Sanara Medtech Inc

NASDAQ:SMTI

Earnings Call Transcript 2024-Q3

[Operator]

Good morning, and welcome to the Sanara MedTech Third Quarter 2024 Earnings Conference Call. The company issued its earnings release yesterday and will post today's supplemental deck on the Investor Relations page on the company's website. With us today are Ron Nixon, Executive Chairman and CEO; Mike McNeill, Chief Financial Officer; Seth Yon, President, Commercial; and [ Sam Apollo ] who leads Tissue Health Plus.

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 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 the company's most recent annual report on Form 10-K as supplemented by the Risk Factors in the company's most recent quarterly report on Form 10-Q. Also this conference call, the earnings release and supplemental deck reference certain non-GAAP measures. In that regard, please refer 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, operator, and good morning, everyone. During the third quarter of 2024, the company generated $21.7 million in net revenue. This was an increase of 35% year-over-year and represented our 12th consecutive record revenue quarter. The strong sales performance in Q3 is a testament to the hard work and dedication of our entire organization and executing our strategy. We remain focused on continuing our growth and delivering exceptional value to both our customers and shareholders.

Third quarter also achieved improved adjusted EBITDA results. Sanara generated adjusted EBITDA of $800,000 during the third quarter of 2024 compared to adjusted EBITDA of $300,000 for the same period in 2023. In Q2, we began reporting additional financial performance metrics of our Surgical division in Tissue Health Plus as a separate business segments. This transition to segment reporting better aligns with how our leadership team views the business. Our Surgical segment generated a $200,000 net loss in the third quarter and a net loss of $2.9 million year-to-date through September 30, 2024.

On a segmented EBITDA basis, the Surgical segment generated $2.6 million and $5.1 million of segmented EBITDA during the third quarter and year-to-date through September 30, 2024, respectively. We continue to see strong growth opportunities for both segments, which Sam and Seth will discuss in further detail. We plan to continue investing in THP technology platform and related infrastructure through the expected commercial launch in mid-2025. And as a reminder, we are pursuing like-minded financial partners that will bring value to the strategy, including capital. In September, we invested $5 million in exchange for an ownership percentage of approximately $6.6 million in ChemoMouthpiece, LLC, which owns and manufacturers of 5 2K cleared cryotherapy device designed to reduce the incidence and severity of chemotherapy-induced oral mucositis.

In connection with the investment, we announced the exclusive -- the execution of an exclusive U.S. distribution agreement through our JV with InfuSystem for ChemoMouthpiece. This product aligns well with Sanara's wound and skin care strategy, which includes our license coverage and peptides from Top University with 1 particular peptide focused on radiation dermatitis. SI Healthcare Technologies LLC, a joint venture entity owned 50-50 by Sanara and InfuSystem Inc will be the exclusive distributor of the chemotherapy kits by our partner system.

We look forward to working with system team commercializing this product in 2025. I'll now turn it over to Seth to discuss our surgical business results and momentum.

[Seth Yon, executive]

Thank you, Ron. As of the end of the third quarter, our products had been sold in over 1,200 hospitals across 34 states in the District of Columbia during the trailing 12 months and were contracted or approved to be sold in more than 4,000 facilities. We currently have selling agreements with over 300 distributors representing 2,900-plus potential sellers. Looking at the growth of the territories and the facilities in which we sell. In Q3, our products were sold into over 900 facilities compared to over 600 facilities in the third quarter of 2023.

Sales of our soft tissue products grew from $13.6 million in the third quarter of 2023 to $18.9 million in the third quarter of 2024. Sales of -- products grew from $2.3 million in the third quarter of 2023 to $2.8 million in the third quarter of 2024. We continue to build momentum within our network of over 4,000 contracted or approved facilities, diligently working to expand our surgeon user base in our core orthopedic and spine areas.

