Sanara MedTech Inc.

Good morning, ladies and gentlemen, and welcome to the Sonara MedTech Incorporated second quarter 2022 earnings and business update. At this time, all participants have been placed on a listen-only mode, and the floor will be open for questions and comments after the presentation. It is now my pleasure to turn the floor over to your host, Mr. Callum Nichols, Investor Relations. Callum, over to you.

Thank you, and good morning, everyone. I'd like to welcome you to Cenera MedTech's earnings conference call for the quarter ended June 30th, 2022. We issued our earnings release yesterday afternoon, and I would like to also highlight that we've posted today's deck on the investor relations page of our website. This supplemental deck, as well as a copy of the earnings release and the form 10-Q for the quarter ended June 30th 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, 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 risk 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 and our Form 10-Q for the quarter. Now I'd like to turn the call over to Ron.

Thank you, Callan, and good morning, everyone. In the second quarter of 2022, Sonera generated $9.7 million in revenue, representing a 54% increase from the prior year period. In addition to it being a record revenue quarter, it was also the first quarter during which the company generated $3 million of revenue in all three months of the quarter. Company had a net loss of $3.3 million in the quarter. Mike will go into further detail, but our loss when compared to the same period the previous year was impacted by higher SG&A expenses, which increased $3.9 million, as well as higher R&D costs, which increased $1 million, primarily related to our merger with Precision Healing and several other new development projects. In the second quarter, we completed our merger with Precision Healing, where we acquired the remaining ownership of the company. Zach will go into more detail later in the call. But we believe that the technology currently under development and precision healing will be a key component of our strategy to offer a comprehensive wound and dermatology solution for Medicare Advantage, at-risk payers, and other types of healthcare at-risk models. Subsequent to the end of the quarter, we completed our acquisition of Cyndia Biologics. Zach will also go into more detail, but we believe this acquisition added a significant portfolio of advanced biologic products that are complementary to our current surgical product offering. In addition, we believe the acquisition will expand our ability to provide new health systems and more comprehensive suite of surgical products. Now I ask Zach Fleming to discuss our accomplishments in more detail.

Thanks, Ron. Our surgical team continues to generate strong sales growth, penetrating further into existing customer base and also expanding into new geographic areas. At the end of the second quarter, we had a total of 35 field sales managers employed, We continue to see growth in our distributor partnerships and increase both the number of companies and individuals representing our products. At the end of Q2 2022, Celerate RX was sold in 590 hospitals and ambulatory surgery centers across 27 states during the trailing 12 months and was approved to be sold in 1,580 facilities. As we've discussed before, we believe there are approximately 12,000 hospitals and ambulatory surgery centers in the United States where Celerate RX surgical could potentially be used. As Ron mentioned, in July we completed our acquisition of Cyndia Biologics. Cyndia has long been a partner of ours, and we saw multiple benefits to bringing them into Scenera. Through this acquisition, we acquired a suite of advanced biologic products that we believe could prove beneficial to physicians who use the Celery line of products. Cyndia markets multiple complementary products with our primary focus on Amplify verified inductive bone matrix, Alisite advanced cellular bone matrix, BiForm, bioactive moldable matrix, and texagen amniotic membrane allograft. Prior to the acquisition, Scindia generated revenue in eight states at or above $50,000 per year, where Scindia did the same. We believe that there's an opportunity to expand Scindia's sales into the additional 18 states where Scindia generated revenue above that level. Our ultimate goal is to expand the geographic footprint for all of Scindia and Scindia's products across all 50 states. CINDYA's unaudited full-year 2021 revenue was $8.3 million, and unaudited trailing 12-month revenue was $11 million as of May 31, 2022. Over the same trailing 12-month period, sales of CINERA products to CINDIA were $1.5 million. I would also note that we did expect the acquisition to be accretive to CINERA's EPS in Q3 of 2022. The initial purchase price for CINDIA was $7.4 million comprised of $1.4 million in cash and $6 million in stock. In addition, there are two earn-out payments payable in cash or stock at scenarios election. Those are based upon the achievement of certain sales growth thresholds in years one and two following the acquisition. Now turning to our comprehensive wound and skin strategy, as Ron mentioned earlier, we believe that the precision healing multispectral imager and biomarker assay are an important component of our strategy. The imager is intended to be integrated with Scenera's proprietary EMR system and virtual consult capability with the goal of giving the company the ability to diagnose, treat, track, collect, and further analyze data on the healing progression of wounds across the continuum of care. We believe the data collected by the precision healing platform will help clinicians rapidly and accurately diagnose the root cause of the patient's wound and develop tailored treatment protocols that can be adjusted as more information is gathered. Additionally, the platform is expected to enable the company to further develop evidence-based treatment algorithms for use as suggested clinical practice guidelines. CNERA expects that this will help improve wound healing efficacy and reduce healing time while lowering overall cost of healing. The Precision Healing Imager 510K is being prepared for submission to the FDA and is expected to be filed early in Q4. As it relates to the complete Wounderm offering, we continue to advance discussions with our potential payer partners that could benefit from the use of our comprehensive offering. With that, I will now turn it over to Mike to discuss our financial results.

