Earnings Call Transcript - SMTI Q3 2024

Operator, Operator

Good morning, and welcome to the Sanara MedTech Third Quarter 2024 Earnings Conference Call. The company issued its earnings release yesterday and will post today's supplemental deck on the Investor Relations page on the company's website. With us today are Ron Nixon, Executive Chairman and CEO; Mike McNeil, Chief Financial Officer; Seth Yon, President, Commercial; and Sam Muppalla, who leads Tissue Health Plus. 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 factors set forth in our most recent annual report on Form 10-K, as supplemented by the risk factors in the company's most recent quarterly report on Form 10-Q. Also, this conference call, the earnings release and supplemental deck reference certain non-GAAP measures. In that regard, please refer 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 Nixon.

Ronald Nixon, CEO

Thank you, operator, and good morning, everyone. During the third quarter of 2024, the company generated $21.7 million in net revenue. This was an increase of 35% year-over-year and represented our 12th consecutive record revenue quarter. The strong sales performance in Q3 is a testament to the hard work and dedication of our entire organization in executing our strategy. We remain focused on continuing our growth and delivering exceptional value to both our customers and shareholders. Third quarter also achieved improved adjusted EBITDA results. Sanara generated adjusted EBITDA of $800,000 during the third quarter of 2024 compared to adjusted EBITDA of $300,000 for the same period in 2023. In Q2, we began reporting additional financial performance metrics of our Surgical division and Tissue Health Plus as separate business segments. This transition to segment reporting better aligns with how our leadership team views the business. Our Surgical segment generated a $200,000 net loss in the third quarter and a net loss of $2.9 million year-to-date through September 30, 2024. On a segmented EBITDA basis, the Surgical segment generated $2.6 million and $5.1 million of segmented EBITDA during the third quarter and year-to-date through September 30, 2024, respectively. We continue to see strong growth opportunities for both segments, which Sam and Seth will discuss in further detail. We plan to continue investing in the THP technology platform and related infrastructure through the expected commercial launch in mid-2025. And as a reminder, we are pursuing like-minded financial partners that will bring value to the strategy, including capital. In September, we invested $5 million in exchange for an ownership percentage of approximately 6.6% in ChemoMouthpiece LLC, which owns and manufactures a 510(k) cleared cryotherapy device designed to reduce the incidence and severity of chemotherapy-induced oral mucositis. In connection with the investment, we announced the execution of an exclusive U.S. distribution agreement through our joint venture with InfuSystem for ChemoMouthpiece. This product aligns well with Sanara's wound and skin care strategy, which includes our licensed collagen peptides from Tufts University, with one particular peptide focused on radiation dermatitis. SI Healthcare Technologies, LLC, a joint venture entity owned 50-50 by Sanara and InfuSystem Inc. will be the exclusive distributor of the chemotherapy kits by our partner, InfuSystem. We look forward to working with the InfuSystem team to commercialize this product in 2025. I will now turn it over to Seth to discuss our Surgical business results and momentum.

Seth Yon, President, Commercial

Thank you, Ron. As of the end of the third quarter, our products have been sold in over 1,200 hospitals across 34 states and the District of Columbia during the trailing 12 months and were contracted or approved to be sold in more than 4,000 facilities. We currently have selling agreements with over 300 distributors representing 2,900-plus potential sellers. Looking at the growth of the territories and the facilities in which we sell, in Q3, our products were sold into over 900 facilities compared to over 600 facilities in the third quarter of 2023. Sales of our soft tissue products grew from $13.6 million in the third quarter of 2023 to $18.9 million in the third quarter of 2024. Sales of bone fusion products grew from $2.3 million in the third quarter of 2023 to $2.8 million in the third quarter of 2024. We continue to build momentum within our network of over 4,000 contracted or approved facilities, diligently working to expand our surgeon user base in our core orthopedic and spine areas. We have also intensified our focus on nontraditional users to drive growth in both active and new accounts. Expanding into additional geography remains a top priority for our regional sales managers, particularly through the engagement of key distribution partners. The commercial team is working closely with our operations team to constantly enhance our sales analytics, which will uncover greater opportunities through a strategic focus across all the areas that we serve. In addition to our organic growth, we are regularly evaluating opportunities for surgical M&A and partnerships. Our management team sees synergistic potential transactions as a key growth driver that complements our strong organic growth. With that, I'll turn it over to Sam to provide an update on Tissue Health Plus.

