Sanara MedTech Inc. (NASDAQ:SMTI) Q3 2023 Earnings Call Transcript

Sanara MedTech Inc. (NASDAQ:SMTI) Q3 2023 Earnings Call Transcript November 14, 2023

Operator: 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. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Mr. Callon Nichols. Sir, you may begin.

Callon Nichols: 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.

A biomedical technician testing and calibrating medical equipment to be deployed.

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 [Indiscernible] 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.

Ron Nixon: 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 college-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 — 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. Now Zach Fleming will provide more details on our business.

Zach Fleming: 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 in 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 cell rate usage in additional specialties outside of ortho and spine in an expanded product portfolio with the additional 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 cost over cost of 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 1099 partners and expanding our selling efforts to additional specialty. 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 plus the District of Columbia.

A 33rd state missed our trailing 12 months revenue cutoff by less than $2,000. Our products were contracted or approved to be sold in over — 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 analyst, sorry, I got a little caught out 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 existing of $9.75 million in cash paid at closing. Shares of the company’s common stock and with an agreed upon value of $3.0 million and 4 equal installments of $625,000 in cash. The sellers also entitle — are 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 was materially impacting the quality of care and outcomes. We’re planning to offer payers in other population risk-bearing entities, a first-in-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.

Mike McNeil: 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, a 23% increase over prior year. For the 9 months ended September 30, we generated revenues of $47.3 million compared to $30.5 million during the same period in 2022. This represented a 55% increase over the prior year period. The higher revenues in 2023 were primarily due to increased sales of soft tissue repair products and to lesser extent, bone fusion products as a result of our increased market penetration geographic expansion, additional revenues as a result of the Scendia acquisition and our continuing strategy to expand our independent distribution network in both new and existing U.S. markets.

SG&A expenses for the third quarter were $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 compared to $31.9 million in 2022. The higher SG&A expenses in 2023 were primarily due to higher direct sales and marketing expenses, which accounted for approximately $6.8 million or 77% of the overall increase from prior year. Higher direct sales and marketing expenses in 2023 were primarily attributable to an increase in sales commissions of $5.9 million as a result of our higher product sales. Year-to-date SG&A also included $0.8 million of increased costs as a result of sales force expansion and operational support. R&D expenses for the quarter ended September 30, 2023, were $1 million compared to $1.1 million for the same period last year.

Year-to-date R&D expenses were $3.5 million compared to $2.3 million for the same period in 2022. The higher R&D expenses in 2023 were primarily due to costs related to the Precision Healing Diagnostic Image related elevate R&D expenses also included costs associated with the ongoing development for projects currently on our currently licensed products. We had a net loss — we had a loss before income tax of $1.1 million for the third quarter compared to $3.2 million during the same period in 2022. Our year-to-date loss before income taxes through September 30 was $4.2 million compared to $9.8 million in 2022. The lower loss before income tax in 2023 was due to operating expenses increasing at a slower rate than net sales in addition to the benefit recorded as a result of the change in fair value of earnout liabilities.

For the quarter ended September 30, we had a net loss of $0.1 million compared to a net loss of $1.5 million during the same period last year. For the 9 months ended September 30, we had a net loss of $4.2 million to $3.9 million during the same period last year. Our cash on hand at the end of the quarter was $6.2 million, a slight increase from $6.1 million we had on hand at the end of the second quarter. With that, I’ll turn it back over to Ron for some closing remarks.

Ron Nixon: 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. And 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.

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

Zach Fleming: I can take that. This is Zach. Yes. So we — you’re correct. There were a few hospitals where usage was outpacing what procurement preferred. And so they limited usage, and that’s where we’ve seen a little bit of slowdown. And we’ve responded by training up our sales representatives to make sure everybody is educated on the reasons that, that product should be used and that there’s a initial evidence and additional evidence that can be provided to support the usage. And then as further, we wanted to — we put people on to additional specialties, so you’d have a broader reach into the surgeon specialties and opposed to being focused on maybe just a few specialties in the building, and that helps to standardize the usage so that the hospitals allow the continued usage.