We have also intensified our focus on nontraditional users to drive growth in both active and new accounts, expanding into additional geography remains a top priority for our regional sales managers, particularly through the engagement of key basin partners. The commercial team is working closely with our operations team to constantly enhance our sales analytics, which will uncover greater opportunities through a strategic focus across all the areas that we serve. In addition to our organic growth, we are regularly evaluating opportunities for surgical M&A and partnerships. Our management team sees synergistic potential transactions as a key growth driver that complements our strong organic growth.

With that, I'll turn it over to Sam to provide an update on Tissue Health Plus.

[Unknown Executive]

Thanks, Seth. Last call, we outlined THB strategies to disrupt the $100 billion-plus nonacute wound care market. As planned, Q3 was focused on enhancing our execution capacity and building the platform to support the scale delivery of our distinctive care model. We have established a world-class leadership team with extensive expertise in wound care and technology to oversee the execution of our global multidisciplinary team. The development of THP's state-of-the-art wound assessment software has a medical device and innovative real-time EMR integrated clinical decision support is on track for release in the first half of 2021.

Early previews have been well received with the provider community, demonstrating its transformative value. We are compiling a list of enthusiastic pilot partners. On the payer side, we have successfully collaborated with a leading value-based care consulting firm to refine our program economics model ensuring alignment with standard payer reimbursement strategies and infrastructure. This engagement reaffirmed the efficacy of our innovative episodic risk share model. In preparation for market entry in mid-2025, we have launched an introductory website, www.tissuehealthplus.com to say hello to the world.

We have also recruited a luminary clinical advisory board to help us anticipate and overcome real-life adoption hurdles. I would now like to turn it over to Mike to discuss our financial results in more detail.

[Michael McNeil, executive]

Thank you, Sam. During the third quarter of 2024, Sanara generated net revenue of $21.7 million compared to $16 million in the third quarter of 2023, a 35% increase over the prior year period. Higher revenue in Q3 was primarily due to increased sales of soft tissue repair products, including Cellerate Rx as a result of increased market penetration, geographic expansion and our continued strategy to expand our independent distribution network in both new and existing U.S. markets. Third quarter gross profit of $19.7 million, increased $5.4 million or 38% compared to prior year.

Year-to-date gross profit of $54.5 million increased $13.3 million or 32% compared to the same period in 2023. SG&A expenses for the third quarter were $19 million compared to $13.9 million for the same period in 2023. The higher SG&A expenses included $3.7 million of direct sales and marketing expenses and $1.2 million of costs related to the build-out of our THP platform and infrastructure. Third quarter R&D expenses were $1.4 million compared to $1 million during the same period in 2023. R&D expenses included $600,000 and $800,000 attributable to our Tissue Health plus segment for the quarters ended September 30, 2024, and 2023, respectively.

Higher R&D expenses in 2024 were primarily due to new projects associated with CellerateRX. interest expense was $900,000 for the quarter compared to $200,000 in Q3 2023. The higher interest expense was primarily related to our term loan with CRG. Sanara had a net loss of $2.9 million for the third quarter of 2024 compared to a net loss of $1.1 million for the same period in 2023. The net loss included $2.7 million and $1.7 million attributable to our Tissue Health plus segment for the quarters ended September 30, 2024, and 2023, respectively. The higher net loss for the third quarter of 2024 was primarily due to higher SG&A costs related to the build-out of the THP platform, higher interest expense related to our CRG term loan and higher expense related to change in fair value of earn-out liabilities.

As Ron mentioned earlier, in order to better inform the investor community of our strategic rationale of the acute and post-acute comprehensive strategy investments, we have separated financial results of our 2 operating segments, Sanara Surgical and Tissue Health Plus. Net of expenses, we believe to be not core to our operations, we generated consolidated positive EBITDA of $800,000 and $1.7 million during the 3 and 9 months ended September 30, 2024, respectively. Our Sanara Surgical segment generated positive EBITDA of $2.6 million during the third quarter of 2024 and $5.1 million year-to-date through September 30, 2024.

Tissue Health Plus generated negative segment EBITDA of $1.7 million during Q3 and negative $3.4 million during the 9 months ended September 30th. 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 to -- Technologies. Our cash balance at the end of the quarter was $16.3 million. I will now turn it over to Ron for closing comments.