Sam Muppalla, Lead, Tissue Health Plus

Thanks, Seth. Last call, we outlined THP's strategies to disrupt the $100 billion-plus non-acute wound care market. As planned, Q3 was focused on enhancing our execution capacity and building the platform to support the scaled delivery of our distinctive care model. We have established a world-class leadership team with extensive expertise in wound care and technology to oversee the execution of our global multidisciplinary team. The development of THP's state-of-the-art wound assessment software, as a medical device and innovative real-time EMR integrated clinical decision support, is on track for release in the first half of 2025. Early previews have been well received by the provider community, demonstrating its transformative value. We are compiling a list of enthusiastic pilot partners. On the payer side, we have successfully collaborated with a leading value-based care consulting firm to refine our program economics model, ensuring alignment with standard payer reimbursement strategies and infrastructure. This engagement reaffirmed the efficacy of our innovative episodic risk-sharing model. In preparation for market entry in mid-2025, we have launched an introductory website, www.tissuehealthplus.com, to introduce ourselves to the world. We have also recruited a clinical advisory board to help us anticipate and overcome real-life adoption hurdles. I would now like to turn it over to Mike to discuss our financial results in more detail.

Michael McNeil, CFO

Thank you, Sam. During the third quarter of 2024, Sanara generated net revenue of $21.7 million compared to $16 million in the third quarter of 2023, a 35% increase over the prior year period. The higher revenue in Q3 was primarily due to increased sales of soft tissue repair products, including CellerateRX, as a result of increased market penetration, geographic expansion, and our continued strategy to expand our independent distribution network in both new and existing U.S. markets. Third quarter gross profit of $19.7 million increased $5.4 million or 38% compared to the prior year. Year-to-date gross profit of $54.5 million increased $13.3 million or 32% compared to the same period in 2023. SG&A expenses for the third quarter were $19 million compared to $13.9 million for the same period in 2023. The higher SG&A expenses included $3.7 million of direct sales and marketing expenses and $1.2 million of costs related to the build-out of our THP platform and infrastructure. Third quarter R&D expenses were $1.4 million compared to $1 million during the same period in 2023. R&D expenses included $600,000 and $800,000 attributable to our Tissue Health Plus segment for the quarters ended September 30, 2024 and 2023, respectively. The higher R&D expenses in 2024 were primarily due to new projects associated with CellerateRX. Interest expense was $900,000 for the quarter compared to $200,000 in Q3 2023. The higher interest expense was primarily related to our term loan with CRG. Sanara had a net loss of $2.9 million for the third quarter of 2024 compared to a net loss of $1.1 million for the same period in 2023. The net loss included $2.7 million and $1.7 million attributable to our Tissue Health Plus segment for the quarters ended September 30, 2024 and 2023, respectively. The higher net loss for the third quarter of 2024 was primarily due to higher SG&A costs related to the build-out of the THP platform, higher interest expense related to our CRG term loan, and higher expense related to the change in fair value of earn-out liabilities. 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 have separated the financial results of our two operating segments, Sanara Surgical and Tissue Health Plus. Net of expenses we believe to be non-core to our operations, we generated consolidated positive EBITDA of $800,000 and $1.7 million during the three and nine months ended September 30, 2024, respectively. Our Sanara Surgical segment generated positive EBITDA of $2.6 million during the third quarter of 2024 and $5.1 million year-to-date through September 30, 2024. Tissue Health Plus generated negative segment EBITDA of $1.7 million during Q3 and negative $3.4 million during the nine months ended September 30. All corporate and overhead expenses are included in the Sanara Surgical segment as substantially all of these costs relate to supporting operations and activities of the Surgical segment. Sanara Surgical also includes our in-house research and development team, Rochal Technologies. Our cash balance at the end of the quarter was $16.3 million. I will now turn it over to Ron for closing comments.

