Earnings Call Transcript - SMTI Q3 2022

Operator, Operator

Good day, everyone, and welcome to the Sanara MedTech Inc. Q3 2022 Earnings and Business Update. It is my pleasure to turn the floor over to your host, Callon Nichols, Director of Investor Relations. The floor is yours.

Callon Nichols, Director of Investor Relations

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, 2022. We issued our earnings release yesterday afternoon. And I would also like to highlight that today's deck can be found under the SEC filings section of 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 September 30, 2022, 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 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 the risks and uncertainties involving forward-looking statements and factors that could cause actual results to vary materially from those projected or implied by forward-looking statements, please see our most recent annual report on Form 10-K and our Form 10-Q for the quarter. Now I'd like to turn the call over to Ron.

Ronald Nixon, Executive Chairman

Thank you, Callon, and good morning, everyone. In the third quarter of 2022, Sanara generated $13 million in revenue, representing a 124% increase from the prior year period. Third quarter revenues included $3 million of Scendia sales. The third quarter of '22 was another record quarter for Sanara as well as for our historical business before we acquired Scendia. Additionally, it was also the first quarter during which the company generated $4 million of revenue in a single month. The company had a loss before income taxes of $3.2 million for the third quarter of 2022. The higher loss in 2022 was due to increased SG&A costs, higher R&D expenses, and higher amortization of our acquired intangibles. Mike will go into further detail, but our net loss after tax is $1.5 million for Q3. The lower net loss in 2022 was due to the recognition of a noncash income tax benefit of $1.7 million in Q3 related to purchase accounting of the Scendia acquisition. As previously discussed at the beginning of the third quarter, we completed our acquisition of Scendia. Zach will go into more detail shortly. During the quarter, we worked to integrate Scendia into Sanara's business, and we continue to see significant opportunities as well as synergies from the combination of the two companies. We proved this combination's value through our previous Scendia joint venture, which led to the acquisition of the business. Subsequent to the end of the quarter, we announced our partnership with InfuSystem Holdings. We will discuss this later in the call, but this partnership pairs Sanara's product line and deep expertise in wound care with InfuSystem's distribution and complex billing capabilities as well as our existing sales team and national footprint. In Q3, we delayed the submission of our Precision Healing Imager 510(k) due to an electrical firmware issue that has now been resolved. We plan to file our 510(k) next month by the end of the year. Turning to our broader comprehensive wound and skin strategy. We continue to have discussions with a number of value-based companies and plan to launch this strategy in 2022.

Zachary Fleming, Chief Executive Officer

Thanks, Ron. Our surgical team continues to generate strong sales growth, penetrating further into our existing customer base and also expanding into new geographic areas. At the end of the third quarter, we had a total of 36 field sales managers employed. We continue to see growth in our distributor partnerships and individuals representing our products. At the end of Q3 2022, CellerateRX was sold in 662 hospitals and ambulatory surgery centers across 28 states during the trailing 12 months, including facilities where CellerateRX has been sold by Scendia since our acquisition of Scendia in July 2022, and was approved to be sold in 1,714 facilities. As we have discussed before, we believe there are approximately 12,000 hospitals and ambulatory surgery centers in the United States where CellerateRX surgical could potentially be used. Subsequent to the end of the quarter, we filed our 510(k) for BIASURGE. This is our surgical cleanser. We believe that the product could have a significant impact on both the surgical wound care market and our sales when commercially available. As Ron mentioned, in the third quarter, we worked to integrate Scendia into Sanara. Scendia generated approximately $3 million in revenue for the quarter. We continue to focus on four key Scendia products: Amplify, verified inductive advanced cellular bone matrix, bioactive mobile matrix, and Texigen, amniotic membrane allograft. We believe that these products fit well with our CellerateRX offering and could be used by existing customers either as standalone products or in conjunction with CellerateRX. Turning to our InfuSystem partnership. This is a true 50-50 partnership focused on delivering a complete wound care solution, targeting and improving patient outcomes, lowering the cost of care and increasing patient and provider satisfaction. The partnership is expected to enable InfuSystem to offer innovative products, including medical LLC's negative pressure wound therapy and PWT devices and supplies along with Sanara's advanced wound care product line and associated services to new customers. By pairing the company's capabilities, we believe we are positioning the partnership to successfully offer a comprehensive solution to NPWT patients. Now I will turn it over to Mike to discuss our financial results.

