Sanara Medtech, Inc. (SMTI) Q2 2023 Earnings Call Transcript

Sanara Medtech, Inc. (NASDAQ:SMTI) Q2 2023 Earnings Conference Call August 15, 2023 9:00 AM ET

Company Participants

Callon Nichols - VP, Corporate Operations

Ron Nixon - Executive Chairman

Zach Fleming - CEO

Mike McNeil - CFO

Conference Call Participants

Ross Osborn - Cantor Fitzgerald

Ian Cassel - MicroCap Club

Operator

Greetings. Welcome to the Sanara MedTech Inc. Second Quarter 2023 Results and Business Update Conference Call. [Operator Instructions]. Please note that this conference is being recorded. I will now turn the conference over to your host, Callon Nichols, Director of Investor Relations. 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 June 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 June 30, 2023, 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 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 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.

Now I would like to turn the call over to Ron Nixon.

Ron Nixon

Thank you, Callon, and good morning, everyone. In Q2 2023, Sanara generated $15.8 million in net revenue, representing a 63% increase from the prior-year period. Second quarter of 2023 was another record quarter -- revenue record quarter for Sanara, but the company did have a slower growth rate, which Zach will discuss and outline the plan we are implementing to continue our increased year-over-year growth strategy.

Our loss before income taxes narrowed from $3.4 million to $1.9 million year over year in Q2. We had a net loss of $1.9 million compared to net income of $800,000 for the for the prior-year period. A higher net income in 2022 was primarily due to a one-time non-cash income tax benefit realized in Q2 of 2022.

Turning to our new product pipeline, we continue to prepare for the commercialization of BIASURGE Advanced Surgical Solution. This product, which was developed by our R&D team at Rochal Technologies, is expected to commercially launch in mid-Q4 of this year.

In the first quarter of 2023, we entered into a sales agreement with Cantor Fitzgerald for an ATM offering of our common stock. Stock sales were paused at the end of Q1, and we have no immediate plans to reactivate the ATM offering. We could potentially utilize it if and when management and the Board determined it is appropriate.

Subsequent to the end of the quarter, we announced the acquisition of certain assets related to our collagen products business. The acquisitioning includes all rights and ownership for human wound care uses for four 510(k) cleared collagen-based wound care products, including CellerateRX and HYCOL.

We believe this transaction was a significant strategic milestone for the company and was something the team has been working on for quite some time. Now Zach Fleming will provide more details on the quarter.

Zach Fleming

Thanks, Ron. Our surgical sales team continues to work to penetrate farther into our existing customer base, sell additional non-CellerateRX products, and expand into new geographic areas.

During the trailing 12 months ended June 30, 2023, our products were sold in over 950 hospitals into ambulatory surgery centers across 33 states. And as of June 30, 2023, our products were contracted or approved to be sold in over 3,000 facilities.

There was a significant jump in the number of facilities where our products are approved to be sold between Q1 and Q2. This increase was due to an agreement we signed with a major group purchasing organization or GPO. We believe that this is a significant opportunity for our team to get our products into new facilities, and penetrating these new facilities will be a priority of ours over the next year.

As Ron mentioned, we had a lower sales growth rate in Q2 compared to our historical rates of growth. Our sales growth was impacted by our slower pace of sales manager hiring in late 2022. While the reduced pace of hiring was part of an effort to budget expenses and ensure we were efficient in our hiring based on our analysis of the existing sales team and data regarding potential opportunities, we did have a slowdown effect on our sales in this period.

As we have mentioned previously, the continued ALLOCYTE supply issues also negatively impacted our sales. At the outset of 2023, we increased our hiring pace and have recently hired and trained a new class of field sales representatives and plan to continue to hire through the end of the year. We have greatly improved our training program and vetting process for new hires, which we believe will serve us well as we continue to expand.

Additionally, we are doing significant analysis on our territories, distributors, and field sales representatives and have developed metrics that will help us determine where new hires will be most impactful. In order to fix the ALLOCYTE supply constraints, we have identified and secured a secondary sourcing option and expect that source to come online in the near future.

Looking at our product sales mix, sales of soft tissue products were $13.2 million, and sales of bone fusion products were $2.5 million in Q2. The sales growth of the non-CellerateRX products such as FORTIFY, TEXAGEN, and our bone fusion products is very encouraging. Our strategy to integrate Scendia into the national sales strategy is making progress, and we continue -- we intend to continue focusing on growing the sales of these products.

