Sanara Medtech Inc

NASDAQ:SMTI

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

Greetings. Welcome to the Sanara MedTech Inc. Second Quarter Results and Business Updates. [Operator Instructions] Please note, this conference is being recorded.

I will now turn the conference over to your host, Callon Nichols, Director of Investor Relations at Sanara MedTech. Callon, you may begin.

[Callon Nichols, executive]

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, 2024. We issued our earnings release yesterday morning, 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 Form 10-Q for the quarter ended June 30, 2024 are also available on this page. We will reference this information in our remarks today.

With us today are Ron Nixon, our Executive Chairman and CEO; Mike McNeil, our Chief Financial Officer; Seth Yon, our President of Commercial; Jake Waldrop, our Chief Operating Officer; and [ Sam Apollo ], who leads Tissue Health Plus.

Please note that certain statements in this conference call and our press release, 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 our most recent quarterly report on Form 10-Q.

Also, this conference call, our earnings release and our 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 Nixon.

[Ronald Nixon, executive]

Thank you, Callon, and good morning, everyone. During the second quarter of 2024, the company generated $20.2 million in revenue. This is our 11th consecutive record revenue quarter. I'd like to take a moment to recognize our entire team, including surgical sales, clinical, R&D, customer service, marketing and finance; who continue to do an outstanding job contributing to our record growth strategy.

In the second quarter, Sanara generated a net loss of $3.5 million and positive adjusted EBITDA of $600,000. Adjusted EBITDA is net of expenses that we view as noncore in our operations, including $900,000 of separation costs related to our former CEO as well as $400,000 in legal and diligence expenses for prospective acquisitions and partnerships.

Prior period have been recast in our earnings press release to reflect this change in how we calculate adjusted EBITDA. Mike will go into this in more detail. But in Q2, we began reporting additional financial performance metrics of our Surgical business and Tissue Health Plus segment as separate segments that we could account for. Following the recent change in our CEO position, this transition to segment reporting better aligns with how I view the business.

Our Surgical segment generated a $2.2 million net loss in the second quarter and a $2.7 million net loss in the first half of 2024. On a segmented EBITDA basis, the Surgical segment generated $1.4 million and $2.5 million of segmented EBITDA during the second quarter and first half of 2024, respectively.

We continue to see strong growth opportunities for both segments, which Seth and Sam will continue -- will discuss in further detail shortly. During the second half of 2024, we expect to invest an additional $4 million to $5 million to build out the THP strategy in anticipation of a commercial launch in the second half of 2025, which Sam will detail later in the presentation.

I will now turn it over to Seth to discuss our Surgical business results and momentum in that segment.

[Seth Yon, executive]

Thanks, Ron. As of the end of the second quarter, our products have been sold in over 1,100 hospitals and ASCs across 34 states and the District of Columbia in the trailing 12 months and were approved to be sold in more than 4,000 facilities in total. We currently have selling agreements with over 300 distributors representing 2,500-plus potential sellers.

Looking at the growth of the territories and facilities in which we sell, in Q2, our products were sold into over 800 facilities compared to over 600 facilities in the second quarter of 2023. Sales of our soft tissue products grew from $13.2 million in the second quarter of 2023 to $17.6 million in the second quarter of 2024. Sales of bone fusion products were flat at $2.5 million for the same quarter-over-quarter period in 2023.

I'd now like to discuss some of the key opportunities for growth that we believe will continue to drive our future performance.

In the second quarter, we signed a contract with a national GPO that added over 1,000 facilities where our products are contracted or approved to be sold. Our team is working to generate sales in those new facilities while also working the future -- or further penetrate the existing facilities where our products are sold.

As we have discussed before, we are also focused on expanding usage outside of our traditional specialty focus in ortho and spine. We see a significant use case and value proposition in the trauma, vascular and general surgery markets and are working diligently to expand into our [ use ] products into those areas.

In addition to our organic growth, we are regularly evaluating opportunities for surgical M&A and partnership opportunities. Our management team sees synergistic potential transactions as a key growth driver that complements our strong organic growth strategy.

I'd now like to introduce Jake Waldrop, our new COO, to give a brief overview of some of the key initiatives he's been working on since joining us in April.

[Jacob Waldrop, executive]

Thank you, Seth. Good morning, everyone. The key focus of our operations team has been to centralize ownership and accountability across all aspects of our customer support, product fulfillment and underlying IT system infrastructure. This strategy includes building out an IT road map focus on workflow automation and digital support for our next phase of growth.

