Sanara MedTech Inc. (NASDAQ:SMTI) Q4 2022 Earnings Call Transcript

Sanara MedTech Inc. (NASDAQ:SMTI) Q4 2022 Earnings Call Transcript March 21, 2023

Operator: Greetings and welcome to the Sanara MedTech Incorporated Fourth Quarter and 2022 Full Year Results and Business Update Call. At this time, all participants are in a listen -only mode and a question -and-answer session will follow the formal presentation. I will now turn the conference over to your host Mr. Callon Nichols. You may begin.

Callon Nichols: Thank you, and good morning, everyone. I’d like to welcome you to Sanara MedTech’s earnings conference call for the quarter and year ended December 31st, 2022. We issued our earnings release yesterday afternoon. And I would also 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-K for the year ended December 31st, 2022 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 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 vary materially from those projected or implied by forward-looking statements, please see our most recent annual report on Form 10-K. Now I’d like to turn the call over to Ron.

Ron Nixon: Thank you, Callon, and good morning, everyone. In 2022, Sanara generated $45.8 million in net revenue, representing a 90% increase in the — from the prior year period. Fourth quarter of 2022 was another record year — record quarter for Sanara as well as for our historical business lines prior to acquiring Scendia. In the fourth quarter, the company generated $15.3 million in net revenue and it was the first quarter during which the company generated over $5 million in net revenue in a single month. We continued to see strong growth in Cellerate sales as well as the sales from the products we licensed from Cook Biotech. The sales at Scendia were flat from Q3 to Q4 due to a stock out of our Allocyte product, which we will discuss in more detail later.

For the year, our net loss was $8.1 million in 2022 compared to $8 million in 2021. Mike will go into further detail, but the company had a loss before income taxes of $13.9 million compared to a loss before income taxes of $8.0 million in 2021. The higher loss in 2022 was due to increased SG&A costs, higher R&D expenses, the loss on the disposal of the investment related to the dissolution of Sanara Pulsar and higher amortization of our acquired intangible assets related to the acquisitions of Precision Healing and Scendia. Despite the record quarter and year, our sales were impacted in Q4 by a stock out of our ALLOCYTE product, which began in late Q3 due to a shortage of the source material. We’re expecting improvements in our ability to source this product from our suppliers, but we do not anticipate a full resolution until the second half of the year.

In December 2022, we dissolved Sanara Pulsar and ceased marketing the Sanara Pulsar II AWI Wound Debridement System. When we formed Sanara Pulsar, we believed the Pulsar products would provide clinicians with a novel debridement solution. We also believed that the Pulsar product would receive an expanded reimbursement code by which all the — code by use of all clinician types. Ultimately, we decided we did not receive an additional reimbursement code, which limited the adoption and sales of the Pulsar Products. In Q4, the submission of our Precision Healing Imager 510(k) was delayed due to unexpected electrical and software issues as well as increased product validation testing, which we believe provides further validation related to FDA regulatory testing requirements following our submission.

The 510(k) was filed subsequent to the end of the quarter on March 16th, 2023. Zach will go into more detail, but we continue to be focused on the commercial development of our Imager, LFA and the Comprehensive Wound ARM strategy. It’s an area of significant investment for the company that we believe will have a competitive differentiator for the company and should be well received by the market. Subsequent to the end of the quarter, we entered into a sale agreement with Cantor Fitzgerald for an ATM offering of our common stock equity. We’ve entered into this agreement for two purposes. The first is to raise capital for opportunistic — opportunistic acquisitions and partnerships, and the second is to increase the liquidity of our stock. We currently intend to use the net proceeds we received from this offering to fund potential acquisitions, further development of our products, services and technology pipeline and clinical studies expand our sales force and for general corporate purposes.

I’ll ask Zach Fleming to discuss our business in more detail.

