Sanara MedTech Inc.

Greetings. Welcome to the Sonara MedTech, Inc. Second Quarter 2023 Results and Business Update Conference Call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note that this conference is being recorded. I will now turn the conference over to your host, Callan Nichols, Director of Investor Relations. You may begin.

Thank you, and good morning, everyone. I'd like to welcome you to Ceram MedTech's earnings conference call for the quarter ended June 30th, 2023. We issued our earnings release yesterday afternoon, and I would like to highlight that we've posted today's deck on the investor relations page of our website. The supplemental deck, as well as a copy of the earnings release, and the Form 10-Q for the quarter ended June 30, 2023 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 the risk factors set forth in our most recent annual report on Form 10-K as supplemented by the risk factors in our most recent quarterly report on Form 10-Q. Now I would like to turn the call over to Ron Nixon.

Thank you, Kellen, and good morning, everyone. In Q2 2023, Sonera generated $15.8 million in net revenue, representing a 63% increase from the prior year period. Second quarter of 2023 was another record quarter, revenue record quarter for Sonera, but the company did have a slower growth rate, which Zach will discuss and outline the plan we're implementing to continue our increased year-over-year growth strategy. Our loss before income taxes narrowed from $3.4 million to $1.9 million over year-over-year in Q2. We had a net loss of $1.9 million compared to net income of $800,000 for the prior year period. The higher net income in 2022 was primarily due to a one-time non-cash income tax benefit realized in Q2 of 2022. Turning to our new product pipeline, we continue to prepare for the commercialization of BioSurge Advanced Surgical Solution. This product, which was developed by our R&D team at Rochelle Technologies, is expected to commercially launch in mid-Q4 of this year. In the first quarter of 2023, we entered into a sales agreement with Canna Fitzgerald for an ATM offering of our common stock. Stock sales were paused at the end of Q1, and we have no immediate plans to reactivate the ATM offering. We could potentially utilize it if and when management and the board determine it is appropriate. Subsequent to the end of the quarter, we announced the acquisition of certain assets related to our collagen products business. The acquisition includes all rights and ownership for human wound care uses for four 510K cleared collagen-based wound care products, including Celerate RX and Hycol. We believe this transaction was a significant strategic milestone for the company and was something the team has been working on for quite some time. Now, Zach Fleming will provide more details on the quarter.

Thanks, Ron. Our surgical sales team continues to work to penetrate farther into our existing customer base, sell additional non-Celerate RX products, and expand into new geographic areas. During a trailing 12 months into June 30, 2023, our products were sold in over 950 hospitals and ambulatory surgery centers across 33 states. And as of June 30, 2023, our products were contracted or approved to be sold in over 3,000 facilities. There was a significant jump in the number of facilities where our products are approved to be sold between Q1 and Q2. This increase was due to an agreement we signed with a major group purchasing organization, or GPO, We believe that this is a significant opportunity for our team to get our products into new facilities and penetrating these new facilities will be a priority of ours over the next year. As Ron mentioned, we had a lower sales growth rate in Q2 compared to our historical rates of growth. Our sales growth was impacted by our slower pace of sales manager hiring in late 2022. While the reduced pace of hiring was part of an effort to budget expenses, and ensure we were efficient in our hiring based on our analysis of the existing sales team and data regarding potential opportunities. It did have a slowdown effect on our sales in this period. As we have mentioned previously, the continued Allisite supply issues also negatively impacted our sales. At the outset of 2023, we increased our hiring pace and have recently hired and trained a new class of field sales representatives and plan to continue to hire through the end of the year. We have greatly improved our training program and vetting process for new hires, which we believe will serve us well as we continue to expand. Additionally, we are doing significant analysis on our territories, distributors, and field sales representatives and have developed metrics that will help us determine where new hires will be most impactful. In order to fix the Allisite supply constraints, we have identified and secured a secondary sourcing option and expect that source to come online in the near future. Looking at our product sales mix, sales of soft tissue products were 13.2 million and sales of bone fusion products were 2.5 million in Q2. The sales growth of the non-celerate products such as Fortify, Texagen, and our bone fusion products is very encouraging. Our strategy to integrate Cyndia into the national sales strategy is making progress and we intend to continue focusing on growing the sales of these products. As Ron mentioned, we expect to commercially launch BioSurge in mid-Q4 of this year. We have scheduled manufacturing runs, and the product is currently being tested by clinical partners to ensure a smooth launch and adoption with key facilities. I'd now like to provide a brief update on our value-based post-acute wound care strategy. Earlier this year, we hired Sam Mupala to lead this initiative. Sam is an experienced wound care executive in the post-acute market, and we are excited to have him on the team. With SAM's leadership, we have developed a detailed value-based strategy and received initial validation from the market. This strategy will include our existing joint venture partner, MP System, and we continue to develop the full complement of products and services required to execute this strategy. Additionally, we have taken the technology assets and developed a platform plan to support the value-based care strategy while exploring accelerators to add to the platform that will allow for a quicker entry into the market. Subsequent to the end of the quarter, as Ron discussed earlier, we completed the acquisition of certain assets related to our collagen products business. With this acquisition, we acquired four 510K cleared collagen-based wound care products, including Celerate RX and HiCall, and three new collagen-based products that are currently under development. Niden patents and all the seller's patents pending for collagen products for human wound care uses, and five trademarks. The acquisition gives us control of the manufacturing process for Celerate RX and HICOL, which is expected to reduce costs. Additionally, we now have full rights to develop new collagen products for human wound care uses based on this acquired technology. Looking at the financial impact, the transaction eliminates the royalty we paid on Celerate RX and HICOL to the sellers. Total consideration for the acquisition was $15.25 million. consisting of $9.75 million in cash paid at closing, shares of the company's common stock with an agreed upon value of $3 million, and four equal annual installments of $625,000 in cash. The sellers are also entitled to receive up to $10 million in potential earn-out payments, as well as certain royalties and incentive payments on future products that are developed. The cash at closing was funded through a loan provided by Cadence Bank. Now I will turn it over to Mike to discuss our financial results.

