Sanara Medtech Inc

NASDAQ:SMTI

Earnings Call Analysis

Sanara MedTech Reports Record 2023 Revenue

Sanara MedTech ended 2023 on a high note, recording its highest annual revenue of $65 million, a 42% increase from the previous year, driven by enhanced sales of soft tissue and bone fusion products. The fourth quarter alone contributed $17.7 million to the total. Despite the revenue surge, the company​ experienced a net loss of $4.4 million for the year. Costs have been optimized with Selling, General, and Administrative (SG&A) expenses dropping to 87.7% of revenue from 100.3%. Looking ahead, Sanara plans to expand its sales force, break into new markets, and innovate by developing peptides licensed from Tufts University.

Sanara's Record-Breaking Performance in 2023

Sanara MedTech Inc. hit a new stride in 2023, charting both a record-breaking fourth quarter and a monumental year over year revenue growth. The company amassed $17.7 million in the last quarter and reached a total annual revenue of $65 million. Despite these revenue highs, the company also reported a net loss of $4.4 million for the year.

Future Growth and Expansion Plans

Looking forward, Sanara intends to expand its sales force, target new geographical markets, and enhance product development. The goal is to branch out to specialties beyond orthopedics and spine, capitalizing on the recently acquired peptides from Tufts University to boost their peptide product platform.

Strategic Moves in Healthcare Offerings and Partnerships

Sanara is cultivating Tissue Health Plus, a value-based care strategy for post-acute wound care. This aligns with the company's aim to cut costs and improve health outcomes. Discussions with potential partners have begun, which may result in Sanara owning a non-majority stake in Tissue Health Plus. This strategic move is designed to complement the company's acute care surgical business with a chronic wound care solution.

Product Developments and Licensing Agreements

The company has secured full rights for human wound care applications of its CellerateRX and HYCOL products, resulting in the elimination of royalties and the empowerment to develop proprietary products. Furthermore, Sanara has rectified supply issues with its ALLOCYTE line and successfully launched ALLOCYTE Plus, alongside the BIASURGE Advanced Surgical Solution, marking these as milestones in widening their product offerings.

Licensing and Sales Results

December 2023 saw Sanara execute a licensing agreement with Tufts University for 18 unique peptides aimed at extending product development at Rochal. This bolstered their sales, with soft tissue products generating $54.8 million and bone fusion products hitting $10 million in 2023.

Operational Expenses and Commercialization Efforts

Sanara's operational expenses for Tissue Health Plus were approximately $5.2 million in 2023. As they search for the right partners to commercialize this, they continue to develop its essential capabilities like a Care Hub, a managed service organization, and a technology platform.

Financial Progress Amid Rising Expenses

While the company reported a significant year-over-year revenue increase of 42%, their SG&A expenses also rose from $46 million to $57 million. Despite this, SG&A expenses as a percentage of revenue dropped from 100.3% to 87.7%, indicating that revenue growth is indeed outpacing expenses.

Reduced Losses and Increased Research Investments

Sanara lowered its net loss from $8.1 million in 2022 to $4.4 million in 2023, primarily due to enhanced gross profit and changes in fair value of earnout liabilities. This is despite increased overhead from SG&A costs, R&D investments, and amortization of intangible assets. The R&D expenses went up to $4.1 million, signifying investment in new project development including the Precision Healing diagnostic imager and LFA.

Conclusion with Optimistic Future Outlook

Sanara concluded the year with $5.1 million cash on hand. The executive team expressed gratitude for the team's hard work which enabled the company to lay down the infrastructure needed to support future growth, setting the stage for an optimistic outlook moving forward.

Earnings Call Transcript 2023-Q4

[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.

[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, executive]

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.

[Ronald Nixon, executive]

Thank you, Callon, and good morning, everyone. Fourth quarter in 2023 was another record revenue quarter for Sanara, and 2023 was another revenue record year. Company generated $17.7 million in revenue in Q4 and $65 million in revenue for the year. For the 3 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 begin 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-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 side of care, selling channels and payment systems between our surgical business in Tissue Health Plus, we believe this is very complementary to our post-acute strategy partnership with [indiscernible].

We envision the system 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 and 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.

[Zachary Fleming, executive]

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 2 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 product and is processed by an alternative supplier with in-house processing capabilities. This will afford us greater control of product supply. 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 and believe that it can be used in any surgery where Sanara products are currently used.

In November 2023, Sanara announced the 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 -- 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 have 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 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 noncash 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 side 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.

[Michael McNeil, executive]

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 -- a 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 earnout 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.

[Ronald Nixon, executive]

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 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.