Thanks, Zach. For the three months into June 30, 2022, we generated net revenues of $9.7 million compared to net revenues of $6.3 million for the three months into June 30, 2021, representing a 54% increase from the prior year period. For the six months into June 30, 2022, net revenues totaled $17.5 million compared to net revenues of $11.3 million for the same period last year, representing a 55% increase from the prior year period. The higher net revenues in 2022 were primarily due to increased sales of our surgical wound care products as a result of our increased market penetration and geographic expansion. and our continuing strategy to expand our independent distribution network in both new and existing U.S. markets. SG&A expenses for the three months into June 30, 2022 were $10.4 million, as compared to $6.6 million for the three months into June 30, 2021. SG&A expenses for the six months into June 30, 2022 were $19.8 million, compared to SG&A expenses of $12 million for the same period last year. The higher SG&A expenses in 2022 were primarily due to higher direct sales and marketing expenses. The increase in 2022 SG&A expenses was also partly attributable to increased non-cash equity compensation, higher travel and in-person promotional activity expenses, and higher payroll costs related to the mid-year addition of the Rochelle workforce in July 2021. We had a net loss of $3.3 million for the three months into June 30, 2022, compared to a net loss of $1.2 million for the three months into June 30, 2021. For the six-month period ended June 30, 2022, we had a net loss of 6.4 million compared to a net loss of 2.4 million for the same period last year. The higher net loss in 2022 was due to increased SG&A costs described a few minutes ago, higher R&D expenses, and the recognition of losses on our equity method investment in precision healing. Our cash balance at the end of Q2 was 12.7 million. With that, I'll turn it back to Ron for some closing comments.

Thanks, Mike. As we've discussed, we continue to have record revenue quarters at Scenera driven by our surgical wound strategy. In addition to advancing our surgical division, we are focused on implementing our comprehensive wound and skin offering, continuing to expand the usage of our surgical products, and fully integrating precision healing in Scenera. 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, and thank you very much.

I do apologise, I have a slight technical issue there. Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments via the phone lines, please press star 1 on your phone at this time. We ask that while posing your question, you please pick up your handset if listening on a speakerphone to provide optimum sound quality. If you would like to ask a question via the webcast, please click on the ask question box on the left side of your screen. Type in your question and hit submit. Please hold whilst we poll for questions. Okay, the first question we have is coming from Ross Osborne from Cantor Fitzgerald. Ross, please ask your question.

Hi, good morning. Congrats on the record quarter. I'm interested in your questions. Since starting off, you had really strong growth in hospital admissions in quarter. What do you think drugs and stuff have been had?

Do you think this is a good way to think about new ads going forward? Hey, Ross. I'm having trouble hearing. I can't hear you.

Hi, is this better?

Yes, very much.

Much better, yes. Okay, great. So my first question is just on the hospital additions during the quarter. There's really strong step-up. Just curious, you know, what you thought drove the step-up in new ads and if this is a good way to think about new hospital additions going forward.

Zach, do you want to take that? Yeah, I'll take that. So, sure. And just to clarify, so you're talking about the 590 approvals that we're selling into or the total 1,580?

Is there a area you're more interested in?

Total. Yeah, you know, we've long since been working really hard with additions. We've hired quite a few folks, as you can recognize, and those people are obviously getting much more active in each of the new markets, so that helps to drive that number up, as well as we hired a national accounts manager that's very well seasoned, and he's been able to add several system approvals.