On the sales operations side, we're implementing plans to efficiently scale our customer service team and simplify the selling process for both internal and external sales representatives. The significant growth experienced by the company, Sanara is working to separate and streamline the [ shipping ] and fulfillment operations to allow customer service to focus on best-in-class sales support.

Our supply chain is also a key part of the strategy, and we have reorganized our supply chain function to facilitate smooth and consistent operations across each of our product lines.

With that, I will now turn it over to Sam to discuss more of our plans on Tissue Health Plus.

[Unknown Executive]

Thank you, Jake. Good morning, everybody. As we discussed before, nonsurgical wound care is ripe for disruption. By nonsurgical wound care, we are referring to the wound care spend outside of surgical settings. This expenditure of roughly $100 [ million ] per year in the U.S. includes treatment services, corresponding medtech products and enabling diagnostic tools.

Despite this large spend, the wound healing rate is estimated to be only 40% to 66% and the 5-year mortality rate for a diabetic foot ulcer is 30%, roughly the same as cancer. Moreover, 15% of the population over the age of 65 has a chronic nonhealing wound.

$69 [ million ] of this expenditure occurs in hospital -- hospital inpatient or hospital adjacent wound centers, which is the highest cost setting. [ $35 billion ] is estimated to be either preventable or overused. THP is targeting this undermanaged expenditure with the goal of generating hospital-based savings for payers and other risk-bearing entities. We plan to orchestrate the delivery of high-touch comprehensive wound care at home and in community settings such as physician offices and skilled nursing homes.

Our program aligns payers, patients and providers to deliver compelling value. THP's value-based program is built on a science-driven, first-of-its-kind care model that integrates prevention, treatment and maintenance of wounds.

A THP patient's journey starts with a targeted outreach from an assigned care navigator from our virtual care coordination center, the Care Hub. From that point on, our care navigator will be a consistent guide for all their wound care needs. THP care navigators will leverage a unique mix of education, engagement and transparency to increase patients' care plan adherence.

Our value proposition to patients is simple, prevent wounds at least 25%, detect them early and improve the healing rates to 90%. An open third-party network will largely be our boots on the ground implementing our care interventions.

We expect that THP state-of-the-art wound assessment Software-as-a-Service medical device along with the groundbreaking real-time EMR integrated clinical decision support will enable our network partners to deliver transformative wound care. We plan to enable higher-EBITDA patient and counter revenue for our network partners, along with enabling new revenue streams such as patient monitoring.

Lastly, we expect our payer customers will benefit from the accrual of THP-generated savings in the range to 2x to 5x of THP fees while alleviating a major quality-of-life issue for their members. We are currently focused on finishing the build phase and plan to launch a pilot in the first quarter of 2025.

Based on comparable specialty [ VBC ] programs and the industry spend in wound care, the scope of THP's contract for one single citywide market is likely to be in multiple millions. We are also exploring selecting strategic supply partnerships to derisk execution.

I would now like to turn over to Mike to discuss our financial results in more detail.

[Michael McNeil, executive]

Thank you, Sam. During the second quarter, Sanara generated net revenue of $20.2 million compared to $15.8 million during the second quarter of 2023, a 28% increase over the prior-year period. The higher revenue in Q2 was primarily due to increased sales of soft tissue repair products, including CellerateRX, as a result of our increased market penetration, geographic expansion and our continuing strategy to expand our distribution network in both new and existing U.S. markets.

SG&A expenses for the second quarter were $19 million compared to $13.8 million for the same period in 2023. SG&A expenses included $0.6 million and $0.5 million attributable to our Tissue Health Plus segment for the quarters ended June 30, 2024, and 2023, respectively.

The higher SG&A expenses in Q2 of 2024 were primarily due to higher direct sales and marketing expenses, which accounted for approximately $3.4 million of the increase compared to prior year. SG&A expenses during the second quarter of '24 also included $0.9 million of executive separation costs and $0.4 million of legal and diligence expenses related to prospective acquisitions and partnerships.

R&D expenses for the 3 months ended June 30, 2024, were $1 million compared to $1.2 million during the same period in 2023. R&D expenses included $0.4 million and $1.0 million attributable to our Tissue Health Plus segment for the quarters ended June 30, 2024 and 2023, respectively. The lower R&D expenses in 2024 were primarily due to lower costs associated with the precision healing diagnostic imager and LFA.

Depreciation and amortization expenses for the quarter ended June 30, 2024, were $1.1 million compared to $0.8 million for the same period in 2023. The higher depreciation and amortization expenses in 2024 were due to amortization of the tangible assets acquired from Applied Nutritionals in August of '23.