Thank you, Zach. For the quarter into June 30, 2023, we generated net revenues of $15.8 million compared to net revenues of $9.7 million for the same period in 2022, a 63% increase over the prior year period. For the six months into June 30, 2023, we generated net revenues of $31.3 million compared to net revenues of $17.5 million for the same period in 2022, a 79% increase over the prior year period. Net revenues for the three and six months into June 30th included $3 million and $6.2 million respectively of Sendia revenues. The higher net revenues in 2023 were primarily due to increased sales of soft tissue repair products and to a lesser extent, bone fusion products as a result of our increased market penetration, geographic expansion, additional revenues as a result of the Sendia acquisition, and our continuing strategy to expand our independent distribution network in both new and existing U.S. markets. SG&A expenses for the quarter into June 30th were $13.8 million compared to SG&A expenses of $10.4 million for the same period in 2022. SG&A expenses for the six months into June 30th were $26.8 million compared to SG&A expenses of $19.8 million for the same period in 2022. Our SG&A expenses for the three and six months into June 30th included $0.8 million and $2.0 million of costs, respectively, related to the Sendia operations. The higher SG&A expenses in 2023 were primarily due to higher direct sales and marketing expenses, which accounted for approximately $2.3 and $5.8 million, respectively, or 69% and 83%, respectively, of the increases compared to prior year. The higher direct sales and marketing expenses for the three and six months into June 30th were primarily attributable to an increase and sales commissions of $2.3 million and $5.2 million respectively as a result of higher product sales. The six months into June 30, 2023 also included $0.6 million of increased costs as a result of Salesforce expansion and operational support. R&D expenses for the second quarter were $1.2 million compared to $1.1 million for the second quarter of 2022. Year-to-date R&D expenses were $2.5 million compared to $1.3 million for the six months into June 30, 2022. Higher R&D expenses in 2023 were primarily due to costs related to the precision healing diagnostic imager and LFA for assessing patient wound and skin conditions. These expenses also included costs associated with ongoing development projects for our currently licensed products. We had a loss before income tax of $1.9 million for the second quarter compared to a loss before income tax of $3.4 million for the second quarter in 2022. For the six months into June 30th, we had a loss before income tax of $3.1 million compared to a loss before income tax of $6.5 million for the same period in 2022. The lower loss before income tax in 2023 was due to operating expenses increasing at a slower rate than sales, in addition to the benefit recorded as a result of change in fair value of current liabilities. For the second quarter, we had a net loss of 1.9 million compared to net income of 0.8 million for the second quarter of 2022. For the six months into June 30th, we had a net loss of 3.1 million compared to a net loss of 2.4 million for the same period in 2022. As Ron mentioned, the higher net income in 2022 was primarily due to a one-time non-cash income tax benefit realized by the company in Q2 2022. Our cash on hand at the end of the quarter was 6.1 million. With that, I'll turn it back to Ron for closing remarks.