Okay, got it. That makes sense. And then maybe switching to the Cyndia acquisition, are you able to disclose how their portfolio performed for the balance of 2Q? I think you disclosed revenue through May of this year, but just curious how June performed.

We have not disclosed that yet, Ross, so we'd like to hold off on that if you don't mind.

Okay, fair enough. Sticking with Cyndia, given the acquisition there, and I realize it's supposed to be accretive to 3Q earnings, but how should we think about the operating expense profile of the company going forward?

Nothing is changing at Cyndia.

They don't actually need to add additional personnel. It's really about adding that product offering to our existing base. So there's a fair amount of leverage that we accomplished by doing so. As you know, they were in a limited number of states, and we continue to expand throughout the other states that we're in, bringing that total to 27. So I think it's going to be a great addition for Sonera.

Okay, great. And then last one for me, and I'll jump. back in queue. Looks like precision slipped a little bit from 3Q filing date to early 4Q. Just curious if there's anything to call out there.

Yeah, you know, it started with the supply chain having issues. You've got electronic components in there. You've got software. And as we move into the production mode, because the 510k needs to be filed with the production unit. We had experienced some delays and just going through all debugging everything that we're working on in order to make it a complete unit so that when we do get through the 510k, we'll be ready to commercialize.

Okay, understood. Congrats again on the short quarter and thanks for taking my questions. Thank you very much, Ross.

Thank you. Your next question is coming from Ian Cassell from IFCM. Ian, please ask your question.

I think my question would be directed towards Zach. You've done a tremendous job growing Celerate from $10 million to $40 million in annual revenues over the last few years. You have 35 field sales managers out in the field in 27 states. I think on previous calls you mentioned you think you ultimately need 40 to 50 reps to cover the United States. Do you still think that 40 to 50 is the right number of reps, or has that changed?

No, that's right in the ballpark. Continuing on the hiring path, you know, we want to build a better distributor network out through the West, and that's an area we're very focused on. We've got some great starts in those states. And then, you know, as we start to gain a – we have a couple business development folks that that's specifically what they do is go build out the market and, you know, initiate the market, and then we place people into those spaces. So that's where we are right now is identifying the next five or six states that we'll put people in.

And one of the things that we said early on is that when we were first developing our strategy for the expansion accelerate, we thought it would require 50. We said one in every state. We've gotten leverage off of that as well. So I believe what you'll see is more as we add more people, it will be more penetration into the existing markets where we'll be filling in with territorial managers, which gives us leverage on that cost as well.

Thank you. Maybe a follow-up on Sendia. I think the piece in the presentation you put out there, the fact that really the Sendia products were a bulk of their revenues and Celerate was a small part of the revenues, I think was a big positive. Looking at those Sendia products that you've brought on, how hard or easy of an upsell are those products to your current surgeons that are purchasing Celerate? Does it take your sales reps a lot of education and effort, or is it pretty easy?

Yeah, I think we're learning and gaining a lot of traction there. I don't know if you remember, we did a JV with Cyndia, so we kind of test ran this and recognized that all these surgeons are using these types of products. There is usually an incumbent type product. And so what we have is some unique, very highly efficacious products that are priced very well for the market. And so our challenge, and no different than when we had Celerate start off, is we had to find the right selling partners. We have a lot of those that you know that have done very well for us in the Celerate realm, and they're beginning to pick up these products as well. Likewise, those surgeons tend to listen, know that we've earned their trust, and they've started to follow suit with these products. Not necessarily all of the products, but again, our goal is not to have all products used in all cases. We just want to get better fixed cost leverage and gain additional usage, get more efficiency in our sale, and have a couple products used in each case. And I think that's exactly where we want to be, and that's what we're doing with these products. So I guess to answer your question really directly, I wouldn't say it's easy, but the marks are there. We can see exactly where we need to be, and those doctors do use these types of products.

Okay, and when you look out over the next 18 months, maybe through the end of 2023, you know, what new products that are in development are you most excited about?

Zach, do you want to talk about Biosurge?