Ronald Nixon, CEO

Thank you, Mike. We continue to execute on our strategic plan in both surgical and non-acute wound care value-based strategy. Our surgical team has generated 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 non-acute wound care market with our THP value-based strategy and anticipate a mid-2025 commercial launch. Operator, I'd now like to open the line for questions.

Operator, Operator

And our first question today will be from Ross Osborn from Cantor Fitzgerald. Ross, your line is live.

Ross Osborn, Analyst

Hi, guys. Congrats on the progress. And thanks for taking our questions today. Starting off, would you walk us through the rationale for the investment in ChemoMouthpiece and how it fits into your broader strategy?

Ronald Nixon, CEO

Our strategy has always focused on wound and skin care. Many people view wounds as a skin condition. We have licensed 18 collagen peptides from Tufts, which are all related to wound and skin care. We are moving forward with a value-based strategy with THP, which addresses both wound and skin issues. The ChemoMouthpiece significantly addresses a serious skin condition related to chemotherapy and oncology. When chemotherapy is used to treat cancer, patients can develop sores, known as oral mucositis, which are essentially open wounds in the mouth. Historically, the only way to manage this problem was through the use of ice cubes, which is outdated. One individual who underwent cancer treatment faced severe issues with oral mucositis; he is an engineer and decided to develop a solution for this. The product is unique and unlike anything else available, and we are collaborating with InfuSystem to bring it to market as it aligns perfectly with our overall strategy.

Ross Osborn, Analyst

Got it. Makes perfect sense. And then turning to THP. If I remember correctly, you were conducting a pilot program with the podiatry group. Curious of any feedback there and how that's progressed?

Ronald Nixon, CEO

Yes. We've not set up that, but I'll turn it over to Sam to talk about that.

Sam Muppalla, Lead, Tissue Health Plus

Thank you, Ron. Ross, as we discussed last time, we were aiming for pilots in the first half, and we are on track to achieve that. As I mentioned during the earnings call, we have a list of collaborators we are working with, and we are optimistic because the early previews have been extremely positive.

Ross Osborn, Analyst

Okay. Great. Okay, great. Thank you for clarifying that. And then last one on THP. How has it gone as far as attracting new operational personnel to join the team there?

Sam Muppalla, Lead, Tissue Health Plus

That's one thing we are particularly proud of, Ross, is we've been able to attract a very skilled team with a lot of execution experience in this space. And we have actually created a team both in the U.S. as well as in India to help us scale our platform development efforts. One of the things we also did was integrate external partners to kind of de-risk the execution. But in terms of being able to attract the talent, it's been a really nice journey so far, and we've been able to onboard them and make them productive really fast.

Ronald Nixon, CEO

One thing, Ross, it makes it very interesting in that and why it's also attractive. Many people know this is a needed strategy in this market, and people have known for decades that this strategy needs to happen. It's complex, but Sam is the perfect person to lead that charge, and he's built a team that complements him very, very well.

Ross Osborn, Analyst

Perfect. And then maybe turning to OpEx. During the quarter, you demonstrated controlled spending, particularly on the R&D line. How should we think about OpEx for the balance of this year and 2025 as you launch Tissue Health Plus in addition to the other projects you have going on?

Ronald Nixon, CEO

We think through that very carefully, Ross, and we lay out exactly where we're going and how we plan to get there. And so we typically don't have a lot of surprises related to that. So it's in our budget. And so when we say that we're moving forward on our strategy to execute that strategy, we have the appropriate budget for that. And as we also said, we expect to see continued growth in our adjusted EBITDA. So it's all part of our overall planning, and we don't see any surprises at this moment.

Ross Osborn, Analyst

Okay. Perfect. And then lastly, any update on your work with Tufts relating to the 18 peptides you have?

Ronald Nixon, CEO

I'm sorry, I didn't hear the question, Ross, say it again.

Ross Osborn, Analyst

Any update on your work with Tufts relating to the 18 peptides you have?