Michael McNeil, Chief Financial Officer

Thanks. For the quarter, we generated revenues of $13 million compared to revenues of $5.8 million for the third quarter of 2021, representing a 124% increase from the prior year period. Third quarter revenues included $3 million of Scendia sales. SG&A expenses for the quarter were $12.1 million as compared to $6.9 million for the third quarter of 2021. The higher SG&A expenses in the third quarter of 2022 were primarily due to higher direct sales and marketing expenses which accounted for approximately $3.9 million or 75% of the increase compared to the prior year. The higher direct sales and marketing expenses were primarily attributable to an increase in sales volume, our sales commissions of $3.1 million as a result of higher product sales, and $0.5 million of increased costs due to sales force expansion and $0.3 million of costs related to travel and operational support. We had a net loss of $1.5 million for the third quarter of 2022 compared to a net loss of $2 million for the third quarter of 2021. The net loss was positively impacted by the recognition of a noncash income tax benefit of $1.7 million related to purchase accounting for the Scendia acquisition. Our cash at the end of Q3 was $10.3 million. With that, I'll turn it back to Ron for some closing remarks. Ron, are you on mute?

Zachary Fleming, Chief Executive Officer

Do you all want me to wrap that up?

Michael McNeil, Chief Financial Officer

If you would, yes, please.

Zachary Fleming, Chief Executive Officer

Okay. Thanks, Mike. As we've discussed, we continue to have record revenue quarters at Sanara, driven by both our Cellerate product line as well as the addition of products distributed by Scendia. We believe we have positioned ourselves with InfuSystem to drive sales in the NPWT market and look forward to updating you in the future on the results of that partnership. That concludes our remarks, and we look forward to answering any questions you may have. Operator, we are ready to open the call for questions. Thank you.

Operator, Operator

There appear to be no further questions in the queue. We have a last-minute question from Chris Plahm with Tall Pines Capital.

Christopher Plahm, Analyst

Two questions, if you guys could give us a little more insight into your InfuSystem partnership and also how you folks see the opportunity with BIASURGE?

Zachary Fleming, Chief Executive Officer

Sure. This is Zach. The InfuSystem partnership allows us to have a group of folks focused on the wound care space. We have a sales team that has been outselling the negative pressure systems, and now they're going to be selling the core system as well as our products. It's certainly an approach that will allow us to have people in the field. They also have complex billing capabilities, which is certainly necessary in the wound care space, so that should help quite a bit. In addition, they have distribution and different facilities where they can store and ship product on local levels, with seven across the U.S. So that will help as we start to go into these new markets. And then transitioning to your second question, what was that one more time?

Christopher Plahm, Analyst

On BIASURGE, how do you guys see the opportunity?

Zachary Fleming, Chief Executive Officer

Oh, BIASURGE. That product, like I said, the 510(k) has been filed, and that should take a little bit of time just leaving it into the agency to approve that. This product is going to be sold into surgical cases. The premise is that in surgery, they always irrigate on the way into the cavity they're working on as well as on the way out, particularly with the hardware cases that we attend. So they do a lot of that in both orthopedics, spine, podiatry, really all of the surgical cases. This product would go in and cleanse the area, eradicate the biofilms, and allow for a cleaner procedure to reduce the chance of infection.

Operator, Operator

We have some questions now, so let's hand it back to Callon for those inquiries.

Callon Nichols, Director of Investor Relations

Sure. We have some questions coming in from the Webex. One question is for Zach. Are there any updates on publishing clinical studies on Cellerate?

Zachary Fleming, Chief Executive Officer

So we've talked a little about upcoming studies. We're excited to say that there are some coming shortly. I can't say when, and I can't say by who, but I think you guys will like the studies. We've worked really hard on them, and you should be seeing those in the not-too-distant future.

Callon Nichols, Director of Investor Relations

And next question, do you have any sense of the penetration rates of Cellerate in the existing hospitals?

Zachary Fleming, Chief Executive Officer

I think we have a sense that it's sort of an open book, as there are many surgical specialties that are appropriate for the use of Cellerate to reduce wound complications. The product typically can get in through orthopedics or spine as usually one of our first forays into that, because those are the groups that we leverage. From there, it's 10 to 15 additional specialties. So in any given hospital, it's quite different. It's hard to give you one answer, but we certainly can see where many specialties can pick that product up and use it. On a typical basis, they're using it about one-third of the time when they have an appropriate case, because what they're looking for is that patient with comorbidities that would reduce their ability to heal. So just a very approximate number would be around that one-third of their cases.

