Sanara MedTech Inc. Q3 FY2023 Earnings Call

Greetings, and welcome to the Sanara MedTech Incorporated Third Quarter 2023 Results and Business Update Call. At this time, all participants are in a listen-only mode. And a question-and-answer session will follow the formal presentation. Please note, this conference is being recorded. I will now turn the conference over to your host, Mr. Callon Nichols. Sir, you may begin.

Thank you, and good morning, everyone. I'd like to welcome you to Sanara MedTech's earnings conference call for the quarter ended September 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 September 30, 2023, are available on this page. We will reference this information in our remarks today. We expect today's prepared comments from Ronald 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 in 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 risks and uncertainties involving forward-looking statements and factors that could cause actual results to differ 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. Also this conference call, our earnings release and supplemental deck will reference certain non-GAAP measures. In that regard, I direct you to the reconciliation of these measures in the earnings materials that are available on our website. Now I'd like to turn the call over to Ron.

Thanks, Callon, and good morning, everyone. In Q3, '23, Sanara generated $16 million in net revenue, representing a 23% increase from the prior year period. The third quarter of 2023 was the eighth record revenue quarter for Sanara, and we continue to strengthen our sales infrastructure to support our growth strategy as well as focus on increasing our penetration in the hospitals where we have approvals and minimal revenue. I'd like to point out that by the end of the third quarter of 2023, we had generated more revenue than in all of 2022. Our loss before income taxes narrowed from $3.2 million to $1.1 million year-over-year in Q3 and that also had $1.1 million in Q3 compared to a net loss of $1.5 million for the prior year period. The company also realized an adjusted EBITDA of $300,000 in Q3 compared to adjusted EBITDA of negative $1.6 million in Q3 2022. Mike will provide more details on our financial results in a few minutes. A key strategic milestone for the company in the third quarter was the acquisition of certain assets related to our collagen products business. The acquisition included all rights and ownership for human loaned care uses for specific 510(k) cleared collagen-based Wound Care products, including CellerateRx and HYCOL. This transaction has had multiple financial and strategic benefits as you will hear about later. Turning to our pipeline. Subsequent to the end of the third quarter, we had several key achievements. In early October, we realized our first sale of ALLOCYTE Plus advanced viable bone matrix. This product replaces our ALLOCYTE advance cellular bone matrix product and is processed by a well-established supplier with in-house processing capabilities and affords us greater control of our product supply. Sanara has a sufficient supply to meet current demand and we believe measures are in place to provide product for our future requirements. In addition to our first sale of ALLOCYTE Plus, the company also realized its first sale of BIASURGE Advanced Surgical Solutions in early November 2023. We believe both of these products are key in our growth initiatives. As you know, our ATM offering of common stock was paused at the end of Q1, and we do not currently have any plans to reactivate the ATM.