Thanks, Mike. As we've discussed, we had another revenue, another record revenue quarter in Q2 2023. We did experience a lower sales growth rate and have begun hiring additional field sales managers to penetrate the new approvals across the country while finding a solution for our Alliside stock out, which Zach mentioned earlier. We still see significant growth opportunities for our core business as well as for our new Biosurge product line. We would also add that we are constantly looking at various metrics to determine the field sales manager's performance, territory performance, individual account performance. These are and will continue to be key metrics for us as we expand our sales force and grow our business. As has been our practice in the past, we're looking to hire the very best candidates for our regional sales manager and territory manager positions with proven experience in med tech. Once again, we will provide them with high-level, I mean, once hired, we'll provide them with high-level training, and we believe this sets us up to quickly and meaningfully contribute to the company's financial performance. In closing, I'd like to again emphasize that the acquisition of assets related to our collagen products business was a strategic win for the company. We believe it will lead to cost savings and aid our ability to develop new impactful products for the future. 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.

Certainly. At this time, we will be conducting the question and answer sessions. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using a speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Please hold just a moment while we poll for questions. Your first question is coming from Ross Osborne with Cantor Fitzgerald. Please pose your question. Your line is live.

Hey, good morning, everyone. Congrats on the progress. So maybe starting off with Cyndia, you posted another quarter around $3 million of sales. Should we think about this segment as a pretty steady business, or should we expect growth to inflect higher? And if so, what is the commercialization plan there?

Zach? Yeah, we continue to get adoption of those products, and we think it is steady for sure. However, we do see where each doctor is quite valuable, so we keep adding additional surgeons to the uses. As you remember, the Alice site is backordered right now, and that's going to be a big upside for us going forward.

Okay, got it. And then maybe can you describe some more color on how sales per facility has trended year-to-date and quarter-to-date, just thinking about driving further penetration within existing accounts in addition to adding new accounts?

Can you repeat the first part of that kind of jumbled up? Sorry. Okay.

Yes, apologies. Just curious on how sales per facility has trended year-to-date and quarter-to-date, and how should we think about that going forward?

Yeah, it's very steady. If you look across the nation, we are not losing. We're growing in each of the different facilities on average, and that's because of what we just said. We're adding additional products in, but also additional specialties so that, you know, sort of same store sales, if you will. The amount we sell in each facility has grown and will continue to grow as we continue to do that. One of the other things that has been a real, you know, boon to our business and we expect to see additional growth from is what I mentioned in the call. And that's the addition of the additional about 1,200 since last quarter facilities. I think we had 1,800 approved. Now we have 3,000 approved. And so, you know, that's our task is to get additional people in more facilities. And then those people that are already in facilities, we want to go deeper, wider, and find out, find additional product uses in each, every case.

Got it. Thank you. And then last one for us, and apologies that this has been addressed, but juggling a couple calls. Is there any update on infu or precision?

Yeah, so we've been in great community. Well, I'll do infu system first. We're working closely with them. They are working to set up, you know, their billing capabilities in the DME market. They are selling negative pressure today, which is helping us as, you know, kind of leading the way for our products to follow. Their sales team is getting organized, and I think they're in a really good spot. We talk to them very regularly and feel like that's moving forward well. Just a typical infrastructure build to be able to make sure that that business goes off without a hitch. And then if I jump over to precision, our imager, as you know, was submitted to the FDA. We're in current discussions with those for a resubmit. We expect to resubmit that within the next, you know, two months, and then expect, well, I'm sorry, by November, by November, excuse me. And then by end of year, we should have a decision from the FDA on the imager. And then the LFA, that also we're in communication. The LFA is a lateral flow assay. We're in communication with the FDA. That's moving forward, and we're continuing to learn the requirements around that approval.

Got it. Thank you, and congrats again on the results. Thank you. Thanks, Ross.

Your next question is coming from Ian Castle with Microcraft Club. Please pose your question. Your line is live.

Thank you. Yeah, congrats on signing up a major group purchasing organization. I was wondering, Zach, if you can talk about, you know, what it takes to sign up a group of that size. I mean, it looks like it was 1,000 hospitals or more. You know, what's it take to sign up a group like that? And maybe you can talk about, you know, how you attack that opportunity.