Ron Nixon: But I’d also like to say what I like to say in addition to what as Zach just said, Sanara has spent a lot of money on gathering the evidence — clinical evidence on numerous studies, some of those of which have just recently come out to support what the value of our products are in terms of the overall value proposition of lowering overall cost and improving outcomes. We see that data as being very impactful. We’ll continue to do more studies to support that to just keep using evidence as our basis for why these products are so impactful in surgery as opposed to just a preference by a surgeon.

Operator: [Operator Instructions] Our first question is coming from Ross Osborn with Cantor Fitzgerald. Your line is open.

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Q&A Session

Ross Osborn: 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?

Zach Fleming: Did you say fading?

Ross Osborn: Yes.

Zach Fleming: Yes. We think we’ve achieved that. So in terms of those facilities where they were impacted, it was limited to just a few 4 markets and where the product was utilized beyond what procurement was comfortable procurement pushback on that spend and very situational. And in those — each of those instances, obviously, 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 and that would include in servicing, making sure everybody is educated on the use of the product and, of course, additional surgeons, as I mentioned a minute ago.

Ross Osborn: 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?

Zach Fleming: 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 that there’s a risk based on the patient’s comorbidities, different statuses of disease state, et cetera. And of course, all surgeries have some risk of a complication or infection. 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. So you can imagine really every surgery could potentially be appropriate for that. And 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 not consistent.

So in recent years, there’s been a few market entrants where they’ve come in and offered a consistent manufactured wash like by a surge. Our offers benefits that the others don’t, such as it’s a leave-in rents, also a product that has a low cytotoxicity and it allows for leave-in usage means 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.

Ron Nixon: And remember that Ross, you may remember this from past data that we have provided. We have tested the BIASURGE-based formula against numerous of our competitors and it out performed them for biofilm kill, as well as the kill VRE [indiscernible] and other types of bad actors out there from the microbe standpoint. And so 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.

Ross Osborn: 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?

Ron Nixon: 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.

Ross Osborn: That’s correct. And then just any update on Precision imaging?

Ron Nixon: So two things. I’ll take that, Zach. Two things on that, Ross. One, when do you think about our overall value-based strategy, it involves everything through the post-acute. So I’d go from the discharge at the hospital, it would be down through the entire post acute, which would include the skilled nursing facilities, home health and then ultimately at home when they’re not on a care plan — plan care. So what we would — what we’re looking at is who else could we team with that would really provide that level of service at the home and there’s numerous home health care companies that we know exceedingly well that are interested in the value-based plan. . We also know that this is a focus on skilled nursing facilities because, as you know, with the passing of legislation for SNF at home and other programs like that, everybody is looking to be able to pick up efficiencies and lower costs and improve outcomes.

So there’s going to be way more focus on that as we move forward with at the value-based arrangements being front and center. More and more CMS dollars are being allocated to these value-based arrangements. So we see fee-for-service shrinking CMS and numerous other payers have responded by saying we have got to get a value-based strategy for these difficult specialties like Wound Care, where they are having very high increasing rates and not great outcomes for their patients. So people that would be in the SNF and the post-acute or people that bring technology or other things or payers that understand the risk that they’re taking could even be a part of that as well as providers of the services themselves. So we’ve got a broad array of potential partners, and we’ve obviously been in discussions with numerous of these over the last year as we prepare.

And then secondly, on Precision and Precision Healing on its — on the lateral flow assay and on the imager, we’re going a different pathway with that, and it’s a pathway that we’ll achieve more from the standpoint of an FDA approval. And so we’ve taken our time and decided that let’s get the better pathway that will achieve greater outcome and greater potential acceptance of the product. So that’s what we’re doing.

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

Ian Cassel: 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?

Ron Nixon: 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.

Ian Cassel: And maybe getting back to BIASURGE, I know you just launched BIASURGE back in, well, just earlier this month. Can you give us some color on sort of the — just the early indications you’re getting from the surgeons as you launched it?

Ron Nixon: Zach would you might