Interest expense was $0.6 million for the quarter ended June 30, compared to 0 in 2023. The higher interest expense in 2024 was primarily related to our new term loan with CRG. Sanara had a net loss of $3.5 million for the second quarter of 2024 compared to a net loss of $1.9 million for the same period in 2023. The net loss included $1.3 million and $2.0 million attributable to our Tissue Health Plus segment for the quarters ended June 30, 2024 and 2023, respectively.

The higher net loss for the second quarter of 2024 was primarily due to higher SG&A costs, higher interest expense related to our new CRG term loan, lower change in fair value of earn-out liabilities and higher amortization of our acquired intangible assets, partially offset by higher gross profit and R&D expenses. Our cash balance at the end of the quarter was $6.2 million.

As Ron mentioned earlier, in order to better inform the investor community of our rationale of the acute and post-acute comprehensive strategy investments, we will be breaking out the financial results of our 2 operating segments, Sanara Surgical and Tissue Health Plus.

Net of expenses, we believe to be noncore or operations, we generated consolidated adjusted EBITDA of $0.6 million and $0.9 million during the 3 and 6 months ended June 30, respectively. Our Sanara Surgical segment generated positive segment EBITDA of $1.4 million during the second quarter of 2024 and $2.5 million during the 6 months ended June 30, 2024. Tissue Health Plus generated negative segment EBITDA of $0.8 million during Q2 and negative $1.6 million during the 6 months ended June 30, 2024.

All corporate and overhead expenses are included in the Sanara Surgical segment as substantially all 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.

As Ron mentioned earlier, we're going to invest another $4 million to $5 million to further the Tissue Health Plus strategy in the second half of 2024. As we discussed in our last call, we closed a new $55 million debt facility with CRG during the second quarter. This transaction helped us strengthen our cash position and provided access to capital in a way that was nondilutive to equity holders.

The term loan is structured as a senior secured loan with a 5-year term. In addition to the $15 million drawn at close, we may draw an additional $39.8 million before June 30, 2025. This facility provides us access to capital for accretive transactions and general working capital purposes.

I will now turn it over to Ron for closing comments.

[Ronald Nixon, executive]

Thanks, Mike. We continue to execute on our strategy, both in surgical and post-acute wound care value-based strategy. Our surgical team is generating 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 post-acute wound care market with our value-based strategy and anticipated 2025 commercial launch.

Operator, I'd now like to open the line for questions.

[Operator]

[Operator Instructions] The first question today is coming from Ross Osborn from Fitzgerald.

[Ross Osborn, analyst]

Congrats on another record quarter. So starting off, there's been a lot of disruption in the chronic wound space with regards to reimbursement, causing some confusion. Any thoughts on the market broadly? And could you provide some more color on the diagnostic front of THP, especially given that I believe you're targeting the home care space?

[Ronald Nixon, executive]

Yes. Yes, Ross, this is Ron, and I'm assuming that you're talking about the disruption that is around the CTPs and the use of CTPs and the fact that the number of those are not being reimbursed today. But for the broader question, I'm going to turn it over to Sam. And Sam, if you want to address that, that would be great.

[Unknown Executive]

Thank you, Ron. In terms of the disruption in the chronic wound care space, especially in CTP, that is something we are factoring into our strategy. As we discussed before, our strategy is to generate savings and mostly hospital-based savings. So this -- the direction CMS and the payers are moving in is very congruent to where we're going.

In terms of the diagnostic device, one of the key things which we looked at when we were putting to the THP strategy was how do you make this diagnostic devices scalable in cost and also something which can be used across multiple settings and multiple levels of clinicians. So as we come out with that, will be -- you will see that, that's the key aim we have actually achieved.

[Ross Osborn, analyst]

Okay. Got it. And then switching to your partnership with [ TOP ], any color you can provide on [ corporation ] timeline of the peptides and [ CellerateRX ]?

[Ronald Nixon, executive]

We've got several various activities going on right now with that, with the 18 peptides that you're referring to. We're obviously not going to take on all to 18 at one time, but we have taken on and are selecting certain ones that you'll be hearing more about in the near term, Ross.

[Ross Osborn, analyst]

Okay. Great. And then lastly, could you walk through the game plan for targeting your new adjacent markets you called out, such as trauma, just the key steps there to driving adoption? Do you need to generate more data? Is it more such a factor of knocking on doors? Any color would be helpful.

