Sanara MedTech Inc. (NASDAQ:SMTI) Q4 2023 Earnings Call Transcript

Sanara MedTech Inc. (NASDAQ:SMTI) Q4 2023 Earnings Call Transcript March 26, 2024

Sanara MedTech Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings. Welcome to the Sanara MedTech Inc. Fourth Quarter and 2023 Full Year Results and Business Update Conference Call. At this time, all participants are in a listen-only mode. 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, Callon Nichols. 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 and year ended December 31, 2023. We issued our earnings release yesterday afternoon, 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-K for the quarter and year ended December 31, 2023 are also available on this page. We will reference this information in our remarks today. With us today are Ron Nixon, our Executive Chairman; Zach Fleming, our Chief Executive Officer; and Mike McNeil, our Chief Financial Officer. Please note that 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 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. Also, this conference call, our earnings release and supplemental deck 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: Thank you, Callon, and good morning, everyone. Fourth quarter of 2023 was another record revenue quarter for Sanara, and 2023 was another revenue record year. Company generated $17.7 million in revenue in Q4, $65 million in revenue for the year. For the three months ended December 31, 2023, the company had a net loss of $300,000. For the year ended December 31, 2023, we had a net loss of $4.4 million. We were breakeven on an adjusted EBITDA basis in Q4 and generated a $300,000 adjusted EBITDA loss for the year. We incurred expenses of $400,000 in the second half of 2023 due to an acquisition opportunity that didn’t materialize. Looking ahead to 2024, we expect to further expand our sales force and focus on new geographic areas, further penetrate additional specialties outside of ortho and spine, and continue to drive new product development, including expanding this — the CellerateRX platform intellectual property as well as being develop — began developing the peptides we recently licensed from Tufts University to expand our peptide platform.

We’re also continuing to seek complementary partnerships and platform expansion opportunities that could be beneficial to our business. I’d like to also provide a brief overview of Tissue Health Plus, our value-based care strategy for post care — post-acute wound care. This strategy fits well with Sanara’s goal to lower cost and improve outcomes within the healthcare system. However, there are significant differences between THP and our surgical business, which is focused on the acute market related to healing and preventing infections of surgical sites, while THP is being developed to address the prevention and treatment of chronic wounds at home. Given the differences in the care — in the site of care, selling channels and payment systems between our Surgical business and Tissue Health Plus, we believe this is very complementary to our post-acute strategy partnership with InfuSystem.

We envision the InfuSystem wound care partnership being an integral part of the Tissue Health Plus strategy given their focus on overall wound care and the common objective of improving outcomes and lowering costs for the healthcare system. We have begun to have discussions with other potential partners to share the development cost of our strategy that could result in Sanara potentially owning less than a majority of Tissue Health Plus by carrying out this very important strategy. I will now turn it over to Zach to go into more details on our achievements during 2023.

Zach Fleming: Thanks, Ron. I’d like to start by discussing the strategic and operational achievements that the company realized in 2023. In August, we acquired all rights for human wound care uses for CellerateRX and HYCOL in addition to other wound care assets. Since the transaction, we have eliminated the royalty we pay on these two products and we now have full rights to develop our own proprietary products. As we previously discussed, we had supply issues related to our ALLOCYTE product line in 2023. In late 2023, we saw this issue and successfully launched and recorded our first sale of ALLOCYTE Plus. This product replaces our ALLOCYTE — excuse me, replaces our ALLOCYTE product and is processed by an alternative supplier with in-house processing capabilities.

This will afford us greater control of product supply, excuse me. The company now has a sufficient supply of ALLOCYTE Plus to meet currently expected demand, and we have measures in place to adequately stock the product in the future. In addition to our first sale of ALLOCYTE Plus in November 2023, we launched and recorded our first sale of BIASURGE Advanced Surgical Solution. We view this product as a significant addition to the portfolio — excuse me, I can’t catch my breath, portfolio and believe that it can be used in any surgery where Sanara products are currently used. In November 2023, Sanara announced publication of a retrospective study involving 5,335 patients. The study demonstrated the effectiveness of CellerateRX Surgical Powder in promoting surgical wound healing, specifically a significant decrease in surgical site infections was observed.