[Ronald Nixon, executive]

Thank you, Mike. We continue to execute on our strategic plan in both surgical and non-acute wound care value-based strategy. Our surgical team has generated 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 non-acute wound care market with our value-based strategy and anticipated mid-2025 commercial launch.

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

[Operator]

[Operator Instructions] And our first question today will be from Ross Osborn from Cantor Fitzgerald.

[Ross Osborn, analyst]

Congrats on the progress. Starting off, would you walk us through the rationale for the investment in ChemoMouthpiece and how it fits into your broader strategy?

[Ronald Nixon, executive]

Sure. Happy to. our strategy, Ross, has always been wound and skin care. We see many, many people think of wounds as a skin condition. We licensed the 18 college of peptides from up. Those are all centered around wound and skin. We have a strategy moving forward on the value-based side, THP. That is a wound and skin and the ChemoMouthpiece directly impacts a skin condition that is horrific in the chemotherapy oncology space.

So if you think about it, what happens is when they use chemotherapy in treating cancer you can get these stores or mucositis source, and they are really a wound that is open in your mouth. And the only way historically to be able to solve that problem is used ice cubes, which is pretty antiquated. And so this -- a particular gentleman that had gone through cancer treatment had terrific experience with or mucositis, he's an engineer by background and decided he's going to come up with that. It's a de novo product, which means it's a one of a kind. It's very unique, and we're bringing it to market with InfuSystem because it fits our overall strategy very well.

[Ross Osborn, analyst]

Got it. Makes perfect sense. And then turning to THP. If I remember correctly, you were conducting a pilot program with the podiatry group. Curious any feedback there and how that's progressed?

[Ronald Nixon, executive]

Yes. We've not dated up that, but I'll turn it over to Sam to talk about that.

[Unknown Executive]

So thank you, Ron. Ross, as we discussed last time we were targeting pilots in the first quarter -- in the first half, if you will, and we are on target to do that. And as I said on the earnings call, we have a list of people we are working with. And we are hoping to really -- the early previous have been really, really good.

[Ross Osborn, analyst]

Okay. Great. And then last 1 on THP, how has it gone as far as attracting new operational personnel to join the team there?

[Unknown Executive]

That's 1 thing we are particularly proud of, Ross, is we've been able to attract a very skilled team with a lot of execution experience in this space, and we have actually created a team book, which is in the U.S. as well as in India to help us scale our platform development efforts. One of the things we also did was integrated into the team external partners to kind of derisk the execution. But in terms of being able to attract the talent, it's been a really nice journey so far, and we've been able to onboard them and make them productive really fast.

[Ronald Nixon, executive]

One thing, Ross, that makes very interesting in that and why it's also attractive. Many people know this is a needed strategy in this market and people have known for decades that this strategy needs to happen. It's complex, but Sam is the perfect person to lead that charge and he's built a team that complements in very, very well.

[Ross Osborn, analyst]

And then maybe turning to OpEx. During the quarter, you demonstrated a controlled spend, particularly on the R&D line. How should we think about OpEx for the balance of this year in 2025 as you launched tissue health pots in addition to the other projects you have going on?

[Ronald Nixon, executive]

We think through that very carefully, Ross, and we lay out exactly where we're going and how we plan to get there. And so we typically don't have a lot of surprises related to that. So it's in our budget. And so when we say that we're on -- that we are moving forward on our strategy to execute that strategy, we have the appropriate budget for that. And as we also said, we expect to see continued growth in our EBITDA -- adjusted EBITDA. So it's all part of our overall planning and we don't see any surprises at this moment.

[Ross Osborn, analyst]

Okay. Perfect. And then lastly, any update on your work with costs relating to the -- peptide idea.

[Ronald Nixon, executive]

I'm sorry, I didn't hear the question, Ross, say it again.

[Ross Osborn, analyst]

Any update on your work with Tops relating to the 18 peptides you have?