Thanks, Ron. I'd like to start my remarks with a discussion of our accomplishments over the past few years and how it has laid the groundwork for what we believe will be a very promising future for the company. In 2021, we acquired the assets of Rochal Industries. And since that time, we've achieved developing deep in-house technical capabilities for research and development. Our efforts have proved successful with the launch of BIASURGE and we currently have numerous other promising products at various stages of development. Over the past few years, we've executed on our strategy to extend our surgical bag, not only through the in-house development of BIASURGE but also through the acquisition of Scendia and license agreement with Cook Biotech. We have also focused on expanding our approved locations and recently, we were approved by a national GPO leading to a 67% increase in hospital approvals between March 31, 2023, to June 30, 2023. This has set the stage for what we believe will lead to growth in 2024. It will be driven by a focus on increasing Cellerate usage in additional specialties outside of ortho and spine, an expanded product portfolio with the addition of BIASURGE, multiple M&A opportunities, and continued work by Rochal to develop new products. With that overview, I would like to now discuss our most recent results. ALLOCYTE supply issues negatively impacted our sales in Q3, but we believe we have resolved the supply issue with our new supplier of ALLOCYTE Plus. It will take some time to reengage with potential customers who we had put on hold, and these have begun, and we are currently focused on our sales team along with BIASURGE. Concern over selling costs over facilities due to surgeons’ significant use of the product negatively impacted growth in four territories. The surgeons see a great value to, as they say, protect our work. However, procurement reduced or limited usage in a few of these instances. These territories, as well as our business as a whole, have been analyzed, and appropriate adjustments have been made including building stronger relationships, internal personnel adjustments, the identification of new selling partners, and expanding our selling efforts to additional specialties. We have expanded our training to both our direct and indirect sales team regarding account management. In the trailing 12-month period, our products were sold in over 1,000 hospitals and ambulatory surgery centers across 32 states plus the District of Columbia. A 33rd state missed our trailing 12-month revenue cutoff by less than $2,000. Our products were contracted or approved to be sold in more than 3,000 hospitals and ambulatory surgery centers as of September 30, 2023, leveraging field intelligence and data analytics. We are looking at our data analysis, sorry, I got a little caught up there. Looking at our product sales mix, sales of soft tissue products were $13.6 million, and sales of bone fusion products were $2.3 million in Q3. The 16% sales growth for bone fusion products for the quarter year-over-year is encouraging, and we will continue to focus on continuing to build out these product lines. As Ron mentioned, we launched BIASURGE early November of this year at the American Association of Hip and Knee Surgeons Conferences, and our first sale was made shortly after that. We have ample supply of this product and are currently selling it through our distribution network. Initial feedback has been positive, and though it will take time to add this product to our existing contracts, we believe there is a case for this product to be used in any surgery where our existing products are being used. The launch, we were able to add BIASURGE to 41 contracts. We will continue to build on these efforts as we market the product. In August 2023, as Ron discussed earlier, we completed the acquisition of certain assets related to our collagen products business. With this acquisition, we acquired specific 510(k) cleared collagen-based wound care products, including CellerateRx and HYCOL, 9 patents, and all of the seller's patent spending for collagen products for human wound care uses and 5 trademarks. The acquisition gave 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 the acquired technology, including CellerateRx and HYCOL, new application formats. Looking at the financial impact, the transaction eliminates the royalty we pay to CellerateRx and HYCOL to the sellers. The initial purchase 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 $3.0 million, and 4 equal 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. Our gross margins increased in Q3 to 89% from 86% in Q2 2023. As a result of this acquisition and the elimination of the royalty we previously paid to the seller. I would now like to spend some time on the post-acute value-based strategy, which we have renamed Tissue Health Plus. As we have discussed before, we see significant opportunity to positively impact the post-acute wound care market where costs are significantly increasing and a shortage of wound care experts paired with an aging population is materially impacting the quality of care and outcomes. We're planning to offer payers and other population risk-bearing entities, a first-of-its-kind integrated wound prevention and treatment program. We will bundle advanced products, technology, and clinical delivery through value-based contracts for this $35 billion-plus market. We are exploring ways to accelerate the commercialization of this strategy or find appropriate partners to participate in execution. Our spending year-to-date for Tissue Health Plus has been over $5 million. Now I will turn it over to Mike to discuss our financial results.