Callon Nichols, Director of Investor Relations

Thank you. Any sense of what percent of surgeries—this is probably a similar follow-up—but any sense of what percent of surgeries Cellerate is used in some of your earliest hospitals?

Zachary Fleming, Chief Executive Officer

Do we have a number for that? Yes, I'd be making that up if I told you a number. I don't have that number.

Callon Nichols, Director of Investor Relations

Okay. Is Cellerate's entry into hospitals and ASCs becoming harder in a difficult operating environment for hospitals?

Zachary Fleming, Chief Executive Officer

There's always complexities, but it has not become harder. In fact, the doctors and facilities are looking for solutions to help their patients. They are having to see patients that are highly comorbid. They need solutions to help them heal just to avoid complications. So the same story as always; it's no more difficult now than ever.

Callon Nichols, Director of Investor Relations

Next question, what are the important drivers of increasing utilization within existing hospitals?

Zachary Fleming, Chief Executive Officer

So it's adoption and training. For us, we have to get into the hospital, certainly find that initial supporter, and usually a physician that would take our product to the Value Analysis Committee and gain approval. From there, our regional sales managers and territory managers have to go in and begin to train and spread that word to these additional surgeons. We do that through different promotional activities, but as well in-servicing, in-servicing means you're standing and doing some training, usually in the operating suite.

Callon Nichols, Director of Investor Relations

This is the last question that I have from the Webex. Could you update us on how the pilots with home health agency went? Is there a market fit there?

Ronald Nixon, Executive Chairman

Yes. And I'll take that, Zach, if you would like.

Zachary Fleming, Chief Executive Officer

Sure.

Ronald Nixon, Executive Chairman

So the pilots that we've been doing in home health care have shown us that having the complete comprehensive strategy is going to be of great value. We have seen that the ability of us to be able to link our specialist where the provider has added value in terms of knowledge at the wound side at the bedside leads to better care. We have high expectations when our imager comes out that it's just going to give us more data at the wound bed to be able to make better decisions.

Operator, Operator

Our next call-in question comes from Ian Cassel with MicroCapClub.

Ian Cassel, Analyst

Maybe my first question was on the negative pressure side, either Zach or Ron or whoever. I'm just curious if you could highlight that market opportunity; how big is negative pressure as a percentage of the acute wound care market and who are the large players there? And maybe how are you and core medical products differentiated, if at all?

Ronald Nixon, Executive Chairman

Yes. I'm happy to take that one, Ian. Negative pressure is a very large part of the acute wound care space. And it's been dominated by KCI, which is part of 3M, and it's in the middle of an evolution. KCI has always been a big player, but there's a large post-acute market that is in the hospital setting. In the post-acute market, there are many players in that segment as it goes down through skilled nursing facilities and home health, etc. We see it as a very large market; I think that the overall NPWT market is probably close to $2 billion, somewhere between $1 billion and $2 billion, if you look at the worldwide stats. But what we know is there's been many instances where negative pressure is a very good therapeutic device for advancing wound care. We believe with some of the products that we've got at Sanara, such as our antimicrobial and our hydrolyzed collagen, that they will actually, in combination, produce even better results. So that's what we're focused on. As you know, Ian, our long-term focus is always about lowering overall costs and improving outcomes.

Ian Cassel, Analyst

The next question is, was there significant integration expense with integrating Scendia during the quarter? And maybe a follow-up to that initial question would be whether there are other kind of Cellerate distributors out there that would be good acquisition targets for you guys?

Ronald Nixon, Executive Chairman

Yes. It's hard for us to speculate on that. We'll see how it unfolds as it unfolds. We're always in conversations and are always looking for ways to expand what we do, either geographically, product-wise, or technology-wise. So it's a continual process.

Ian Cassel, Analyst

Maybe the last question. I know on the previous call, you mentioned your goal is to be cash flow breakeven by the end of Q1 of '23. Is that still the goal?

Ronald Nixon, Executive Chairman

It's still the goal.

Callon Nichols, Director of Investor Relations

There are no remaining questions in the queue. Do our hosts have any closing comments or thoughts they would like to finish with?

Ronald Nixon, Executive Chairman

I would just like to thank everyone for joining us on our call, and we appreciate you being our shareholders, and thank you for all the support. Take care.

Zachary Fleming, Chief Executive Officer

Thank you. Bye-bye.

Ronald Nixon, Executive Chairman

Bye.

Operator, Operator

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