[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, analyst]

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 [indiscernible] sold in? And then as a follow-up, any feedback you could share [indiscernible]

[Ronald Nixon, executive]

Zach, do you want to take that? Zach, you're on mute.

[Zachary Fleming, executive]

I'm sorry. I heard the first part. You said how many centers in the fourth quarter. What was the second part?

[Ross Osborn, analyst]

Just any feedback you could share?

[Zachary Fleming, executive]

Yes. So BIASURGE has been very well liked out in the market. As you know, we had kind of a prelaunch soft trial where we sent product out to the facilities and we 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've 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 WACC 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 -- 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 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.

[Ronald Nixon, executive]

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 of surgical site infection. This just goes hand in hand with that, very complementary. So I think it's going to be well received by the surgeons that already use Cellerate.

[Ross Osborn, analyst]

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

[Zachary Fleming, executive]

Ron, do you want to take that?

[Ronald Nixon, executive]

I didn't actually hear the question.

[Zachary Fleming, executive]

Yes. He just asked what are we trying to accomplish by getting the 18 peptides -- so different set of peptides, but they are. Yes, go ahead.

[Ronald Nixon, executive]

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 and will continue to be in the future. I just want to strengthen that platform but also expand it into more usages within the surgical arena. And some of those peptides actually have application outside of that and more than likely in that case, we will be seeking partners 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.

[Operator]

Your next question is a webcast question from Neil Cataldi. You mentioned ALLOCYTE sales began to pick 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?

[Zachary Fleming, executive]

Sure, I can take that. So yes, we did have a kind of a delay and inability to get full supply late last year, starting around September and then actually it 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 some momentum and had lost the ability to sell because of supply. And then now we're back on page with most of those facilities. Some of them have moved on to other products. But for the most part, we are able to get back on track with all those facilities. But then there's the additional time that it takes to stock and then start to ramp up.

And then we're trying to regain some of the business from the surgeons and so forth. And of course, the distributors that work with us as well and retrain them, coach them back up on this particular product and then get it started again. So that's where we see that, and it's kind of like that whole fourth quarter was to kind of regain our footing and then into this year, start to sell and to proactively approach new facilities and go beyond where we were. So we kind of treaded water, if you will. And now we're on the move forward, and we feel confident in our approach and where we're headed with that product. It's starting to move forward very nicely.

[Operator]

Your next question is from Michael Liu at IFCM.

[Michael Liu, analyst]

Congrats on the quarter. My first question, could you potentially clarify the sales force growth throughout the year. I think you disclosed last year that you ended the year at 39 and you're at 39 now, and it sounded like you added a couple throughout the year, and it seems to be about flat. So could you just maybe take us through the cadence of how many sales force reps you've had throughout the year and where the major changes have happened?

[Zachary Fleming, executive]

Yes. I think the simple way to think of it is that 3 folks got reclassified and then 4 -- roughly 4 got -- I don't know if it was 4 -- that got terminated in Q4. And then so you had kind of reclassifications, promotions would be part of that and then terminations.

[Michael Liu, analyst]

Okay. So broadly it was...

[Ronald Nixon, executive]

Yes, Michael, the one thing that I think is the most noteworthy is that we accomplished a 42% increase in revenue growth with the same number of beginning -- at the beginning of 2023 or ending of 2022 and where we ended 2023. Our data analytics, as Zach mentioned earlier, are being well utilized. We're seeing much better efficiency. And so we have a much better speed to profitability per rep.

We also have a much better understanding of their potential and how to achieve that potential within each one of the areas that they're selling in. So I think the efficiency gains we've gotten there has given us great leverage on our sales force, and then we'll just continue to expand as needed into the marketplace.

[Zachary Fleming, executive]

We're always making adjustments to the team -- whenever we see all this data and analytics, we're really trying to make adjustments that optimize the team. So you'll continue to see that. That's not going to change. And we always want to increase efficiency where we can. And so that's the second component of that where -- like Ron said, we're going to look at that data, we're going to optimize location and we're going to optimize the call points. And so in doing that, that's the kind of plus/minus and we have to always let people go that maybe aren't working out as well. So that just will continue to happen.

[Michael Liu, analyst]

Okay. Great. And on the Tissue Health plus potential spin out or partnership -- and I appreciate you can't provide too many details yet, but I was curious if you could tell us what stage you are in the talks of doing that spin-out? And my main question is, when you do a transaction that one way or another gets Tissue Health plus off your books, would that be a cash inflow to Sanara or a cash outflow for you? Or would it not impact your cash?

[Ronald Nixon, executive]

Yes. So here's how I would describe it, Michael. Our strategy. We're very much big believers in Tissue Health Plus. No one has ever accomplished pulling the comprehensive strategy together the way that we've described it today to you. And our overarching goals are achieved funding for the strategy with partners that can actually help implement the strategy.