Thank you, Zach. As Ron mentioned earlier, we generated revenues of $16 million in Q3 compared to $13 million during the third quarter of 2022, reflecting a 23% increase year-over-year. For the nine months ending September 30, our revenues were $47.3 million, up from $30.5 million in the same period of 2022, marking a 55% increase compared to the prior year. This growth in 2023 was largely driven by higher sales of soft tissue repair products, along with some contribution from bone fusion products, due to our increased market penetration, geographic expansion, additional revenues from the Scendia acquisition, and our ongoing strategy to broaden our independent distribution network in both new and existing U.S. markets. SG&A expenses for the third quarter amounted to $13.9 million, compared to $12.1 million during the third quarter of 2022. Year-to-date SG&A expenses through September 30 were $40.7 million against $31.9 million in 2022. The increase in SG&A expenses in 2023 was chiefly due to higher direct sales and marketing costs, which accounted for about $6.8 million, or 77% of the total increase from the previous year. The rise in direct sales and marketing expenses was mostly due to an increase in sales commissions of $5.9 million linked to our higher product sales. Year-to-date SG&A also included an additional $0.8 million in costs stemming from sales force expansion and operational support. R&D expenses for the quarter ending September 30, 2023, were $1 million, compared to $1.1 million for the same period last year. For the year to date, R&D expenses totaled $3.5 million compared to $2.3 million during the same time in 2022. The increase in R&D expenses in 2023 was mainly driven by costs related to the Precision Healing Diagnostic Image, with related elevate R&D expenses also encompassing costs tied to ongoing project development for our licensed products. We recorded a loss before income tax of $1.1 million for the third quarter, down from a loss of $3.2 million during the same period in 2022. For the year-to-date period ending September 30, our loss before income taxes stood at $4.2 million versus $9.8 million in 2022. The reduced loss before income tax in 2023 was due to operating expenses rising at a slower pace than net sales, along with an included benefit from the change in fair value of earnout liabilities. For the quarter ending September 30, we reported a net loss of $0.1 million compared to a net loss of $1.5 million during the same period last year. For the nine months ended September 30, our net loss was $4.2 million compared to a loss of $3.9 million for the same timeframe last year. Our cash on hand at the end of the quarter was $6.2 million, a slight increase from the $6.1 million available at the end of the second quarter. With that, I'll turn it back over to Ron for some closing remarks.

Thanks, Mike. In summary, we are very, very proud of our continued record quarters as well as the introduction of another impactful proprietary product for surgery and BIASURGE. We will continue to work on executing our strategy to achieve improving growth rates and expect to be aided by ample supply of ALLOCYTE Plus. The key strategic acquisition of assets related to our collagen business will improve our financial results by eliminating the royalty we pay as we continue to grow Cellerate and HYCOL. This also allows us to develop new proprietary products based on these assets through Sanara's research team. That concludes our remarks. And we look forward to any questions you may have. Operator, we're ready to open the call for questions. Thank you.

Thank you, sir. Before we go to our phone lines, we've had a question sent in. Could you please add more color to the decelerated sales slowdown? And did I understand correctly that certain hospitals have capped salary purchases because surgeons were buying too much of it?

I can address that. This is Zach. Yes, you're right. There were a few hospitals where usage exceeded what procurement was comfortable with. As a result, they restricted usage, leading to a slight slowdown on our end. In response, we've trained our sales representatives to ensure they are knowledgeable about the reasons for product use, including some initial and additional evidence that supports it. Furthermore, we assigned people to more specialties to expand our reach among surgeons, rather than just focusing on a few specialties. This approach aids in standardizing usage, allowing hospitals to maintain their usage levels.

I would like to add to what Zach mentioned. Sanara has invested significantly in gathering clinical evidence through various studies, some of which have recently been released to demonstrate the value of our products in terms of reducing overall costs and improving patient outcomes. We believe this data is very impactful and will continue to conduct more studies to reinforce why these products are so beneficial in surgical settings, rather than being based solely on surgeon preference.

Our first question is coming from Ross Osborn with Cantor Fitzgerald. Your line is open.

So starting off and apologies for a couple of calls, but would you provide some more color on the unique market challenges you called out in your press release, any foresight into those fading this year or early next?

Did you say fading?

Yes.

Yes. We think we've achieved that. So in terms of those facilities where they were impacted, it was limited to just a few markets where the product was utilized beyond what procurement was comfortable with. There was pushback from procurement on that spending and very situational. In those instances, we’ve remedied that, and moving forward, we’ll be able to pick up additional facilities to cover the slight slowdown in those areas as well as regain those markets with additional effort. This will include servicing, making sure everybody is educated on the use of the product and additional surgeons, as I mentioned a minute ago.

And then maybe turning to some of your recent product launches. How should we think about ALLOCYTE and BIASURGE's market opportunity in terms of annual dollars and adoption there, realizing you can use a variety of surgeries? But where do you think the low-hanging fruit is? And how would you rate market awareness?