As Ron mentioned, we expect to commercially launch BIASURGE in mid-Q4 of this year. We have scheduled manufacturing runs, and the product is currently being tested by clinical partners to ensure a smooth launch and adoption with key facilities.

I would now like to provide a brief update on our value-based post-acute wound care strategy. Earlier this year, we hired Sam Muppalla to lead this initiative. Sam is an experienced wound care executive in the post-acute market, and we are excited to have him on the team.

With Sam's leadership, we have developed a detailed value-based strategy and received initial validation from the market. This strategy will include our existing joint venture partner, InfuSystem, and we continue to develop the full complement of products and services required to execute this strategy.

Additionally, we have taken the technology assets and developed the platform plan to support the value-based care strategy while exploring accelerators to add to the platform that will allow for a quicker entry into the market.

Subsequent to the end of the quarter, as Ron discussed earlier, we completed the acquisition of certain assets related to our collagen products business. With this acquisition, we acquired four 510(k) cleared collagen-based wound care products, including CellerateRX and HYCOL, and three new collagen-based products that are currently under development; nine patents and all of the sellers' patents pending for collagen products for human wound care uses; and five trademarks.

The acquisition gives 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 this acquired technology.

Looking at the financial impact, the transaction eliminates the royalty we paid on CellerateRX and HYCOL to the sellers. Total consideration for the acquisition was $15.25 million, consisting of $9.75 million in cash paid at closing; shares of the company's common stock with an agreed-upon value of $3 million; and four equal annual installments of $625,000 in cash.

The sellers are also 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.

Now I will turn it over to Mike to discuss our financial results.

Mike McNeil

Thank you, Zach. For the quarter ended June 30, 2023, we generated net revenues of $15.8 million compared to net revenues of $9.7 million for the same period in 2022, a 63% increase over the prior-year period. For the six months ended June 30, 2023, we generated net revenues of $31.3 million compared to net revenues of $17.5 million for the same period in 2022, a 79% increase over the prior-year period.

Net revenues for the three and six months ended June 30 included $3 million and $6.2 million, respectively, of Scendia revenues. The higher net revenues in 2023 were primarily due to increased sales of soft tissue repair products and, to a 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 continued strategy to expand our independent distribution network in both new and existing US markets.

SG&A expenses for the quarter ended June 30 were $13.8 million compared to SG&A expenses of $10.4 million for the same period in 2022. SG&A expenses for the six months ended June 30 were $26.8 million compared to SG&A expenses of $19.8 million for the same period in 2022.

Our SG&A expenses for the three and six months ended June 30 included $0.8 million and $2.0 million of costs, respectively, related to the Scendia operations. The higher SG&A expenses in 2023 were primarily due to higher direct sales and marketing expenses, which accounted for approximately $2.3 million and $5.8 million, respectively, or 69% and 83%, respectively, of the increases compared to prior year.

The higher direct sales and marketing expenses for the three and six months ended June 30 were primarily attributable to an increase in sales commissions of $2.3 million and $5.2 million, respectively, as a result of higher product sales.

The six months ended June 30, 2023, also included $0.6 million of increased costs as a result of sales force expansion and operational support. R&D expenses for the second quarter were $1.2 million compared to $1.1 million for the second quarter of 2022.

Year to date, R&D expenses were $2.5 million compared to $1.3 million for the six months ended June 30, 2022. The higher R&D expenses in 2023 were primarily due to costs related to the Precision Healing diagnostic imager and LFA for assessing patient wound and skin conditions. These expenses also included costs associated with ongoing development projects for our currently licensed products.

We had a loss before income tax of $1.9 million for the second quarter compared to a loss before income tax of $3.4 million for the second quarter in 2022. For the six months ended June 30, we had a loss before income tax of $3.1 million compared to a loss before income tax of $6.5 million for the same period in 2022.

The lower loss before income tax in 2023 was due to operating expenses increasing at a slower rate than sales in addition to the benefit recorded as a result of change in fair value of current liabilities.

For the second quarter, we had a net loss of $1.9 million compared to net income of $0.8 million for the second quarter of 2022. For the six months ended June 30, we had a net loss of $3.1 million compared to a net loss of $2.4 million for the same period in 2022.

As Ron mentioned, the higher net income in 2022 was primarily due to a one-time non-cash income tax benefit realized for the company in Q2 2022. Our cash on hand at the end of the quarter was $6.1 million.

With that, I'll turn it back to Ron for closing remarks.