[Ronald Nixon, executive]

Yes. So if you think about the skin and wound strategy that I discussed with you just a few minutes ago, the radiation dermatitis is almost an identical same-sized market as the oral mucositis. And there has been no particular solution that has been developed that is a preventative and a solution for healing radiation dermatitis. And it's a horrific skin condition as a result of radiation. And both of those are the 2 skin conditions that really be havoc on keeping people on their -- on the regimen for chemotherapy and also radiation.

So yes, our technical team at Roche scientific team is working on that, and we are moving that forward as quickly as we can and we see it as a very strong complement for our JV with InfuSystem because it will be the same call points.

[Operator]

[Operator Instructions] We did get another question come from Ian Cassel from MicroCapClub.

[Ian Cassel, analyst]

Yes. Congratulations on the quarter. Can you talk generally about the types of partners that you're looking to attract for Tissue Health Plus and maybe just generally how those conversations are going.

[Ronald Nixon, executive]

Sure. I'll turn that over to Sam and let him do that. Sam?

[Unknown Executive]

Thank you, Ron. Thank you, , for the question. In terms of the partners we are looking for, we are looking for 2 types of partners: one, financial partners, obviously, and second, execution partners. And as we laid out, we have actually filled out dancing card execution partners. In terms of financial partners, we're really looking at some strategics who can bring execution as well, right? So not just money, but actually smart money, if you will. So we're looking for people who have reach into the provider community.

We're looking for people who have reached into the supply chain we'll be using at THP, so people like DME providers. we're looking for strategic product suppliers -- product manufacturing companies who have deep signs in this space as well. Outside of that, we are also looking for potential typical financial investors, like venture catalysts or people who have an execution track record in the health care space we are targeting.

[Ian Cassel, analyst]

One last question. When Tissue health Plus launches middle of next year commercially, would you expect that segment to be immediately profitable? Or will there be some ramp-up needed to get to profitability in that segment?

[Unknown Executive]

There will be a ramp-up needed to get to profitability.

[Operator]

The next question will be coming from Chris Plahm from Tall Pines Capital. Chris, your line is live.

[Christopher Plahm, analyst]

Two questions. One, can we get an update on IP progress with Cellerate and also just an update on BIASURGE?

[Ronald Nixon, executive]

Yes. Well, I'll let Seth talk about BIASURGE and on the IP front, the IP front, as we mentioned in several calls, historically, that is a priority for us, and it is going very well and we'll be able to report by year-end, the success that we've had, but we continue to file provisional patents around all of our products and the combination of our products and other things like that. So we really good progress, Chris. And then as it relates to BIASURGE, Seth, maybe you could just talk about from the introduction of November through this quarter, what you see.

[Seth Yon, executive]

Sure. Great question, Chris. Thank you.

So BIASURGE soft launched last year at this time, formally launched at the turn of the year. We are right on pace not only at the facility level and gaming approvals but starting to scale that product as well. It's really a facility level sale, not just a surgeon level sale, and we're really happy with how that's gone through the third quarter.

[Operator]

The next question is coming from John -- from Twin Oaks Equity.

[Unknown Analyst]

Congratulations on another growth quarter, year-to-date, year-over-year $47 million to $60 million, fantastic results. I just have 2 quick questions. The last time I asked about the -- our share price and where it's been in the mid-30s. And I was wondering, could you tell us a little bit about what Sanara has for market makers out there? Just in the last, say, 2 years, the low have been $28 to $30 and the highs have been $45 to $50. And so we've had people buy in at both of those levels and now we'll say we're around $30.

And so we -- at some point, we do have to look out for these investors and try to get the price up a little higher with our net losses continuing on and borrowing more money for this growth. A couple of the reviews out there say that it's maybe 3 years until profitability. I was wondering how you guys felt about that because I know how much capital it takes to grow, of course, but I was -- I just wanted to get you guys' thoughts on the burn of cash, I know you have a lot of access to it. But what you see for profitability down the road. Is it $100 million? Is it something like that? I know it's a big question. And then how will that affect our market makers out there with our share price.