[Ronald Nixon, executive]

Yes. Seth, would you mind taking that, please?

[Seth Yon, executive]

Sure. We'll continue to expand with the right distribution partners in those spaces as well, alongside of even looking at other partnership opportunities as well to expand into those unique specialties, so that will be a focus. In addition to that, we've also hired some specialists as well that are so focused specifically into the bone space as well. And we think that, that can be a great complement to get into some of those additional specialties.

[Ross Osborn, analyst]

Okay. Great. Congrats again on another strong quarter.

[Operator]

The next question will be from Chris Plahm from Tall Pines Capital.

[Christopher Plahm, analyst]

Two questions. One, with the new GPO deal, does that cause a shift in strategy to go after the 3,000 approved that aren't sold into? And then also, if we can get a little more color update on BIASURGE's progress since launch.

[Ronald Nixon, executive]

Yes. Seth, why don't you take both of those, if you would, please?

[Seth Yon, executive]

Yes, we'll continue to look to expand both at a local level and at national level to gain access into these facilities. So that progress won't change. That approach won't change for us as far as having access at both the local IDN level and also at the national GPO level. We've done that with great success, which obviously allows us a faster track to success. But also, the attraction that it brings to great distribution partners, that's a wonderful thing for us as well, so that's one.

The second question again was specific to what -- could you ask that again?

[Christopher Plahm, analyst]

To BIASURGE? Just how that's going...

[Seth Yon, executive]

Sure. We had a soft launch of BIASURGE in the late fourth quarter of 2023. It has really started to pick up and carry some momentum, not only on the contracting side, but again, as a sales organization, we're looking at that as a facility-level conversation, not just a surgeon-level conversation.

We're really happy with the progress being made, specifically through the second quarter, with the growth of that product as well. It fits nicely into a top 6 product for us already in its overall performance. And again, really happy with the progress that's being made with that product.

[Ronald Nixon, executive]

Seth, why don't you tell Chris a little bit about the feedback also from the surgeons that have used it.

[Seth Yon, executive]

Yes, all the way around, we've reached a number of different specialties. And again, I think that's another piece that's complementary to us reaching into other specialties. Every single surgeon that's into the OR is using some type of wash, and that allows us to expand into the trauma and the general and plastic spaces as such as well.

But we've had wonderful feedback from everything, from orthopedics into spine, vascular, general; in a very early window. And really satisfied and happy with, again, the progress that's being made there in multiple specialties with that product.

[Operator]

[Operator Instructions] The next question is coming from Ian Cassel from MicroCapClub.

[Ian Cassel, analyst]

Thanks for bringing the whole team, this is very beneficial. Maybe -- my first question maybe is kind of relating to what Seth answered a few questions ago. I was curious if there's any color into why the bone fusion product specifically seemed their growth has been stagnating in the last couple of quarters.

[Seth Yon, executive]

I'm sure I can answer that as well. So I would say this, part of that is an approval process, one, where maybe the access for products like [ CellerateRX ] and FORTIFY and such have a little bit greater opportunity based upon the number of approvals.

One of the ways that we're tackling not only that is at a national level and local. But we did -- just recently, in the last 90 days, we've hired a few bone specialists as well that will be in different markets to help build that out in addition to the regional managers and distributors that we have today.

We think that's a great complement to that space into those markets and should start to see a rise coming out of it as a result of people being hyper focused into that bone space, whereas you can see from our performance, the performance has really been focused into that soft tissue space. So we think this is a great one to point for us in the second half of the year.

[Ian Cassel, analyst]

I appreciate that. My next question would be for Sam. What are the key areas you need to solidify to get ready for that Tissue Health Plus pilot in Q1 of '25?

[Unknown Executive]

Thank you. In terms of the key areas, there are 3. The first is we are finishing the build-out of our technology platform. And the second is we are finishing off the build-out of our economic model and validating that both from economics, which we're putting in front of payers, as well as our network partners. The third piece is really preparing education and onboarding assets for both onboarding our staff as well as our network partners.

[Ian Cassel, analyst]

And maybe last one for you, Ron. I appreciate you breaking apart in the segment financials, so we can see what Tissue Health Plus doing versus Surgical. What is preventing you from being more profitable in Surgical at your current run rate?

[Ronald Nixon, executive]

Yes. That's a good question. So Ian, quite frankly, we set out from the very beginning with the launch of Cellerate and then beyond adding additional products, we want to be a complete portfolio of products to be able to support the surgeons for ancillary products that can help them in their surgery. So protect their work, make their work better. And we've done that successfully by adding our BIASURGE to that, along with Cellerate and our other products, both soft and soft tissue and bone.