Ronald Nixon, CEO

Yes. So if you think about the skin and wound strategy that I discussed with you just a few minutes ago, the radiation dermatitis is almost an identical same size market as the oral mucositis, and there has been no particular solution that has been developed that is preventative and a solution for healing radiation dermatitis. And it's a horrific skin condition as a result of radiation. And both of those are the two skin conditions that really wreak havoc on keeping people on their regimen for chemotherapy and also radiation. So yes, our technical team at Rochal scientific team is working on that, and we are moving that forward as quickly as we can. And we see it as a very strong complement for our joint venture with InfuSystem because it will be the same call points.

Ross Osborn, Analyst

Perfect. Thanks for taking our questions and congrats again on the progress.

Ronald Nixon, CEO

Thank you, Ross, appreciate that. Thank you for the support.

Operator, Operator

Thank you. We received another question from Ian Cassel from MicroCapClub. Ian, your line is now open.

Ian Cassel, Analyst

Congratulations on the quarter. Can you talk generally about the types of partners that you're looking to attract for Tissue Health Plus and maybe just generally how those conversations are going?

Ronald Nixon, CEO

Sure. I'll turn that over to Sam and let him do that. Sam?

Sam Muppalla, Lead, Tissue Health Plus

Thank you, Ron. Thank you, Ian, for your question. We are seeking two types of partners: financial partners and execution partners. We have actually filled our roster of execution partners. For financial partners, we are looking for strategic ones who can also offer execution capabilities, so we want smart money, not just funding. We are looking for individuals or organizations with connections to the provider community and to the supply chain we plan to use at THP, such as DME providers. Additionally, we are interested in strategic product suppliers and manufacturing companies that have strong expertise in this field. Furthermore, we are also open to traditional financial investors, like venture capitalists, especially those with a proven execution track record in the healthcare sector we are targeting.

Ian Cassel, Analyst

One last question. When Tissue Health Plus launches in the middle of next year commercially, would you expect that segment to be immediately profitable? Or will there be some ramp-up needed to get to profitability in that segment?

Sam Muppalla, Lead, Tissue Health Plus

There will be a ramp-up needed to get to profitability.

Operator, Operator

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

Chris Plahm, Analyst

Good Morning, guys. Two questions. One, can we get an update on IP progress with Cellerate and also just an update on BIASURGE?

Ronald Nixon, CEO

Yes. I'll let Seth discuss BIASURGE. Regarding our intellectual property, we've emphasized in previous calls that it is a key priority for us and is progressing well. We expect to report on our successes by year-end, and we continue to file provisional patents for all of our products and their combinations. We're making excellent strides, Chris. Now, Seth, could you share your insights on BIASURGE from its introduction in November through this quarter?

Seth Yon, President, Commercial

Sure. Great question, Chris. Thank you. So BIASURGE soft launched last year at this time, formally launched at the turn of the year. We are right on pace not only at the facility level and gaining approvals, but starting to scale that product as well. It's really a facility level sale, not just a surgeon level sale, and we're really happy with how that's gone through the third quarter.

Chris Plahm, Analyst

Great. Thanks guys.

Ronald Nixon, CEO

Thank you, Chris.

Operator, Operator

Thank you. And the next question is coming from John Siedhoff from Twin Oaks Equity. John, your line is live.

John Siedhoff, Analyst

Thank you. Good morning, Ron, Mike, how are you guys doing? Congratulations on another growth quarter year-to-date, year-over-year, $47 million to $60 million. Fantastic results.

Ronald Nixon, CEO

Thanks John.

John Siedhoff, Analyst

I have two quick questions. Last time I asked about our share price, which has been in the mid-30s. Could you provide some insight into what Sanara offers to market makers? Over the past couple of years, we've seen lows of $28 to $30 and highs of $45 to $50. People have invested at both levels, and now we’re around $35. At some point, we need to consider these investors and work on increasing the price, especially with our ongoing net losses and the need to borrow more for growth. Some reviews suggest it might take three years to reach profitability. I’m curious about your perspective on this given the amount of capital needed for growth. I wanted to know your thoughts on cash burn and your outlook for profitability in the future. Is it around $100 million? It’s a big question, and I’d also like to know how this impacts our market makers regarding our share price. Thank you.

