a profitable company or prove to them you're heading toward profitability in the near term. The balance sheet is nearing about $6 million in cash. I'm just curious how you juggle profitability versus growth when looking out into the future.

Yes, that's a good question. We constantly monitor our cash position and how close we are to achieving our earnings targets. Over time, we hope to provide you with more visibility and eventually provide actual guidance. We keep a close eye on everything and have data-driven strategies in place. We feel comfortable where we are today, and the ATM served its purpose; we proved its effectiveness for a short period. We have no immediate plans for it, but it's a tool availble should we need it. We're confident regarding opportunities for partnerships and funding, but our main focus is generating revenue and earnings to support our expansion. Specifically, we feel very secure about our current position, closely forecasting our path forward.

Maybe one last question while I have you on the line, is there any international opportunity for any of the products that you have?

We believe there's a very large international opportunity. However, we want to ensure we penetrate the U.S. market significantly first. Over the last three years, we've seen significant progress—experiencing 60-plus percent growth year over year, both quarterly and on a trailing 12-month basis—which indicates high growth. However, building the infrastructure to support an international business differs greatly from domestic expansion. Therefore, our immediate focus will remain on strengthening our U.S. business, though we continue to look at the international market and identify large opportunities we will pursue at the right time.

Thank you.

There are no additional questions in queue at this time, and we have reached the end of the question and answer session. I would now turn the call back over to Ron Nixon, Executive Chairman, for closing remarks.

Thank you, and I appreciate everyone for listening in on the call today. We feel very good about where we're going. We have a lot to report in the future as well. I want to thank everybody for joining us today.

Thank you. This concludes today's conference call, and you may disconnect your lines at this time. Thank you for your participation.