Sanara MedTech Inc. Q2 FY2024 Earnings Call

Greetings, welcome to the Sanara MedTech Inc.'s Second Quarter Results and Business Updates. At this time all participants are in a listen-only mode. 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, Callon Nichols, Director of Investor Relations at Sanara MedTech. Callon, 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 June 30, 2024. We issued our earnings release yesterday morning and I would like to highlight that we have 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, 2024, are also available on this page. We will reference this information in our remarks today.

Please note that 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 differ materially from those projected or implied by forward-looking statements, please see the risk factor 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 our supplemental deck reference certain non-GAAP measures. In that regard, I direct you to the reconciliation of these measures and the earnings materials that are available on our website. Now I'd like to turn the call over to Ron.

Thank you, Callon and good morning everyone. During the second quarter of 2024, the company generated $20.2 million in revenue. This is our 11th consecutive record revenue quarter. I'd like to take a moment to recognize our entire team, including surgical sales, clinical R&D, customer service, marketing and finance, who continue to do an outstanding job contributing to our record growth strategy. In the second quarter, Sanara generated a net loss of $3.5 million and positive adjusted EBITDA of $600,000. The adjusted EBITDA is net of expenses that we view as noncore in our operations, including $900,000 of separation costs related to our former CEO, as well as $400,000 in legal and diligence expenses for prospective acquisitions and partnerships. Prior periods have been recast in our earnings press release to reflect this change in how we calculate adjusted EBITDA. Mike will go into this in more detail, but in Q2 we began reporting additional financial performance metrics of our Surgical business and Tissue Health Plus segment as separate segments that we could account for. Following the recent change in our CEO position, this transition to segment reporting better aligns with how I view the business. Our Surgical segment generated a $2.2 million net loss in the second quarter and a $2.7 million net loss in the first half of 2024. On a segmented EBITDA basis, the Surgical segment generated $1.4 million and $2.5 million of segmented EBITDA during the second quarter and first half of 2024, respectively. We continue to see strong growth opportunities for both segments, which Seth and Sam will discuss in further detail shortly. During the second half of 2024, we expect to invest an additional $4 million to $5 million to build out the THP strategy in anticipation of a commercial launch in the second half of 2025, which Sam will detail later in the presentation. I will now turn it over to Seth to discuss our Surgical business results and momentum in that segment.

Thanks Ron. As of the end of the second quarter, our products have been sold in over 1100 hospitals and ASCs across 34 states and the District of Columbia in the trailing 12 months and were approved to be sold in more than 4000 facilities in total. We currently have selling agreements with over 300 distributors representing over 2500 potential sellers. Looking at the growth of the territories and facilities in which we sell, in Q2 our products were sold into over 800 facilities compared to over 600 facilities in the second quarter of 2023. Sales of our soft tissue products grew from $13.2 million in the second quarter of 2023 to $17.6 million in the second quarter of 2024. Sales of bone fusion products were flat at $2.5 million for the same quarter-over-quarter period in 2023. I'd now like to discuss some of the key opportunities for growth that we believe will continue to drive our future performance. In the second quarter, we signed a contract with a national GPO that added over 1000 facilities where our products are contracted or approved to be sold. Our team is working to generate sales in those new facilities, while also working to further penetrate the existing facilities where our products are sold. As we have discussed before, we are also focused on expanding usage outside of our traditional specialty focus in ortho and spine. We see significant use cases and value propositions in the trauma, vascular and general surgery markets and are working diligently to expand our use of products into those areas. In addition to our organic growth, we are regularly evaluating opportunities for surgical M&A and partnership opportunities. Our management team sees synergistic potential transactions as a key growth driver that complements our strong organic growth strategy. I'd now like to introduce Jake Waldrop, our new COO, to give a brief overview of some of the key initiatives he's been working on since joining us in April.