Ronald Nixon, CEO

John, we're on pace exactly as we're planning. We like the progression of our adjusted EBITDA. Mike can speak to the actual cash. And so Mike, you could talk about that now. But I would tell you, our plan is to continue to do exactly what we're doing, 12 straight quarters. Last I've checked, that's a lot of time frame, and we're going to continue to keep that pace. That's what we want to do. And I think the market will take care of itself. All we have to do is continue to produce results, and we don't expect to have any surprises where we would need to have a highly dilutive event. We would look for events that are extremely accretive to us, and we've said that on many calls before from our M&A and partnering activity. And so Mike, if you want to talk a little bit about the year projections on cash flow, that would be great.

Michael McNeil, CFO

Yes. Thanks, Ron. Yes, we had a strong cash performance during the quarter. We actually generated a couple of million dollars of positive cash flow in the quarter from operating activities. And so we've been somewhat neutral through most of the year, and most of the borrowing has been for investing activities. So we don't expect to be burning cash in operating activities in the near future or even going forward.

John Siedhoff, Analyst

Well, thanks, Mike. That's really good news to hear. And then Ron, thanks also. I know that you guys are focused on growth. I know what it takes to get there. And it's great to hear that you've got our investors in mind because the money that you've raised has certainly been non-dilutive. So I appreciate that.

Ronald Nixon, CEO

Thank you.

John Siedhoff, Analyst

You guys have a great day. I appreciate it.

Ronald Nixon, CEO

Thanks John.

Operator, Operator

Thank you. And there were no other questions from the lines. We did get some webcast questions in, so I'll go through a few of those right now. Can you give some more granularity on the timeline for THP? Will a pilot be launched in the first half of '25?

Ronald Nixon, CEO

Yes. Sam, do you want to take that?

Sam Muppalla, Lead, Tissue Health Plus

Sure. Yes. We are planning to launch a pilot in the first half of '25, yes.

Operator, Operator

Okay. Can you give some color on where the majority of work is that remains in order to launch THP by mid-2025, engineering partnerships, et cetera?

Sam Muppalla, Lead, Tissue Health Plus

Sure. The majority of work in THP involves three key areas. The first area focuses on building a platform to scale our care model delivery, supported by partnerships. While I won't disclose partner names, I can say we've collaborated on integrating with EMRs, accelerating development, and utilizing innovative data management techniques to enhance our technology. We're aiming to avoid duplicating existing market solutions and instead building on what's already available, leveraging these partnerships effectively. The second area of work involves the continuous expansion and testing of our clinical model's efficacy. This model and its scientific foundation serve as crucial inputs to our platform, with ongoing progress. For instance, we've recently broadened our clinical model to cover atypical wounds, representing about 20% of the wound care population, which is among the initial efforts to establish standard care for these cases. The third focus is on commercialization, where we are identifying network partners, collaborating on pilot programs, and examining pricing models in the market. We've received positive feedback on these efforts. In summary, these are the three main areas we are actively pursuing. Hopefully, that clarifies our current focus.

Operator, Operator

Okay. The next question, what are your expectations regarding ChemoMouthpiece's contribution to top and bottom line?

Ronald Nixon, CEO

We're not prepared to give that answer at this time. We obviously are very enthused and think it is a terrific opportunity in front of us. And as we progress on the introduction of this product and start to launch in 2025 and get this commercially accepted in the marketplace through our partnership with InfuSystem, then we'll come back and report what our expectation is. But it's a very big wide open market from my perspective.

Operator, Operator

Thank you. And what are some of the characteristics you're looking for in a potential M&A target for Surgical?

Ronald Nixon, CEO

Yes, we will inform them of that once we finalize the deal.

Operator, Operator

Okay. And we are currently seeing no remaining questions at this time. That does conclude our conference for today. Thank you for your participation.