Yeah, I was going to say Biosurge is right at the top. You know, it's a very unique product. It has, you know, a couple qualities that other products that are in the space that they don't have, and so it's a highly – you know, I'd say the market is extremely primed for it because there's a lot of surgeons that are very in tune with reducing healing complications, infections specifically. And so this type of product can help do that by, you know, washing the wound out post-surgical and leaves behind a biofilm resistant and antimicrobial kill. So that's exactly what you're going to do. And it's non-cytotoxic, meaning it doesn't kill the good tissue.

And Ian, in addition to that, I think that you're we are seeing that as it normally takes with new products, if you go look at Bicos and our other products that we're introducing into the market, we're gaining an understanding of the efficacy of those products and how well they're performing. And we've got studies coming out to assist us in that regard. And I think there's nothing that is more compelling to a surgeon or a caregiver when you've got clear evidence of how your product works and why it works and that it is working. And that last component, that it is working and working very well, is a key component to getting that success of getting them to start using that. Okay.

Yeah, thank you. Maybe another two questions I have. This might be more directed towards you, Ron, but you spent a lot of time effort and money kind of bringing together these strategic, well, at first they were investments or partnerships, and now you've acquired the important ones to kind of build out your next generation wound care ecosystem. You know, you're obviously playing a longer-term game. You know, we're seeing kind of the expenses of that kind of go through the P&L currently. And so, you know, maybe the first question I have as it relates to the ecosystem itself is, you know, what are the critical milestones that we should be looking for between now and the launch? I know precision healing obviously needs to be filed and then approved. Are there payer announcements that we should be looking for or other things that we'd be looking for leading up to the launch?

A key component is clearly if we don't have payer contracts, we're not going to be able to go prove our model. We believe that the traction will be there for the payers. They've been looking for this solution for quite some time in my view. And I think there are a number of areas that we can go on that we will be announcing as we begin to find partners for that area. And when I say partners, customers, because when they're at risk, they become your partner. And we think that's a really key component differentiating us from the traditional fee-for-service If you are there to help them lower their overall cost, improve the healing rates, et cetera, they are your real partner because they are at risk, and we'll see how all that works out. But we're very positive about it. We wouldn't be going after this and spending the amount of time and effort on this that we are if we didn't believe in it for long term.

Yeah, and the last question I have for you, Ron, is, you know, How should investors think about the end game and the potential of this ecosystem when you look out three to five years? I mean, what's the potential of this? Obviously, you think it's significant given the time and capital you're spending.

Well, Catalyst's initial partnership that started out was 30 years, and that was in 1990, and I don't believe in determining an end game. I think it goes into perpetuity, and you grow this thing and grow this thing, and The end game for me is to just keep getting more and more market share, keep building this company, and look for the next area around our focus of Rune and Scan and say, how else can we continue to improve it to stay ahead of the competition and make our customers really happy? So I don't think of an end game. I think of it as a constant build and build and build and satisfy your customers' needs.

Okay. Thank you.

Thank you very much. I just have a couple of questions that have come in via the webcast. Could you discuss the timeline of utilization in surgeries versus hospitals sold into for Celerate, and what percentage of cases are value-add for hospitals to use Celerate?

Can you repeat the first question? Can you repeat that first question? I just want to make sure I understood it.

Could you discuss the timeline of utilization in surgeries versus hospitals sold into Facelerate?

Okay. I think I understand what they're saying.

So if I understand correctly, you know, the timeline, so in terms of in the surgeries, I think is the way they're asking it. Ron, do you understand that question? I'm not sure if I understand exactly what they're looking for.

No, I'm actually not sure on that first one. So can you read that again for us if you wouldn't mind?

I'm just trying to differentiate what they're trying to compare there.

Yeah, I understand. Could you discuss the timeline of utilization in surgeries versus hospitals sold into? I don't think maybe it's that phrase that's making it difficult. Versus hospitals sold into.

I'm not sure we can answer that question.

I think maybe what they're asking is, like, how quick does it get utilized is what I'm guessing. I just maybe misunderstand that. But, you know, essentially we go out.

So from when they buy it to when they use it maybe, when they first buy it.