I think the low-hanging fruit is any patient where there's a risk for potential infection, and that's very broad. A lot of surgeries have a risk based on the patient's comorbidities, different statuses of disease state, etc. And of course, all surgeries have some risk of complications or infections. So what we're trying to do is place that product in a prophylactic position where it could be used to prevent any of those types of infection events or complications. You can imagine really every surgery could potentially be appropriate for that. Certainly, it's going to be focused on those patients where there's a risk factor, and that would be where we would start. In terms of just the acceptability, I think that's a commonly used practice that in historical sense, they have used an antimicrobial wash of some type, usually one that's made in-house by the pharmacy, but that's not very standardized and consistent. In recent years, there have been a few market entrants that have come in and offered a consistent manufactured wash like BIASURGE. Our offer benefits that the others don't, such as it being a leave-in rinse, also a product that has a low cytotoxicity and allows for leave-in usage, meaning they don't have to wash it out with saline. So we think we have a market position there and, of course, an attractive value to the facility.

And remember that Ross, you may remember this from past data that we have provided. We have tested the BIASURGE-based formula against numerous competitors, and it outperformed them for biofilm kill, as well as for its efficacy against various pathogens. Therefore, we see a significant market opportunity for this product, as Zach mentioned, and it will be a key core product for us as we move forward, we believe.

And then lastly, in train your aspirations to be a comprehensive wound company. Is there any more color you can provide on the types of partners you're looking for that could add a value-based component and lastly, any update on Precision?

Yes. So I didn't hear the very last part. I heard about what the profile of the partners that we would seek out for the value-based arrangement would be, but I didn't hear what you said after that.

That's correct. And then just any update on Precision imaging?

So two things. First, our overall value-based strategy encompasses everything from the hospital discharge through the post-acute care continuum, which includes skilled nursing facilities and home health, extending all the way to when patients are at home and not on a care plan. We are exploring potential partnerships that could enhance the level of service provided at home. There are several home health care companies that we are familiar with and that are interested in our value-based plan. Additionally, we recognize the growing focus on skilled nursing facilities, particularly in light of legislative developments related to SNF at home and similar programs. Everyone is aiming to improve efficiencies and reduce costs while enhancing patient outcomes. As we advance with these value-based models, there will be an increasing emphasis on them. More funds are being directed toward value-based arrangements, leading to a decline in fee-for-service models. Various payers have acknowledged the necessity of adopting a value-based strategy, especially in complex specialties like wound care, where there are rising rates and suboptimal patient outcomes. Providers in the SNF and post-acute sector, as well as those offering technology, potential partners, and payers aware of their risk, can all play a role in this strategy. We have numerous potential partners and have been actively discussing collaborations with many of them over the past year as we prepare for these changes. Second, regarding Precision and Precision Healing, particularly concerning the lateral flow assay and imager, we are pursuing a different pathway that we believe will lead to better FDA approval outcomes. We have taken the necessary time to ensure we follow a pathway that yields superior results and greater acceptance for the product.

Our next question is coming from Ian Cassel with IFCM. Your line is live.

Maybe as a follow-on to Ross' question. You mentioned in the presentation that you spent about $5 million in the Tissue Health Plus strategy year-to-date. Do you expect that number to increase, decrease as you start to commercialize that over the next 24 months?

Yes. For Sanara itself, we don't expect that number to increase. We would expect that number to decrease over the next 12 to 24 months, and that would be by executing our strategy with the right kind of partners that would start to carry some of that load themselves.

Can you provide us with some insight on the early feedback you’re receiving from surgeons about the recent launch of BIASURGE?

Zach, would you like to comment?