Zachary Fleming: Thanks, Ron. Our product sales team continues to generate strong sales growth and we’re penetrating further into our existing customer base and also expanding into new geographic areas. At the end of 2022, we had a total of 39 field sales representatives employed. CellerateRX was sold in 700 hospitals and ASCs across 29 states during the trailing 12 months ended December 31st, 2022 and was approved to be sold in over 1700 facilities. As we have discussed before, we believe there are approximately 12,000 hospitals in ambulatory surgery centers in the United States where CellerateRX Surgical could potentially be used. You’ll notice that the number of approvals we have was relatively flat from Q3 to Q4. The reason for this is that we have made a strategic decision to focus our efforts on our existing accounts and facilities in terms of introducing our suite of products to new physicians and finding more cases in those facilities where patients and physicians would benefit from the use of our products rather than focusing on new facility approvals.

As Ron mentioned, in the third and fourth quarters, we began to experience supply issues with Allocyte product line. The amount of qualifying eligible donor tissue was significantly reduced industry wide due to the stringent screening that is required. During the fourth quarter of 2022, we were unable to fill certain orders for this product, which negatively impacted our sales. We are expecting to see some improvements, but we do not anticipate a full resolution of the supply issues until the second half of 2023. As we mentioned in our last call, in Q4, we submitted our 510(k) for BIASURGE, which is our surgical cleanser, and launched a partnership with InfuSystem. We continue to believe that BIASURGE will have a significant impact on both Surgical Wound Care market and our sales when commercially available, which we believe will be sometime this year.

Our InfuSystem partnership is focused on the negative pressure wound therapy in chronic wound care segments of the market and combines Sanara’s product line and our deep expertise in wound care with InfuSystem’s distribution and complex billing capabilities, their existing sales team and national footprint. As Ron mentioned earlier, we submitted our 510(k) for our Precision Healing Imager to the FDA. We believe that our Imager is the final component we need in order to offer a comprehensive solution for wound and skin care. We plan to submit our 510(k) for our lateral flow assay, which will expand our wound diagnostic capabilities even further later this year. I want to take some time to discuss our comprehensive solution. Our goal with this offering is to lower costs through early diagnosis, decreased hospitalizations, decreased wound center visits, more advanced treatments at home, and improved outcomes.

The platform has four key components that allow us to offer more advanced solutions than the current standard of care, including our proprietary advanced diagnostics and data analytics. Our wound and dermatology EMR and mobile app, wound and dermatology telehealth services and proprietary products for wound and skin conditions. These four components work together in a repeatable cycle as progress is validated. We are currently seeking out partnerships for this offering. Now, I will turn it over to Mike to discuss our financial results.

Mike McNeil: Thank you, Zach. For the year we generated revenues of $45.8 million compared to revenues of $24.1 million for the year ended December 31st, 2021, representing a 90% increase from the prior year period. Our 2022 revenues included $6 million of Scendia sales. SG&Aexpenses for 2022 were $46 million compared to SG&A expenses of $28.1 million for 2021. Our 2022 SG&A expenses included $2.9 million of costs related to Scendia operations. The higher SG&A expenses in 2022 were primarily due to higher direct sales and marketing expenses, which accounted for approximately $13.6 million or 76% of the increase compared to prior year. The higher direct sales and marketing expenses were primarily attributable to an increase in sales commissions of $9.6 million as a result of higher product sales and $2.7 million of increased costs as a result of sales force expansion and operational support, costs related to travel and in-person promotional activities increased by $0.9 million in 2022 compared to 2021 due to the resumption of many in-person activities that were cancelled or postponed in 2021 as a result of the COVID-19 pandemic.

The increase in SG&A expenses was also partly attributable to the increase — increased non-cash equity compensation, higher payroll costs related to the mid-year edition of the Rochal workforce in July 2021, the Precision Healing workforce in April 2022 and the Scendia workforce in July 2022. R&D expenses for the year ended December 31st, 2022 were $3.4 million compared to $0.6 million in 2021. R&D expenses for 2022 included approximately $2.5 million of costs related to our newly acquired Precision Healing diagnostic imager and lateral flow assay. The higher R&D expenses in 2022 were also partly due to costs associated with several new development projects for our currently licensed products. Other expense for 2022 was $1.7 million compared to $0.6 million for 2021.