Potentially, yeah, or maybe when they adopt it. So essentially the sales cycle can be fairly short once we gain approval. So it's a value analysis committee approval. That usually takes a little while to get on the schedule with the back analysis committee. Okay. Usually they're looking at both efficacy as well as cost. And, of course, you know, the doctors have to request it. At that point, once it's approved, it's almost immediate and the product can get into the surgeries. Our representatives are there to make sure the product's available. So I think that may be what you're looking for on that answer, but I apologize if that wasn't what you're asking. And then, you know, the approval can take up to six to nine months. So maybe that's another part of what you're asking there, too. So I apologize if that's not what you're looking for.

Zach, this is Calum. We had some clarification come in from that question. Okay. Thank you. Does that mean it's immediately used in surgeries, and is there a ramp to maturity? So I think you kind of covered that.

I was pretty close. I was pretty close. It's immediately available. It's just a matter of getting it ordered and stocked, which takes no time at all once we've gained approval. And then as far as, you know, the – Ramp to maturity. I think it's almost, you know, we're still figuring it out in terms of the length of time. And the reason is, is because this product can be used across many specialties. So it's not just say orthopedics and then you've talked to all the orthopedics folks and you're done. In fact, it's across every surgical specialty that does surgery. So you've got potentially 30, 40 targets maybe in every hospital or more. And so it's endless. And those conversations continue and adoption continues. And so we still have very longstanding accounts that are continuing to grow now today. And, you know, I've been working here since 2017. So that kind of gives you an idea that it takes a while to fully mature.

That's great. That's a good thing. I think the other part also is what percentage of cases actually see the added value of using Celerate.

We try to really approach the surgeon in a space where we're talking about at-risk patients, folks that are maybe not potentially likely to heal or could have some sort of healing difficulty. And so those are the patients we target. And, you know, I'd say that it's probably something like, you know, and I don't have an exact number, but I would guess in the 30% of all surgeries, they're at risk, maybe a little higher than that depending on the surgical type. Certainly surgeries that involve the groin and or abdomen tend to be dirtier and more dangerous and more difficult for healing. So that would be probably a little higher number just as an example.

And one of the key thoughts on that is if you look at the aging demographics, those as we age, we have more challenge in healing and you end up with more high comorbidities. If you look, I just saw recent stats on the people that have chronic kidney disease, and that's like 38 million, which is a very large percentage of the population. So people that have these comorbidities, that is growing. It's not shrinking, diabetes, et cetera, all the things that cause the surgeon to say, ah, I've got a patient that could be compromised, so therefore let's use the accelerate on it.

Okay, great. Another question we have is, is Celerate pricing stable, increasing, or decreasing?

You know, I'll just say the supply chain is seeing increases across the board. We mentioned some supply chain, you know, things that are going on in the world. And as a result, you'll see most companies have taken price. We are considering, you know, the whole factors to determine what our plan is. As of right now, we've been stable. I think that's been in our favor and building relationships given our growth rate and, you know, penetration with our hospitals. And we believe that's a good strategy for us to date is to be stalwart with where we are and make sure that we become good partners to the facilities. But, of course, we do see some of the supply chain impacts. And so, of course, taking a look at that from a business impact.

Great, thank you very much. We have another question. Just to level set expectations going forward for the back half of this year and next year's earnings, consensus are supposed to be positive. This seems surprising as you are an investment model. Directionally, should SMTI continue generating losses in the end to medium term?

No, we have stated previously that we anticipate that the losses will decrease significantly and potentially cash flow neutral by the end of the first quarter. So we have a high expectation to decrease those. Most of the costs, though, have not been generated by The surgical division, it's been the fact that we don't have significant revenue yet off of our comprehensive strategy because we have been building out all the component pieces. So as we get those contracts, you immediately get fixed cost leverage off of that. And obviously, we've got a heavy abundance of R&D, which we know is really valuable to us. And so we have to cover those costs as well. So... We have our plan. None of our increases in SG&A are a surprise to us. They are all very much planned, and so is our planned turnover to become neutral or positive in our cash flow.

Thank you very much. We don't have any further questions in queue at the moment, so now I will hand back over to Ron for any closing remarks.

We just want to thank everybody for being on the call with us this morning.

Thank you for being loyal supporters of Sonera. We're very positive about where we're going at Sonera, and we thank you for your continued support. And so thank you, everyone, for participating in the call.

Thank you, ladies and gentlemen. This does conclude today's conference call. You may disconnect your phone lines at this time and have a wonderful day. Thank you for your participation.