But we're not stopping there. We're going to continue, as Seth talked about, the 3 new areas that we want to go after, related to vascular and plastics, in general. And they may have different needs for us, and we're constantly looking for what else we can either acquire or partner with others. And because of doing that and knowing where we want to go and how we want to get there through either these partnerships or acquisitions, we want to continue to build our infrastructure to support this organization.

You heard -- that's why I wanted Jake on the call today. Jake came aboard, and he's helping us to increase our efficiencies across everywhere, make sure that we can support the high-growth organization. And we're not interested in slowing down our growth to maximize profitability today. We believe we can maximize profitability as we move into the future just by getting fixed cost leverage as we continue to add more and more to what we're doing today.

So I hope that answers your question, but that's a game plan, and that's where we're headed. And we've got a keen eye on a plan to profitability, increased profitability from where we are today.

[Ian Cassel, analyst]

Maybe one last one to tag on to that. It does look like your growth rate really bounced back from late last year or middle of last year, which is good to see. Was there anything kind of onetime stocking order here in Q2 that made it more robust than it would have been under normal sales cadence?

[Ronald Nixon, executive]

I don't believe so. Mike...

[Seth Yon, executive]

I can answer that as well. We had really steady incremental growth throughout the entire quarter. It wasn't a shot-in-the-arm type of order or big stocking order or things like that, that kind of inflated the number. That did not occur in the second quarter. And really happy from April and the growth inside of April to May, and it just continued to climb. So I would say that the progress was really, really strong overall, and it wasn't a result of just a onetime order.

[Ronald Nixon, executive]

Yes, yes. And I think I misunderstood your question, Ian. Sorry about that.

[Operator]

And the next question will be from [ John Sidoff ] from Twin Oaks Equity LLC.

[Unknown Analyst]

Ron and Mike, congratulations guys on the continued growth. I mean that's -- to be an $80 million run rate is fantastic. You guys have done a great job over the last 5 years. Congratulations.

[Ronald Nixon, executive]

Thank you, John.

[Unknown Analyst]

You bet of course. Ian had a great question about the -- we all know how much it costs to grow a company and the cash you need for that. And I see that you've gotten a new facility. And I certainly like that because you can't run out of money.

Ron, do you foresee when -- is there like a certain number that you're -- I know that you always have a focus on where you want to be and the growth. When do you see a breakeven? Or do you see that you're going to continue to burn some cash as you grow because it takes money to grow?

[Ronald Nixon, executive]

Well, the separation of the separation of Tissue Health Plus ultimately, which we've talked about that we're going to -- that we've always want to seek other partners that can help us in the success of Tissue Health Plus, and as we continue to move to that and Tissue Health Plus crosses that profitability threshold, which we believe if it launches in 2025, it will be very early, it will have a very early success once the contracts are awarded.

And so once that happens, then surgery by itself stands on its own and is going to be -- it is just fine from a profitability standpoint. We know we've got great margins. We've got great momentum in the sales effort. We continue to expand. We just build our infrastructure around it, and then you'll start to see what I think will be significant leverage off of our SG&A.

[Unknown Analyst]

I certainly agree with you there. You've got to get to that -- got to get to enough force going forward. Do you see this negative cash burn, the cash burn as a reason for our -- what I think is a depressed stock price?

[Ronald Nixon, executive]

I don't actually -- the stock market always confuses me. I never understand [indiscernible] vision. So I really can't speak to that, quite frankly. All I know is I've not sold a share of stock, nor have most of our directors. And we all believe in [ growing ], and we believe that this is going to be a very successful company. So we are enjoying the ride, and we're going to just continue to go forward, John.

[Unknown Analyst]

Well, neither have I. I just wanted to get you -- yours and Mike's take on that and see how we're doing for the investors, and I appreciate the growth that you guys are continuing to show us out there in the market. I appreciate it, guys. Thank you.

[Operator]

Thank you. There are no other questions in queue at this time. I would now like to hand the call back to Ron Nixon for closing remarks.

[Ronald Nixon, executive]

Just want to thank all our shareholders that attended the call today and all the ones that we'll read about it, and we just thank you for all your support. Thank you for hanging in there. We believe in our future. We're very excited about where we're going and how we're going to get there, and we continue to build a team that's, I think, best-in-class. And I feel very, very, very proud of that. And so thank you all for attending today, and we'll talk to you soon.

[Operator]

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