Ron Nixon

Thanks, Mike. As we've discussed, we had another record revenue quarter in Q2 2023. We did experience a lower sales growth rate and have begun hiring additional field sales managers to penetrate the new approvals across the country while finding a solution for our ALLOCYTE stockout, which Zach mentioned earlier.

We still see significant growth opportunities for our core business as well as for our new BIASURGE product line. We would also add that we are constantly looking at various metrics to determine the field sales managers' performance, territory performance, and individual account performance. These are and will continue to be key metrics for us as we expand our sales force and grow our business.

Additionally, as has been our practice in the past, we're looking to hire the very best candidates for our regional sales manager and territory manager positions with proven experience in medtech. Once again, we will provide them with high level -- I mean, once hired, we'll provide them with high-level training, and we believe this sets us up to quickly and meaningfully contribute to the company's financial performance.

In closing, I'd like to again emphasize that the acquisition of assets related to our collagen products business is a strategic win for the company. And we believe it will lead to cost savings and aid our ability to develop new impactful products for the future. That concludes our remarks, and we look forward to answering any questions you may have.

Operator, we're ready to open the call for questions. Thank you.

Question-and-Answer Session

Operator

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

Ross Osborn

Hey, good morning, everyone, and congrats on the progress. So are you starting off with Scendia? I mean, you posted another quarter around $3 million of sales. Should we think about that segment as a pretty steady business, or should we expect growth to inflect higher? And if so, what is the commercialization plan there?

Ron Nixon

Zach?

Zach Fleming

Yes, we continue to get adoption of those products, and we think it is steady for sure. However, we do see where each doctor is quite valuable. So we keep adding additional surgeons to the uses. As you remember, the ALLOCYTE is back ordered right now, and that's going to be a big upside for us going forward.

Ross Osborn

Okay. Got it. And then maybe can you spread some more color on how sales per facility have trended year to date and quarter to date, just thinking about driving further penetration within existing accounts in addition to adding new accounts?

Zach Fleming

Can you repeat the first part of that? It was kind of jumbled up, sorry.

Ross Osborn

Yes, apologies. I'm just curious on how sales per facility have trended year to date and quarter to date, and how should we think about that going forward?

Zach Fleming

Yes, it's very steady. If you look across the nation, we are not losing. We're growing in each of the different facilities on average and that's because of what we just said, we're adding additional products in but also additional specialties. So the sort of same-store sales, if you will, the amount we sell in each facility has grown and will continue to grow as we continue to do that.

One of the other things that has been a real boon to our business, and we expect to see additional growth from is what I mentioned in the call, and that's the addition of the additional -- about 1,200 since last quarter, facilities. I think we had 1,800 approved. Now we have 3,000 approved.

And so that's our task, it's to get additional people in more facilities. And then those people that are already in facilities, we want to go deeper, wider, and find out -- find additional product uses in each -- every case.

Ross Osborn

Got it. Thank you. And then last one for us, and apologies if this has been addressed. We're juggling a couple of calls. Is there any update on or Precision?

Zach Fleming

Yes, so we've been -- other than InfuSystem first, we're working closely with them. They are working to set up their billing capabilities in the DME market. They are selling negative pressure today, which is helping us as kind of leading the way for our products to follow.

Their sales team is getting organized, and I think they're in a really good spot. We talk to them very regularly and feel like that's moving forward well, just a typical infrastructure build to be able to make sure that that business goes off without a hitch.

And then if I jump over to Precision, our imager, as you know, was submitted to the FDA. We're in current discussions with those for our resubmit. We expect to resubmit that within the next two months, and then expect -- no, sorry, by November, excuse me. And then by end of year, we should have a decision from the FDA on the imager.

And then the LFA, that also, we're in communication. The LFA is a lateral flow assay. We're in communication with the FDA. That's moving forward, and we continue to learn the requirements around that approval.

Ross Osborn

Got it. Thank you, and congrats again on the results.

Zach Fleming

Thank you.

Operator

Your next question is coming from Ian Cassel with MicroCap Club.

Ian Cassel

Thank you. Yes, congrats on signing up a major group purchasing organization. I was wondering, Zach, if you can talk about what it takes to sign up a group of that size? I mean, it looks like it was 1,000 hospitals or more. What does it take to sign up a group like that? And maybe you can talk about how you attack that opportunity.

Zach Fleming

Yes, I appreciate the question. So first off, it's kind of a groundswell. As you know in the past, we've had to gain facility approval one by one. And as we've grown and had gotten greater adoption, better research studies to support the use of the product, and of course, more experience from doctors that tell the product to other doctors, so you get the groundswell and then the demand through usage. There's a certain level of usage that needs to happen in member facilities.