The higher other expense in 2022 was primarily due to a $1 million loss recognized due to the dissolution of Sanara Pulsar. As Ron mentioned, Sanara Pulsar had minimal sales since its inception and was dissolved effective December 2022. We had a net loss of $8.1 million for the year — year ended December 31st, 2022, compared to a net loss of $8 million for 2021. Our net loss was positively impacted by recognition of a non-cash income tax benefit of $5.8 million related to purchase accounting for the Scendia and Precision Healing acquisitions. Our cash on hand at the end of 2022 was $9 million. With that I’ll turn it back to Ron for some closing remarks.

Ron Nixon: Thank you, Mike. As we’ve discussed, we continue to have record revenue quarters and years at Sanara driven by both our Cellerate product line as well as the addition of products from Scendia and the products we market through our partnership with Cook Biotech. Looking ahead to the remainder of 2023, we plan to continue to build upon the success and surgery while seeking new customers for the WounDerm value based comprehensive strategy and acquisition opportunities in which may further expand our business. That concludes our remarks. We look forward to answering any questions you may have. Operator, we’re ready to open up the call for questions. Thank you.

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Q&A Session

Operator: Thank you. At this time, we will be conducting a question-and-answer session. Thank you. Our first question is coming from Ross Osborn with Cantor Fitzgerald. Please go ahead.

Ross Osborn: Hi. Good morning, everyone, and congrats on the record results. So starting off, could you provide some color on how cross-selling abilities trended in the 4Q between Scendia maybe outside of the shortage? And then the Sanara portfolio and how this is developed in 2023?

Ron Nixon: Yeah, Zach.

Zachary Fleming: Sure. Yeah. So the cross-selling is going very well. The products are extremely complementary. As you know, the reason the Scendia transaction was so attractive were typically used in many of the same cases. The bone biologics are there to complement the bone healing, while the tissue products that we sell are there to complement the tissue healing in compromised patients. And so you see that happen very — very regularly. And so our challenge has been to go out and gain approval for those additional products. We’ll give you numbers, but typically that’s gone very well. We’ve been able to gain great traction with those products. We are seeing good uptake with all products and there’s great symbiosis between all those products working together and delivering solutions that the surgeons really appreciate for both bone and tissue.

Ross Osborn: Okay, great. And then maybe turning to Precision. Congrats on the 510(k) submission. Would you be able to remind us of the predicate offering you based your 510(k) on? And how does Precision compare to the predicate system? And then as a follow up, are you able to share with us your commercialization plan for Precision in terms of it being offered via capital sale or lease, as well as the initial targeted geographies?

Ron Nixon: So Ross one of the — so starting with the latter question. The way we anticipate marketing this as a comprehensive solution and we believe that it would be better served for our — for our customers to have a lease program, but we have not finalized that yet. That’s what we anticipate. And the predicate device that we had used as MolecuLight and the difference is that we have more — more details that we provide through our imager for the wound than what MolecuLight does. And what we’ll do is at a later point we will highlight those differentiated components and let you know that as soon as it’s through the 510(k).

Ross Osborn: Okay, great. Then I guess post commercialization, do you plan to conduct studies demonstrating Precision’s ability to track the wound progression?

Ron Nixon: Yes, that’s all part of the entire comprehensive strategy. So our EMR will gather the data that is collected at the wound by both our LFA and our Imager and that detail will allow us to start to develop clinical practice pathways that we can suggest to clinicians in the field to show them that the data that we have actually leads to better results for the patient. And as Zach mentioned earlier, one of our key components of our strategy is to — is to have hospitalization avoidance and also wound center trips because the wound center bills at the same basic rates as the hospital. So those are two very high cost settings. We view that where the future of wound care is will be treating these patients at home and that’s what our focus will be on.

Ross Osborn: Okay. Got it. And then lastly, you highlighted an interest in acquisitions in your press release and prepared remarks. Would you share your view on private market valuations in this space and that areas of interest that you would complement the existing portfolio between traditional Sanara and Scendia?