Thank you, Seth and good morning everyone. The key focus of our operations team has been to centralize ownership and accountability across all aspects of our customer support, product fulfillment and underlying IT system infrastructure. This strategy includes building out an IT roadmap focused on workflow, automation and digital support for our next phase of growth. On the sales operations side, we're implementing plans to efficiently scale our customer service team and simplify the selling process for both internal and external sales representatives. With significant growth experienced by the company, Sanara is working to separate and streamline its shipping and fulfillment operations to allow customer service to focus on best-in-class sales support. Our supply chain is also a key part of this strategy and we have reorganized our supply chain function to facilitate smooth and consistent operations across each of our product lines. With that I will now turn it over to Sam to discuss more on our plans for Tissue Health Plus.

Thank you, Jake. Good morning, everybody. As we discussed before, nonsurgical wound care is ripe for disruption. By nonsurgical wound care, we are referring to the wound care spend outside of surgical settings. This expenditure of roughly $100 million per year in the U.S. includes treatment services, corresponding medtech products, and enabling diagnostic tools. Despite this large spend, the wound healing rate is estimated to be only 40% to 66% and the five-year mortality rate for a diabetic foot ulcer is 30%, roughly the same as cancer. Moreover, 15% of the population over the age of 65 has a chronic non-healing wound. $69 million of this expenditure occurs in hospital, the hospital inpatient or hospital adjacent wound centers, which is the highest cost setting. $35 million is estimated to be either preventable or overuse. THP is targeting this under-managed expenditure with the goal of generating hospital-based savings for payers and other risk-bearing entities. We plan to orchestrate the delivery of high-touch, comprehensive wound care at home and in community settings such as physician offices and skilled nursing homes. Our program aligns payers, patients, and providers to deliver compelling value. THP's value-based program is built on a science-driven first-of-its-kind care model that integrates prevention, treatment and maintenance of wounds. A THP patient's journey starts with a targeted outreach from an assigned care navigator from our Virtual Care Coordination Center, the Care Hub. From that point on, our care navigator will be a consistent guide for all their wound care needs. THP care navigators will leverage a unique mix of education, engagement, and transparency to increase patients' adherence to their care plan. Our value proposition to patients is simple: prevent wounds at least 25%, detect them early, and improve healing rates to 90%. An open third-party network will largely be our boots on the ground implementing our care interventions. We expect that THP's state-of-the-art wound assessment software-as-a-service medical device, along with the groundbreaking real-time EMR-integrated clinical decision support, will enable our network partners to deliver transformative wound care. We plan to enable higher EBITDA patient encounter revenue for our network partners, along with enabling new revenue streams such as patient monitoring. Lastly, we expect our payer customers will benefit from the accrual of THP-generated savings in the range of 2x to 5x of THP fees, while alleviating a major quality of life issue for their members. We are currently focused on finishing the build phase and plan to launch a pilot in the first quarter of 2025. Based on comparable specialty VBC programs and the industry spend in wound care, the scope of THP's contract for one single city-wide market is likely to be in the multiple millions. We are also exploring selecting strategic supply partnerships to de-risk execution. I would now like to turn it over to Mike to discuss our financial results in more detail.