And then, once those member facilities kind of boil that up into the system and into the GPL, then there's a demand from the GPO to contract, and they wanted to contract on a national basis. And so once that happens, then you've got -- you have the GPO approval, and it puts you in a front-of-the-line situation for each different facility.

There may still be some value analysis committee approvals, but those are typically formality with their level of research we have with us, so we can go present to those value analysis committees. And then it's doctor adoption, facility by facility. And that's where we use our 1099 sales representative network to help us connect into those opportunities.

And then from there, our regional sales managers and territory managers sort of flower that out within each facility. So the initial doctor from the 1099 and then our guys follow on and start to add in additional people that use the products that we've gotten approved.

Ian Cassel

Thank you. And I see that BIASURGE plan to launch mid-Q4. Zach, can you talk about the market opportunity for BIASURGE and how it's differentiated from any competitors in the marketplace?

Zach Fleming

Sure. We're really excited about that product. That product is a new set of products that you probably recognize. That's medicated washes that help to complement outcomes by reducing bacterial burden. And so what they historically have done, doctors would typically use their own potential antimicrobial cocktail that they might make in the in-house pharmacy.

And in recent years, a few companies have come out that had these types of washes. And we think that's a good market that has -- that will provide consistency and results. And our differentiation is that we are a leave-in. In other words, they don't have to do a saline rinse post use of this product, and it is non-cytotoxic to good cells. So you won't kill good tissue as you're trying to re-heal the wound.

And then, of course, it complements the outcome by just keeping that area from having biofilm, and biofilm --not to get too science-y, but basically, it's sort of like a force field that protects the bacterial colonies. And so this breaks down that force field and lets the bacterial colonies be broken down and eradicated so that the wound can heal on eventually.

We think that that fits very well in a prophylactic sense into a surgery, but as well treating those wounds that may already have a significant infection. So if they're going to do a revision on a hip or a knee just to be used that way, it also could be used on a high-risk patient prophylactically.

Ian Cassel

So the market itself is kind of fully aware of the product category. Is that the right way to think about this?

Zach Fleming

Yes, I think it is a burgeoning -- I would say it's a very similar situation as to what we started with Cellerate, where everybody knew there was a need and a demand. And there has been some sort of status quo, which was typically the doctor's cocktail. And we did have a couple of companies that have gone out and started to form that market.

But we're coming in at a very interesting time where I think we're going to have a very interesting value proposition because of our pricing, because of our evidence. And the BIAKŌS, of course, is the sister product that has a lot of evidence as well. So that product should fit in really nicely and I think be a very, very tough competitor in that market space.

Ian Cassel

Thank you. Maybe a last question; I'll get back in the queue. When you look at the company, you have sort of two sides of the business, the surgical side and then the value-based post-acute wound care strategy. And obviously, a lot of the growth, a lot of revenue or all of the growth and all the revenue is coming from the surgical side of the business. And the acute wound care strategy is mainly the SG&A line in the company.

And I'm curious, Ron, in past conversations, at least the last earnings call, I know you were hoping to -- or your goal was to maybe get this thing monetized by the end of this year. I was wondering if you could speak to that and kind of what the division is here in the next 12 months for that.

Ron Nixon

Yes. So when Sam Muppalla came on board, he has really brought a level of detail and understanding, not only on the post-acute market in general. He led one of the largest wound care companies in the post acute related to the skilled nursing facilities. And Sam also has extensive experience on the value-based side.

And so we've really honed the strategy into where we have a much greater visibility as to what the component part is needed, how does the contract need to look, and where should we be going to be able to get those contracts?

And so we're moving forward on that. We've got a couple of things seeing of the delays in the imager and the LFA. Those are critical components to our value-based strategy. So we really want to wait until we have everything fully ready to go, which we believe should be by the very beginning of next year. That's our goal.

Ian Cassel

Okay, thank you.

Operator

[Operator Instructions]. Okay, just one moment. We do have a question coming from the webcast.

Okay. The question is you just mentioned that sales per facility are growing, and now you're trying to go deeper and wider within each facility. But this quarter, we have seen about 1% to 2% sequential growth. Is it accurate to take that number as a direct result of these efforts, or maybe it's more complicated than that? Thank you for any color on this.

Zach Fleming

Yes, sure. So growth isn't linear in any sales company. So as we do the attack that I talked about, which is to go deeper, wider, and as well add additional products per case, there is additional competition and product loss occasionally. And I think that's a normal thing when you're starting to grow, and you start to gain notoriety in your job well done in terms of our sales growth.