This exhibited a significant reduction in surgical site infection rates of 59%. That was among patients undergoing elective surgery. This reduction was most pronounced in clean cases with a 69% decrease in surgical site infection rates. In December, we executed a license agreement with Tufts University for 18 unique peptides. We are currently exploring opportunities to incorporate these peptides into new products that we could develop at Rochal. Turning to our sales results. In 2023, our products were approved — excuse me, were sold in over 1,000 facilities across 34 states and the District of Columbia. Our products were approved to be sold into more than 3,000 facilities as of December 31, 2023. Sales and approvals of BIASURGE continued to grow and we are pleased with the traction we’ve seen in this product.

At the end of 2023, we had 39 field sales representatives. We’ve made significant strides in our data analytics and the use of various sales metrics to both measure our performance as well as penetrate further into our existing accounts and hospital approvals. These efforts have given us detailed insights into our business and allowed us to refine our model for the steps that need to be taken to develop a sales — a successful sales manager and territory. Sales of both our soft tissue products and our bone fusion products continue to grow. Sales of soft tissue products were $54.8 million in 2023 compared to $41.7 million in 2022. Sales of bone fusion products were $10 million in 2023 compared to $4 million in 2022. I’d now like to provide additional details beyond what Ron mentioned earlier on Tissue Health Plus, our value-based care strategy for the chronic wound market.

We’re currently in discussions with prospective partners to facilitate commercialization of Tissue Health Plus and sharing the development cost of the complete strategy. Excluding non-cash items, our full year operating expenses for Tissue Health Plus in 2023 were approximately $5.2 million. While we work to find the right partners, we’ll continue to build out the key capabilities needed to commercialize Tissue Health Plus. These include a care hub, a managed service organization and a technology platform. The care hub will include a virtual care coordination and navigation center. The management service organization will be a network of providers delivering a high standard of patient site wound care. And the technology platform will be an automation and integration platform to scale the care hub and MSO network workflows.

We believe this comprehensive strategy will be unique and impactful in lowering costs and improving outcomes for wound care patients, providers and payers. I will now turn it over to Mike to discuss our financial results.

Mike McNeil: Thank you, Zach. As Ron mentioned earlier, we generated revenue of $65 million in 2023 compared to $45.8 million in 2022, a 42% year-over-year increase. The higher net revenue in 2023 was primarily due to increased sales of soft tissue repair products, which includes CellerateRX and bone fusion products as a result of our increased market penetration, geographic expansion, and our continuing strategy to expand our independent distribution network in both new and existing U.S. markets. Full year 2023 SG&A expenses were $57 million compared to $46 million in 2022. SG&A as a percent of revenue decreased from 100.3% in 2022 compared to 87.7% in 2023. The higher SG&A expenses were primarily due to higher direct sales and marketing expenses, which accounted for approximately $8.1 million or 74% of the increase compared to the prior year period.

The higher direct sales and marketing expenses in 2023 were primarily attributable to an increase in sales commissions of $6.9 million as a result of higher product sales. 2023 SG&A expenses also included $1.2 million of increased costs as a result of sales force expansion and operational support and $0.4 million of costs associated with an acquisition opportunity that didn’t materialize. We expect our SG&A expenses to continue to decline as a percent of net revenues as our sales growth outpaces the cost of sales force expansion and corporate overhead. 2023 R&D expenses were $4.1 million compared to $3.4 million in 2022. The higher R&D expenses in 2023 were primarily due to costs related to the Precision Healing diagnostic imager and LFA. R&D expenses for 2023 also included costs associated with ongoing development projects for our products currently in development.

We had a net — loss before income tax of $4.4 million for the year ended December 31, 2023, compared to a loss before income tax of $13.9 million in 2022. The lower loss in 2023 was primarily due to increased gross profit and changes in fair value of earn-out liabilities, partially offset by higher SG&A costs, higher R&D expenses, and higher amortization of our acquired intangible assets. For the year ended December 31, ’23, we had a net loss of $4.4 million compared to a net loss of $8.1 million in 2022. The lower net loss in ’23 was primarily due to additional gross profit realized on higher 2023 revenues. Our cash on hand at the end of the year was $5.1 million. With that, I’ll turn it back to Ron for some closing remarks.

Ron Nixon: Thank you, Mike. As we mentioned before, Sanara had both a record quarter and record year in 2023. We continue to build the infrastructure that we need to support our growth in the future, and we’re grateful for the hard work and dedication of the entire team. That includes 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.

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Q&A Session

Operator: Certainly. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Your first question for today is from Ross Osborn with Cantor Fitzgerald.