Thank you, Sam. During the second quarter, Sanara generated net revenue of $20.2 million compared to $15.8 million during the second quarter of 2023, a 28% increase over the prior year period. The higher revenue in Q2 was primarily due to increased sales of soft tissue repair products, including CellerateRX as a result of our increased market penetration, geographic expansion, and our continuing strategy to expand our distribution network in both new and existing U.S. markets. SG&A expenses for the second quarter were $19 million compared to $13.8 million for the same period in 2023. SG&A expenses included $0.6 million and $0.5 million attributable to our Tissue Health Plus segment for the quarters ended June 30, 2024, and 2023, respectively. The higher SG&A expenses in Q2 of 2024 were primarily due to higher direct sales and marketing expenses, which accounted for approximately $3.4 million of the increase compared to the prior year. SG&A expenses during the second quarter of 2024 also included $0.9 million of executive separation costs and $0.4 million of legal and diligence expenses related to prospective acquisitions and partnerships. R&D expenses for the three months ended June 30, 2024 were $1 million, compared to $1.2 million during the same period in 2023. R&D expenses included $0.4 million and $1.0 million attributed to our Tissue Health Plus segment for the quarters ended June 30, 2024, and 2023, respectively. The lower R&D expenses in 2024 were primarily due to lower costs associated with the Precision Healing diagnostic imager and LFA. Depreciation and amortization expenses for the quarter ended June 30, 2024 were $1.1 million compared to $0.8 million for the same period in 2023. The higher depreciation and amortization expenses in 2024 were due to amortization of the tangible assets acquired from Applied Nutritionals in August of 2023. Interest expense was $0.6 million for the quarter ended June 30, compared to zero in 2023. The higher interest expense in 2024 was primarily related to our new term loan with CRG. Sanara had a net loss of $3.5 million for the second quarter of 2024 compared to a net loss of $1.9 million for the same period in 2023. The net loss included $1.3 million and $2.0 million attributable to our Tissue Health Plus segment for the quarters ended June 30, 2024, and 2023, respectively. The higher net loss for the second quarter of 2024 was primarily due to higher SG&A costs, higher interest expense related to our new CRG term loan, lower change in fair value of earn-out liabilities, and higher amortization of our acquired intangible assets, partially offset by higher gross profit and R&D expenses. Our cash balance at the end of the quarter was $6.2 million. As Ron mentioned earlier, in order to better inform the investor community of our strategic rationale of the acute and post-acute comprehensive strategy investments, we will be breaking out the financial results of our two operating segments, Sanara Surgical and Tissue Health Plus. Net of expenses we believe to be noncore to our operations, we generated consolidated adjusted EBITDA of $0.6 million and $0.9 million during the three and six months ended June 30, respectively. Our Sanara Surgical segment generated positive segment EBITDA of $1.4 million during the second quarter of 2024 and $2.5 million during the six months ended June 30, 2024. Tissue Health Plus generated negative segment EBITDA of $0.8 million during Q2 and negative $1.6 million during the six months ended June 30, 2024. All corporate and overhead expenses are included in the Sanara Surgical segment as substantially all these costs relate to supporting the operations and activities of the Surgical segment. Sanara Surgical also includes our in-house research and development team, Rochal Technologies. As Ron mentioned earlier, we plan to invest another $4 million to $5 million to further the Tissue Health Plus strategy during the second half of 2024. As we discussed in our last call, we closed a new $55 million debt facility with CRG during the second quarter. This transaction helped us strengthen our cash position and provided access to capital in a way that was non-dilutive to equity holders. The term loan is structured as a senior secured loan with a five-year term. In addition to the $15 million drawn at close, we may draw an additional $39.8 million before June 30, 2025. This facility provides us access to capital for accretive transactions and general working capital purposes. I will now turn it over to Ron for closing comments.

Thanks Mike. We continue to execute on our strategy both in Surgical and post-acute wound care value-based strategy. Our surgical team is generating positive adjusted EBITDA, and we expect to see continued improvement in operating results while executing on the growth plan and market expansion. As discussed, we see a significant opportunity to disrupt the post-acute wound care market with our value-based strategy and anticipate a 2025 commercial launch. Operator, I'd now like to open the line for questions.

Thank you. The first question today is coming from Ross Osborn from Fitzgerald. Ross, your line is live.

Hey guys, congrats on another record quarter. Thanks for taking our questions. So, starting off, there's been a lot of disruption in the chronic wound space with regards to reimbursement, causing some confusion and thoughts on the market broadly? And could you provide some more color on the diagnostic front of THP, especially given that I believe you're targeting the home care space?

Yes, Ross, this is Ron and I'm assuming that you're talking about the disruption is around the CTPs and the use of CTPs and the fact that the number of those are not being reimbursed today. But for the broader question, I'm going to turn it over to Sam and Sam, if you want to address that, that would be great.

Thank you, Ron. In terms of the disruption in the chronic wound care space, especially the CTP, that is something we are factoring into our strategy. As we discussed before, our strategy is to generate savings and mostly hospital-based savings and the direction CMS and the payers are moving in is very congruent with where we're going. In terms of the diagnostic device, one of the key things which we looked at when we were putting together the THP strategy was how do you make these diagnostic devices scalable in cost and also something which can be used across multiple settings and multiple levels of clinicians. So as we come out with that, you will see that that's the key aim we have achieved.