Great indicator that we got 41 approvals before launch, so that was really encouraging to see that these hospitals as well as surgeons felt like there was a need and demand, and so we were able to get the approval. Since launch at the American Association of Hip and Knee Surgeons Conference, we had a packed booth every day. There were a lot of questions about our scientists in the booth. We had our medical science team in the booth and a lot of interest in terms of just the ability for this product to have an impact on their surgeries. That momentum has continued. We've seen a lot of uptake, a lot of surgeons. We've also seen a lot of distributors asking to add that product into their bag and their product mix. So we're really excited about it.

When investors consider BIASURGE, what kind of revenue should we expect from surgeries using this product? I believe it accelerates the cost to several hundred dollars per surgery. How should we assess BIASURGE? Is it around $30 per surgery, or in the range of $100 to $200? What should we be anticipating?

Yes. We have just started pricing on that in those first facilities. I’d tell you we're averaging somewhere around $200 a unit right now. That unit is one liter, and that would be yet to be determined how many they use for a surgery.

Okay. Excellent.

That's a pretty quick sample, but I just would share that with you here early.

And maybe switching to ALLOCYTE. How would you kind of characterize the demand you're seeing now that you have supply again for that product? I mean is the demand you're seeing kind of back to the levels you saw before the supply disruption? And maybe just give us an indication of that.

Yes. The demand is there. It's just a little bit of a process to get back added to facilities. We had to create the line extension ALLOCYTE Plus, and that needs to be added to the contract. So that's really the biggest kind of stopgap of why we haven't gotten back completely where we were, but we are seeing a lot of pickup for that product. So we're really okay with that.

Our next question is coming from Stephen Reed with Pitch Investments.

I think more to follow on Ian and Ross' question. They had most of them, but mine will be around Precision Healing on the imaging, what you've learned if you've learned anything from the FDA? And then what the process you see going forward on the lateral flow assay submission and approval?

It appears Mr. Nixon's line has gone down for a moment, but he is dialing back in as we speak.

Well, if you want to repeat that real quick, Stephen, I was thinking Ron was going to feel that. But if you'd repeat that, I'll answer.

Yes, sure. Really around the Precision Healing, what you've learned so far from your submission if you received any feedback and then going forward on the lateral flow assay or molecular assays, where you're at with that, what you've learned and what the process would be for you to go forward with that technology?

We are working closely with the FDA on the multispectral imager. We've gotten feedback on that and are working for another submission and should have that feedback again shortly. So we're working with them to resubmit. We have not announced, so I'm going to withhold comments on that particular component.

And have you received any feedback yet on going out looking for your appropriate partners for the Tissue Health Plus? Is the diagnosis a critical piece of the process before you see that materialize?

Yes, I can take that. This is Ron. There is significant interest because everyone sees the potential opportunity here. From our viewpoint, we think the market size is much larger than reported, as it's difficult to capture the full cost of wounds due to various comorbidities. Most individuals familiar with payer data understand the complications related to wounds from diabetes, COPD, CHF, and issues with mobility, including pressure ulcers. When considering the OEM costs, costs associated with amputations, readmissions to hospitals, and complications linked to diabetes that aren't necessarily classified as wounds, it’s clear that our prevention program and improved solutions would appeal to those addressing these issues. At this moment, we're not ready to disclose our partners, but there are many interested in collaborating with us on the platform we've built over the years.

Our next question is coming from Niraj Gupta with GCI Partners.

A couple of questions, all related to BIASURGE. Could you guys just speak more broadly on BIASURGE? My understanding was that the product was applicable to virtually any surgery involving sealing the wound cavity. Zach, Ron, could you guys just speak a little bit to just the broadness of the potential applicability for the BIASURGE product?

Yes. I want to clarify that while I will let Zach answer, the purpose is to eliminate bacteria in the wound bed, not to create a seal. It's not a sealant, but I'll provide a detailed response regarding the opportunity.

Yes. I think you're right, Niraj. I think you could imagine this product being used on any surgery. So if you are thinking about the OR, OR is a sterile environment, however, microbes do get introduced inadvertently. Surgeons want to protect that surgical margin where they've been working, for an implant or any other type of surgery you might think of, and they typically will wash that area throughout the surgery usually with saline and then close with a product like this, where it's antimicrobial nature cleanses or sterilizes the field they're working in. That would reduce surgical site complications.