Ross Osborn: Hey, guys. Good morning, and congrats on the strong results. So, starting off maybe with BIASURGE, could you discuss how many centers you sold in during the fourth quarter, or maybe how many you’re approved to be sold in? And as a follow-up, any feedback you could share on that initial launch? Thank you.

Ron Nixon: Zach, you want to take that? Zach, you’re on mute.

Zach Fleming: I’m sorry, I heard the first part, you said how many centers in the fourth quarter. What was the second part?

Ross Osborn: Just any feedback you could share.

Zach Fleming: Yeah. So, BIASURGE has been very well liked out in the market. As you know, we had kind of a pre-launch soft trial where we sent product out to facilities and were able to get feedback from surgeons. And that yielded quite a few pre-sales approvals and we began to sell those immediately. And then, we spent a lot of time since the launch, really November and December, just gaining additional traction in the market, getting additional trials going. As you recall, when we do approvals we have to go through sort of the [VAC] (ph) analysis, but oftentimes it’s a trial as well where they want to take a look at the product for a few patients. And so, we’ve done that. And we have not disclosed the number total for the fourth quarter, but we feel really good about where we are.

We have about, at this point, right around 51 through the fourth quarter, Callon just texted me. So, we did add 51 in the fourth — or have 51 through the fourth quarter and are actively selling to those and we’re continuing to add to those, which we’ll discuss next quarter where we progress. But we’re really happy with the product. And the doctors have really found it to be a really nice adjuvant to the same cases that they’re already using Cellerate in as well as some of our bone biologics. So, as you can imagine, they want to prepare the site by getting rid of the biologic contaminants, any of the biofilm, et cetera, and then they add in our product like Cellerate to help close the wound.

Ross Osborn: Okay…

Ron Nixon: And, Ross, obviously, it’s very complementary to Cellerate, as Zach mentioned. And given that we have published the study, retrospective study that we did for reduction for surgical site infection, this just goes hand in hand with that and very complementary. So, I think it’s going to be well received by the surgeons that already use Cellerate.

Ross Osborn: Got it. Great to hear it. And then maybe lastly for me, just on Cellerate, what do you hope to improve with that offering following the acquisition of the 18 peptides?

Ron Nixon: Zach, do you want to take that?

Zach Fleming: Ron, do you want to take that? Oh, I can…

Ron Nixon: I didn’t actually hear the question.

Zach Fleming: Yeah. He just asked what are we trying to accomplish by getting the 18 peptides. It’s a different set of peptides, but there’s — yeah, go ahead.

Ron Nixon: I’m happy to take that. So, Ross, we — obviously, Cellerate falls into the category of being having collagen peptides. And one of the keys that we’re trying to do is increase our IP around the whole collagen strategy that we’ve got going forward with CellerateRX. And we are — as we mentioned, we want to expand our coverage into other specialties. There might be uniqueness needed or required based on certain specifics of collagen peptides that we would like to develop. And — so they’ve got a number of indications for use through those 18. And as we sort through that and begin to look at what those priorities are going to be for us going forward, we will obviously keep it centered around CellerateRX, which is obviously a great product today, will continue to be in the future.

Just want to strengthen that platform, but also expanded into more usages within the surgical arena. And some of those peptides actually have application outside of that. And then more than likely in that case, we will be seeking partners to that have stronger capabilities on the marketing front for us with those. But the dominant reason that we did that is to continue to secure more and more technological advantage in the marketplace through our IP.

Ross Osborn: Sounds great. Thanks for taking my questions, and congrats again on the strong results.

Ron Nixon: Thank you, Ross.

Zach Fleming: Thank you.

Operator: Your next question is a webcast question from [Neil Cataldi] (ph). You mentioned ALLOCYTE sales began to back — pick up back up in October of last year. However, we didn’t see much of an increase in its revenue segment during the fourth quarter. Can you give us a sense for where you’re at today with ALLOCYTE in terms of ramping back to a normal run rate? And how should we think about that run rate in terms of annual size?

Zach Fleming: Sure, I can take that. So, yeah, we did have a — see a kind of a delay and inability to get full supply late last year starting around September and then actually extended into October. We did a good job of managing based on the sizes available. And so, to your point, we didn’t see a tremendous drop off, we didn’t see a tremendous increase from that particular product because of the management of just the sizes as they were demanded out in the market. And so, what we’ve done is with ALLOCYTE Plus, you have to go back out to the facilities, get a new approval, becomes like a line extension or a new product that has to get added. And so, we’ve done that and gone back to facilities where we had had some momentum and had lost the ability to sell because of supply.