Okay, great. And then lastly, could you walk through the game plan for targeting your new adjacent markets you called out such as trauma, just the key steps there to driving adoption? Do you need to generate more data? Is it more such as a factor of knocking on doors? Any color would be helpful. Thank you.

Yes Seth, would you mind taking that please?

Sure. We'll continue to expand with the right distribution partners in those spaces as well alongside of even looking at other partnership opportunities as well to expand into those unique specialties, so that will be a focus. In addition to that, we've also hired some specialists as well that are focused specifically into the bone space and we think that can be a great complement to get into some of those additional specialties.

Okay, great. Thanks for taking our questions. Congrats again on another strong quarter.

Yes. Thank you, Ross.

Thank you. The next question will be from Chris Plum from Tall Pines Capital. Chris, your line is live.

Good morning, guys.

Good Morning, Chris.

Two questions. One, with the new GPO deal, does that cause a shift in strategy to go after the 3000 approved that aren't sold into? And then also if we can get a little more color update on BIASURGE progress since launch?

Yes. Seth, why don't you take both of those if you would, please?

Yes. We'll continue to look to expand both at a local level and a national level to gain access into these facilities so that progress won't change. That approach won't change for us as far as having access at both the local IDN level and also at a national GPO level. We've done that with great success, which obviously allows us a faster track to success, but also the attraction that it brings to great distribution partners, that's a wonderful thing for us as well. So that's one. The second question, again, was specific to what? Could you ask that again?

To BIASURGE, just how that's going, BIASURGE?

Sure. Sure. We had a soft launch of BIASURGE in the late fourth quarter of 2023. It's really started to pick up and carry some momentum, not only on a contracting side, but again, as a sales organization we're looking at that as a facility-level conversation, not just a surgeon-level conversation. But we're really happy with the progress being made specifically through the second quarter, with the growth of that product as well. It's fit nicely into a top six product for us already in its overall performance, and again, really happy with the progress that's being made with that product.

Seth, why don't you tell Chris a little bit about the feedback also from the surgeons that have used it?

Yes. All the way around we've reached a number of different specialties, and again, I think that's another piece that's complementary to us reaching into other specialties. Every single surgeon that's in the OR is using some type of wash, and that allows us to expand into the trauma and the general and plastic spaces as well. But we've had wonderful feedback from everything from orthopedics into spine, vascular, general in a very early window, and really satisfied and happy with, again, the progress that's being made there in multiple specialties with that product.

Great. Thanks, guys.

Thank you, Chris.

Thank you. The next question is coming from Ian Cassel from MicroCapClub. Ian, your line is live.

Hey, thanks for bringing the whole team on. This is very beneficial. My first question maybe is kind of relating to what Seth answered a few questions ago. I was curious if there's any color into why the bone fusion products specifically seem to, their growth has been stagnating in the last couple of quarters?

Yes, Seth?

Sure, I can answer that as well. So I would say this, part of that is an approval process, one where maybe the access for products like CellerateRX and FORTIFY have a little bit greater opportunity based on the number of approvals. One of the ways that we're tackling not only that is at a national level and local, but we just recently, in the last 90 days, we've hired a few bone specialists as well that will be in different markets to help build that out in addition to the regional managers and distributors that we have today. We think that's a great one-two punch for us in the second half of the year.

Thanks, I appreciate that. And my next question would be for Sam, what are the key areas you need to solidify to get ready for that Tissue Health Plus pilot in Q1 of 2025?

Thank you, Ian. In terms of the key areas, there are three. The first is, we are finishing the build-out of our technology platform. The second is, we are finishing off the build-out of our economic model and validating that both from economics, which we are putting in front of payers as well as our network partners. The third piece is really preparing education and onboarding assets for both onboarding our staff as well as our network partners.