Yeah, appreciate the question. So, you know, first off, it's kind of a groundswell. You know, as you know, in the past, we've had to gain facility approval one by one. And as we've grown and gotten greater adoption, better research studies to support the use of the product, and, of course, more experience from doctors that count the product to other doctors. So you get the groundswell and then the demand through usage. There's a certain level of usage that needs to happen in member facilities. And then once those member facilities kind of boil that up into the system and into the GPO, then there's a demand from the GPO to contract, and they wanted to contract on a national basis. And so once that happens, then you have the GPO approval, and it puts you in a kind of front-of-the-line situation for each different facility. There may still be some value analysis committee approvals, but those are typically formality with the level of research we have with us, so we can go present those value analysis committees. And then it's doctor adoption, facility by facility. And that's where we use our 1099 sales representative network to help us connect into those opportunities. And then from there, our regional sales managers and territory managers sort of flower that out within each facility. So the initial doctor from the 1099, and then our guys follow on and start to add in additional people that use the products that we've gotten approved.

Thank you. And I see that BioCert plan to launch mid-Q4. Zach, can you talk about the market opportunity for BioSurge and how it's differentiated from any competitors in the marketplace?

Sure. We're really excited about that product. That product is a new set of products that you probably recognize. It's medicated washes that help to complement outcomes by reducing bacterial burden. And so what they historically have done, doctors would typically use their own potential products antimicrobial cocktail that they might make in the in-house pharmacy. And in recent years, a few companies have come out that had these types of washes, and we think that's a good market that will provide consistency and results. And our differentiation is that we are a leave-in. In other words, they don't have to do a saline rinse post-use of this product. And it is non-cytotoxic to good cells, so you won't kill good tissue as you're trying to heal the wound. And then, of course, it complements the outcome by just keeping that area from having biofilm. And biofilm, not to get into sciency, but basically it's sort of like a force field that protects the bacterial colonies. And so this breaks down that force field and lets the bacterial colonies be broken down and eradicated so that the wound can heal uneventfully. Okay. We think that that fits very well in a prophylactic sense into a surgery, but as well treating those wounds that may already have a significant infection. So if they're going to do a revision on a hip or a knee, this could be used that way. It also could be used on a high-risk patient prophylactically.

So the market itself is kind of fully aware of the product category. Is that the right way to think about this?

Yeah, I think it's a burgeoning. I'd say it's a very similar situation as to what we started with with Celerate. where everybody knew there was a need and a demand, and there has been some sort of status quo, which was typically the doctor's cocktail. And we did have a couple companies that have gone out and started to, you know, form that market. But we're coming in at a very interesting time where I think we're going to have a very interesting value proposition because of our pricing, because of our evidence. And the Viacose, of course, is the sister product that has a lot of evidence as well. So that product should fit in really nicely. And I think, you know, be a very, very tough competitor in that market space. Thank you.

Maybe last question. I'll get back in the queue. You know, when you look at the company, you have sort of two sides of the business, the surgical side, and then the value-based post-acute wound care strategy. And, you know, obviously a lot of the growth, a lot of the revenue or all of the growth and all the revenues coming from the surgical side of the business and the acute wound care strategy is, is mainly the SG&A line in the company. And I'm, Curious, Ron, in past conversations, at least the last earnings call, I know you were hoping to or your goal was to maybe get this thing monetized by the end of this year. I was wondering if you could speak to that and kind of what the vision is here in the next 12 months for that.

Yeah, so when Sam LaPolla came on board, he has really brought a level of detail and understanding not only on the post-acute market in general. He led one of the largest wound care companies in the post-acute related to the skilled nursing facilities. And Sam also has extensive experience on the value-based side. And so we've really honed the strategy in to where we have a much greater visibility as to what the component parts needed, how does the contract need to look, And where should we be going to be able to get those contracts? And so we're moving forward on that. We've got a couple of things, you know, the delays in the imager and the LFA. Those are critical components to our value-based strategy. So we really want to wait until we have everything fully ready to go, which we believe should be by the very beginning of next year. That's our goal.

Once again, if you do have any remaining questions or comments, please press star 1 to enter the queue.

OK, just one moment while we do have a question coming from the webcast. Okay.

The question is, you just mentioned that sales per facility are growing and that you're trying to go deeper and wider within each facility. But this quarter, we have seen about 1 to 2% sequential growth. Is it accurate to take that number as the rough result of these efforts, or maybe it's more complicated than that? Thank you for any color on this.