I think there are a few competitors out in the market. We don't think that they pose much risk because of our high level of evidence, great results, and we seem to be out in front of all of these competitors. But to the point, we didn't grow as fast as we would have liked. It also is just because we have to get these people up and trained.

There's a little bit of an outage. At the end of last year, we had our national sales director. We only had two of those people. And so their capacity to hire was just a little bit limited. We got those two additional people hired in the first part of this year to be able to hire and fill these territories that are -- have these growth opportunities where the new approvals are.

So now that they're in place, we've been on a hiring -- very good hiring pace. We did have increased our training, improved that, and well, some of that involves us getting those people out into the field, doing field rides, and observing what good looks like from our top representatives. And then as well, we vet the territories, as I mentioned in the call, so those territories are highly super focused.

So we've identified high-potential territories based on a number of operations based on the number of surgeons and surgeries as well as the population and potential market size. And then we look at our approvals that we have already gotten in that area and then couple that with our distributor.

So there's a bunch of things that we're looking at to really hone in on the top areas to deploy. And so we've done that and put people into place to be successful. So that would be my answer to that question.

Ron Nixon

Yes, and Zach, just to add to that. One of the things -- this company is very data driven. We have reused a lot of metrics to look at our business. And as Zach was just mentioning about the analysis of the territories, the customers, the potential, this is not a strategy for us to throw bodies out there and hope that they do well.

In the early days of Sanara, we put people out there, and we started to see where are those potential areas that we need to go to have the highest impact. And so it was a little easier to understand that.

Today, though, across the country, having all these added facilities that we put on, we need to be very strategic because we want to have high efficiency because this is not a revenue strategy long term for Sanara. This is a build-a-business strategy and create income for our shareholders so that we can continue to grow this business.

Operator

Okay your next question is a follow-up question from Ian Cassel with MicroCap Club.

Ian Cassel

Ron, you sort of answered that question already, but I'll ask it again. The acquisition of the collagen asset is impressive. I know what that brings to the company, but also the way you acquired it with the bank debt from Cadence.

And just -- obviously, you showed them that you're going to be a profitable company or prove to them you're going to be a profitable company in the near term. And the balance sheet is getting to about $6 million in cash. I'm just curious how you juggle profitability versus growth when you look out at the future.

Ron Nixon

Yes, that's a good question. Actually, what we do is we constantly look at where we are from a cash perspective, but also how close are we getting to our earnings. And as time goes on, we're going to give you more and more visibility. What we ultimately hope to be able to do is give a better give actual guidance. And once we know we've got predictability in that, we're going to be able to provide that.

But as it relates to that, we watch everything very closely. We're obviously very, very data driven. So we feel comfortable where we are today. The ATM served its purpose. We proved out that it worked for us for that short period of time. We don't have immediate plans for that, but it's a tool that we have out there. But we're not short on opportunities, and we're not short on the potential to find partners that are interested in funding anything that we would do from an acquisitive standpoint.

But we want to generate revenue and earnings inside the company and be able to use that cash flow for expansion as well. So to very specifically answer your question, we feel very comfortable where we are today. We do a lot of forecasting of where we're going, and we feel good about where we're going today.

Ian Cassel

Maybe one last question while I have you on the line, is there any international opportunity for any of the products that you have?

Ron Nixon

We believe there's a very large opportunity internationally. What we don't want to do is -- we want to really penetrate the market in the US in a significant way. We already have, I mean, if you look at just what we've done over the last three years.

It's interesting to me. I have been in a lot of growth businesses. And typically, when you see 60-plus percent growth year over year on a trailing 12-months basis or even on a quarterly basis, that's a really high growth rate. And what happens with that? You end up needing to be able to build infrastructure to support what you're doing.

And building an infrastructure to go support an international business is completely different than building an infrastructure for the domestic business. So we're going to continue to build up the business domestically, but we're always looking out at the international market. And we know that there is going to be a really large market for the products that we have, and we will go pursue that at the appropriate time.

Ian Cassel

Thank you.

Operator

There are no additional questions in queue at this time, and we have reached the end of the question-and-answer session. I would now turn the call back to -- over to Ron Nixon, Executive Chairman, for closing remarks.

Ron Nixon

Thank you, and I appreciate everyone for listening in on the call today. We feel very good about where we're going. We've got a lot to report in the future as well. And I want to thank everybody for joining us today.

Operator

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