As you saw that we've got the MSO network as part of what we do. That is not something that we would own. So that's a partnership. And we have other needs out there related to the strategy that could be fulfilled with partners that have a better focus on certain areas of that. So those are the types of value-added partners that we're seeking. We want to have that accomplished in 2024. We then want to begin to commercialize in 2025. And we assume there would be some sort of a pilot launch either probably sometime in the beginning of Q1 and then go full commercial.

But the overall expectation is that this will be a cash flow generator long term. And whether or not that is accounted for under the equity method, where there'll be distributions kicked out to Sanara or whether we still own the majority of it, and it's kicked out. One way or the other, we want to secure those partners that will help fund this strategy to completion and not be a significant drag on Sanara's overall performance.

[Michael Liu, analyst]

Okay. So to clarify, you're not looking at potential deal structures where, for example, Sanara would have to fund a JV along with a partner or something like that? You would definitely be [indiscernible].

[Ronald Nixon, executive]

Not in any significant way. We've already made lots of investment into that. And so that would be our contribution into the partnership.

[Operator]

[Operator Instructions] Your next question is from Chris Plahm with Tall Pines Capital.

[Christopher Plahm, analyst]

Zach, probably a question for you on Cellerate, could you give us maybe a little more color on 2 things. One, kind of the organic growth from the existing 1,000 hospitals you guys are already selling into for this year and beyond? And then also maybe a little more color on the gap that you want to close on sales with the 2000 cap on approvals and where we're selling into today.

[Zachary Fleming, executive]

Sure. Thanks for the question. Yes. So for the 1,000, one of the main things we're trying to do there is expand to new specialties. We've done a good job, I think, getting into ortho and spine and the foot and ankle. Those are fairly straight line for our representatives as well as the 1099 agents we contract with. And I think those particular specialties have a great need for this type of product. They're putting in fairly expensive hardware material. And then, of course, we want to make sure that the tissue closes uneventfully around it.

And then, of course, any potential problems they might have where as the wound would move forward, they could Cellerate to help that wound to heal. And so we also see a big opportunity of plastics in general, Vascular, primarily those 3, but additional specialties as well where -- they're really challenging patients and really challenging wounds. And we think that there's a lot of opportunity, we've seen a lot of this already, where we've started to access these new specialties. So we're coming out with additional case studies. We're going to do some additional case reports. We're going to do things to really explore and exploit those particular specialties. So they see the benefits of the product just like we've seen with ortho, spine and podiatry.

So that's the main goal is to expand kind of horizontally into facilities, get a little deeper. We're also doing a lot of education to the clinical staff. So in every surgery have scrub tech circulators, different types of nurses that support the case as well as the nurse practitioners and first assists. And those people are really critical to the closures in the cases as well as the postoperative care. So we've done a lot of effort just because BIASURGE is such a great product to have handhold Cellerate is really educating the [indiscernible] points of those products and the power there. So you can prepare the wound and then you can close the wound or help biologically support the wound as it continues to healing. So that's really the goal with the 1,000 is to continue to expand and grow around those.

And some of that is just gaining more headcount. We talked about headcount a moment ago. We're going to have to put a few people in to support larger accounts because there's just a demand there. There's a lot of time associated with supporting the cases, so we can -- we want to have people in the cases at all times and really own the account. So we do have the TM model, which you may remember, that's a supportive component to the regional sales manager. So that will continue as well. And then to gain access to the additional 2,000, a lot of those are just additional partners, 1099 agencies that we can contract with and access into those accounts. We've obviously gotten great data, which allows us to identify and prioritize which facilities have the most opportunity within those 2,000.

So we're going to target those and have our people run to those particular accounts and then identify the surgeons within as well because that data is available that really they're dealing with potential problems or patients that have high risk. That's the type of person we would, of course, want to try to call on and use as a champion. And that happens through a lot of different things. Trade shows, where we're meeting and being in front of different surgeons and meeting new distributors. It also happens through podium talks, things of that nature and then additional papers that we'll have written and published. So all those things kind of help to bring a surround sound and create more demand in these additional accounts.

[Ronald Nixon, executive]

And Chris, we don't actually put out a forecast or penetration into what markets we're going into. But I can tell you that the greenfield opportunities both for the current 1,000-plus, the overall approvals that we have is significant. So we see plenty of potential runway for the Cellerate product.

[Operator]

We have reached the end of the question-and-answer session, and I will now turn the call over to management for closing remarks.

[Ronald Nixon, executive]

Thank you, everyone, for joining our call this morning. We greatly appreciate your support, and thank you for being patient and great long-term shareholders with us.

[Operator]

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