Thank you. And maybe the last one for you, Ron. I appreciate you breaking apart in the segmented financials so we can see what Tissue Health Plus is doing versus Surgical. What is preventing you from being more profitable in Surgical at your current run rate?

Yes, that's a good question. From the beginning, with the launch of CellerateRX and the addition of more products, we aimed to create a comprehensive portfolio to support surgeons with ancillary products that enhance their work. We have successfully done this by incorporating BIASURGE along with CellerateRX and other offerings, covering both soft tissue and bone. However, our efforts won't stop there. As Seth mentioned, we are looking to expand into three new areas related to vascular and plastics, which may have unique requirements. We are always exploring opportunities for acquisitions or partnerships. By pursuing these avenues and having a clear vision of our goals, we are focused on building our infrastructure to support this growth. I wanted Jake to be part of today's call because he is helping us improve efficiencies across the board, ensuring we can support a rapidly growing organization. We aren't looking to slow down our growth to optimize profitability right now; we believe that with fixed cost leverage, we can enhance profitability as we expand further. I hope that answers your question, and we have a solid plan in place aimed at increasing profitability from our current position.

Hey, maybe one last one to tag onto that. It does look like your growth rate really bounced back from late last year or middle of last year, which is good to see. Was there anything kind of one-time, one-time stocking order here in Q2 that made it more robust than it would have been under a normal sales cadence?

I don't believe so. Mike?

Yes, I can answer that as well. We had really steady incremental growth throughout the entire quarter. It wasn't a shot in the arm type of order or big stocking orders or things like that that kind of inflated the number. That did not occur in the second quarter and I'm really happy from April and the growth inside of April to May and it just continued to climb. So I would say that the progress was really, really strong overall, and it wasn't a result of just a one-time order.

Yes. And I think I misunderstood your question, Ian. Sorry about that.

That's okay, thanks I appreciate it.

Thank you. The next question will be from John Siedhoff from Twin Oaks Equity, LLC. John, your line is live.

Thanks. Ron and Mike, congratulations guys on the continued growth. I mean, that's to be an $80 million run rate is fantastic. You guys have done a great job over the last five years, congratulations.

Thank you, John.

Thanks, John.

Thank you. Ian had a great question about the costs of growing a company and the cash required for that. I see that you've acquired a new facility, which I think is a positive step because you need to ensure you have sufficient funds. Ron, do you anticipate a specific timeline for when you might reach breakeven, or do you expect to continue to burn cash during your growth since it requires investment to expand?

The separation of Tissue Health Plus has always been our goal as we seek partners to drive its success. As we progress and Tissue Health Plus reaches profitability, which we anticipate if it launches in 2025, we expect it to achieve early success once contracts are awarded. After that point, Surgery will operate independently and will be fine from a profitability perspective. We are confident in our strong margins and sales momentum, and we are continuing to expand by strengthening our infrastructure. Consequently, we expect to see significant leverage from our selling, general, and administrative expenses.

And I would certainly agree with you there. You've got to get to enough force going forward. Do you see this negative cash burn? The cash burn is as a reason for what I think is a depressed stock price.

I don't actually. The stock market always confuses me. I never understand it. So I really can't speak to that quite frankly. All I know is I've not sold a share of stock, nor have most of our directors, and we all believe in growing and we believe that this is going to be a very successful company. So we are enjoying the ride and we're going to just continue to go forward, John.

Well, neither have I. I just wanted to get yours and Mike's take on that and see how we're doing for the investors and I appreciate the growth that you guys are continuing to show us out there in the market. I appreciate it, guys. Thank you.

Thank you, John.

You bet.

Thank you. There are no other questions in queue at this time. I would now like to hand the call back to Ron Nixon for closing remarks.

I just want to thank all our shareholders that attended the call today and all the ones that will read about it and we just thank you for all your support. Thank you for hanging in there. We believe in our future. We're very excited about where we're going and how we're going to get there, and we continue to build a team that's, I think, best-in-class and I feel very, very proud of that. And so thank you all for attending today, and we'll talk to you soon.

Thank you. This does conclude today's conference. You may disconnect your lines at this time. Thank you for your participation.