Just to add to that, we think the data we have historically gathered on this product from a number of studies, one of which has not come out yet, but will be out shortly, that was used in the post-acute market. I think you'll see that the applicability will yield lots of results because all of the surgeons are always interested in minimizing the potential for surgical site infections. We believe that the data we've collected is going to demonstrate significant opportunity for this product as we move forward.

So the idea is to first utilize your current presence, as you've achieved with over 40 locations. However, looking ahead, the strategy regarding marketing and surgeon engagement is much more extensive than what you currently offer in terms of salaries. Is that correct?

We're learning about the product today in terms of who has the appeal for it, and our impression is, yes, it could be better than Cellerate because it's really for any surgery, as opposed to those that may just be people who have trouble healing with Cellerate. Cellerate has a massive market because they can't always predict which patients will have complications or challenges healing. We've seen Cellerate as a tremendous grower because there are so many patients who benefit from it. We think that BIASURGE is very similar in that respect, and could complement healing and outcomes for the patient. Considering the doctor's challenge of keeping patients healed post-surgery, both products serve a great purpose to achieve those goals. They allow that patient to have low microbes and then increase the biological activity to support healing with Cellerate. So it's a nice combination of products. You clean the area, and then you complement the healing with Cellerate.

So 2 quick ones related to that. So one, on BIASURGE, you talked about rough pricing parameters per liter. Do you expect a typical surgery would involve potentially more than one liter of usage?

Still learning, but yes, there are surgeries that will require more than one liter. It typically depends on size, but certainly, if you had a patient that was a revision surgery where there's already an infection, that could be a surgery where they could potentially use more product than one liter.

And then the final one was just thinking about bundling pricing and just managing growth; your tool bag is growing but you've got 2 outstanding products and Cellerate and BIASURGE in terms of the data about the efficacy and whatnot. Could you just speak to like how this impacts your ability to more broadly penetrate the combined product offering by having both to go to market with? And what does this do about the value proposition of Cellerate as you think about where it stands in its life cycle relative to where it can ultimately get to?

It really starts more conversations because of the broad appeal. We saw this at the booth at Hip and Knee Surgery Conference. There was just a nice starting point with either product, and then you can end the conversation with the other product. When you're able to broaden the conversation to meet the needs of the surgeon and the patient, I think that's a good thing. So having Cellerate allows us to talk about the antimicrobial action and reducing those microbes in surgery, and then once that conversation is done, you want to support the healing with Cellerate. So I think it's really beneficial. And for the hospitals, they really appreciate the sole sourcing of products like this so they don't have to go to multiple vendors to get these products. This certainly helps with our strength in the hospitals and our staying power because they then say, Sanara is an approved vendor, and we have great products that support the case as well, etc. This puts us in more situations with more chances to succeed.

Yes. To add to that, Niraj, we believe that what we're demonstrating not only with Cellerate, but with any new products we have come out, we've said from the very beginning of Sanara that we're going to provide advanced solutions that are proprietary for our surgeons, our hospitals, our post-acute market everywhere we operate. We want to provide unique solutions that are focused on two main objectives: improving outcomes while lowering costs. If we can continue to demonstrate that with multiple products, we believe our brand and credibility will continue to expand. Our customers know that we are backed by strong research and have substantial capabilities to impact those objectives.

As we currently have no further questions in queue at this time, I will hand it back to Mr. Nixon for his closing comments.

Yes. Thank you very much. We appreciate everybody being on the call today. Thank you for all the very good questions that you've asked. We're enthused about where we're headed with the company. As I think all of you know, we're in it for the long term. We want to really build this around our goal of lowering costs and improving outcomes. We want to reach every possible ASC or hospital or any place that we can utilize our proprietary products and our services as it relates to our post-acute area. So thank you guys for all the support. We appreciate that, and that will be the end of our call. So thank you all again for being a shareholder of Sanara.

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