[Ronald Nixon, executive]

John, we're on pace exactly as we're planning. We like the progression of our adjusted EBITDA. Mike can speak to the actual cash. And so Mike, you could talk about that now. But I would tell you, our plan is to continue to do exactly what we're doing, 12 straight quarters. Last I checked, that's a lot of time frame, and we're going to continue to keep that pace. That's what we want to do.

And I think the market will take care of itself. All we have to do is continue to produce results, and we don't expect to have any surprises where we would need to have a highly dilutive event. We would -- we look for events that are extremely accretive to us, and we've said that on many calls before from our M&A and partnering activity. And so Mike, if you want to talk a little bit about the -- your projections on cash flow, that would be great.

[Michael McNeil, executive]

Yes. Thanks, Ron. Yes, we had a strong cash performance in cash. And during the quarter, we actually generated a couple of million dollars of positive cash flow in the quarter from operating activities. And so we've been somewhat neutral through most of the year, and most of the borrowing has been for investing activities. So we don't expect to be burning cash and operating activities in the near future or even going forward.

[Unknown Analyst]

Well, thanks, Mike. That's really good news to hear. And then Ron, thanks also. I know that you guys are focused on growth. I know what it takes to get there. And it's great to hear that, of course, you've got our investors in mind because the money that you've raised has certainly been nondilutive. So I appreciate that.

[Ronald Nixon, executive]

Thank you.

[Operator]

There were no other questions from the lines. We did get some webcast questions in, so I'll go through a few of those right now. Can you give some more granularity on the time line for THP, will a pilot be launched in the first half of '25?

[Ronald Nixon, executive]

Yes. Sam, do you want to take that?

[Unknown Executive]

Sure. Yes. We are planning to launch a product in the first half of '25.

[Operator]

Yes. Okay. Can you give some color on where the majority of work is that remains in order to launch THP by mid-2025, engineering partnerships, et cetera?

[Unknown Executive]

Sure. The majority of work -- if you look at the work going on in THP, there are really 3 streams of work. The first stream of work, which is the locus of work is really building the platform to scale the delivery of our care model. And that's where we have partnerships while not naming partners, I can tell you the areas in which we are partnered. We have partnered in the area of integration with EMRs.

We have partnered in the area of being able to accelerate our development efforts, and we have partnered in the area of being able to use innovative data management techniques and being able to take that data and leverage it into the rest of our tax. So what we're trying to do is to make sure that we are not rebuilding any things which are already in the marketplace, and we are really building on top of what's in the marketplace. So the partnerships have really helped with that.

The second stream of what we are doing is really continuously expanding our clinical model and testing its efficacy. And the clinical model and the signs behind it essentially become an input to our platform. So the work continues on that. And we have made some very good progress there, for example. We have expanded our clinical model to include atypical wounds, which constitute about 20% of the wound population out there and that some of the first work being done to qualify standard of care for those.

The third piece, which we are -- work is going on is really around the commercialization of this. That includes being able to identify network partners and working with them and creating pilots. The second piece of it is also really understanding pricing models, testing it and in the marketplace. And we've received very good feedback on that as well. So those are really the 3 streams of work on which we are working on right now. Hopefully, that helps.

[Operator]

The next question, what are your expectations regarding ChemoMouthpiece's contribution to top and bottom line?

[Ronald Nixon, executive]

We're not prepared to give that answer at this time. We obviously are very enthused and think it is a terrific opportunity in front of us. And as we progress on the introduction of this product and start to launch in 2025 and get this commercially accepted in the marketplace through our partner with InfuSystem, then we'll come back and report what our expectation is. But it's a very big wide open market from my perspective.

[Operator]

And what are some of the characteristics you're looking for in a potential M&A target for Surgical?

[Ronald Nixon, executive]

Yes, that will -- we'll let them know what that is when we close it.

[Operator]

Okay. We are currently seeing no remaining questions at this time. That does conclude our conference for today. Thank you for your participation.