Yeah. Sure. Yeah, so growth isn't linear in any sales company. So as we do the attack that I talked about, which is to go deeper, wider, and as well add additional products per case, there is additional competition and product loss occasionally. And I think that's a normal thing when you're starting to grow and you start to gain notoriety in your job well done in terms of our sales growth. I think there are a few competitors out in the market. We don't think that there's posed much risk because of our high level of evidence, great results. And we seem to be out in front of all of these competitors. So, but, you know, to the point, you know, we didn't grow as fast as we would have liked. It also is just because we have to get these people up and trained. There's a little bit of an outage. So at the end of last year, we had our national sales director. We only had two of those people. And so their capacity to hire was just a little bit limited. We got those two additional people hired in the first part of this year to be able to hire and fill these territories that have these growth opportunities where the new approvals are. And so now that they're in place, we've been on a very good hiring pace. We have increased our training, improved that. And some of that involves us getting those people out into the field, doing field rides and observing what good looks like from our top representatives. And then as well, we vet the territories, as I mentioned in the call. So those territories are highly super focused. So we've identified high potential territories based on number of operations, based on the number of surgeons and surgeries, as well as the population and potential market size. And then we look at our approvals that we have already gotten in that area and then couple that with our distributor. So there's a bunch of things that we're looking at to really, you know, hone in on the top areas to deploy. And so we've done that and put people into place to be successful. So, um, that'd be my answer to that question.

Yeah. And Zach, just to add to that, um, one of the things that this company is very data driven, we have, we use a lot of metrics to look at our business. And as Zach was just mentioning about the analysis of the territories, the customers, the potential, This is not a strategy for us to throw bodies out there and hope that they do well in the early days of scenario. We put people out there and we started to see where are those potential areas that we need to go to, to have the highest impact. And so it was a little easier to understand that today though, across the country, having all these added, uh, facilities that we've put on, we need to be very strategic because we want to have high efficiency. because this is not a revenue strategy long-term for Sonera. This is a build-a-business strategy and create income for our shareholders so that we can continue to grow this business.

Okay, your next question is a follow-up question from Ian Castle with Microclap Club. Please pose your question. Your line is live.

Ron, you sort of answered that question already, but I'll ask it again. The acquisition of the College and Assets was pretty impressive. I know what that brings to the company, but also the way you acquired it with the bank debt from Cadence. Obviously, you showed them that you're going to be a profitable company or proved to them you're going to be a profitable company in the near term. I know the balance sheet's getting to about $6 million in cash. I'm just curious how you juggle profitability versus growth when you look out into the future.

Yeah, that's a good question. Actually, what we do is we constantly look at where we are from a cash perspective, but also how close are we getting to our earnings. And as time goes on, we're going to give you more and more visibility. What we ultimately hope to be able to do is give better, give actual guidance. And once we know we've got predictability in that, we're going to be able to provide that. But as it relates to that, we watch everything very closely. We're obviously very, very uh data driven so we feel comfortable where we are today and um you know the atm served its purpose we proved out that it worked for us for that short period of time we don't have immediate plans for that but it's a tool that we have out there but but we're not short on um on opportunities and we're not short on the potential to find partners that are interested in funding anything that we would do from an acquisitive standpoint but we want to generate revenue and earnings inside the company and be able to use that cash flow for expansion as well so to very specifically answer your question we feel very comfortable where we are today we do a lot of forecasting of where we're going and we feel good about where we're going today maybe one last question while i have you on the line

Is there any international opportunity for any of the products that you have?

We believe there's a very large opportunity internationally. What we don't want to do is we want to really penetrate the market in the U.S. in a significant way. We already have. I mean, if you look at just what we've done over the last three years, you know, it's interesting to me. I have been in a lot of growth businesses, and typically when you see 60 plus percent growth year over year on a trailing 12 months basis or even on a quarterly basis, that's a really high growth rate. And what happens with that? You end up needing to be able to build infrastructure to support what you're doing. And building an infrastructure to go support an international business is completely different than building an infrastructure for the domestic business. So we're going to continue to build our business domestically, but we're always looking out at the international market, and we know that there is going to be a really large market for the products that we have, and we will go pursue that at the appropriate time.

There are no additional questions in queue at this time, and we have reached the end of the question and answer session. I would now turn the call back over to Ron Nixon, Executive Chairman, for closing remarks.

Thank you, and I appreciate everyone for listening in on the call today. We feel very good about where we're going. We've got a lot to report in the future as well, and I want to thank everybody for joining us today.

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