Greetings, and welcome to the Sanara MedTech Incorporated Third Quarter 2023 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. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Mr. Callon Nichols. Sir, you may begin.

Thank you, and good morning, everyone. I'd like to welcome you to Sanara MedTech's earnings conference call for the quarter ended September 30, 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. This supplemental deck as well as a copy of the earnings release and Form 10-Q for the quarter ended September 30, 2023, are available on this page. We will reference this information in our remarks today. We expect today's prepared comments from Ronald 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 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 as supplemented by the risk factors in our most recent quarterly report on Form 10-Q. Also this conference call, our earnings release and [Indiscernible] deck will 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.

Thanks, Callon, and good morning, everyone. In Q3, '23, Sanara generated $16 million in net revenue, representing a 23% increase from the prior year period. The third quarter of 2023 was the eighth record revenue quarter for Sanara, and we continue to strengthen our sales infrastructure to support our growth strategy as well as focus on increasing our penetration in the hospitals where we have approvals and minimal revenue. I'd like to point out that by the end of the third quarter of 2023, we had generated more revenue than in all of 2022. Our loss before income taxes narrowed from $3.2 million to $1.1 million year-over-year in Q3 and that also had $1.1 million in Q3 compared to a net loss of $1.5 million for the prior year period. The company also realized an adjusted EBITDA of $300,000 in Q3 compared to adjusted EBITDA of negative $1.6 million in Q3 2022. Mike will provide more details on our financial results in a few minutes. A key strategic milestone for the company in the third quarter was the acquisition of certain assets related to our collagen products business. The acquisition included all rights and ownership for human loaned care uses for specific 510(k) cleared college-based Wound Care products, including CellerateRx and HYCOL. This transaction has had multiple financial and strategic benefits as you will hear about later. Turning to our pipeline. Subsequent to the end of the third quarter, we had several key achievements. In early October, we realized our first sale of ALLOCYTE Plus advanced viable bone matrix. This product replaces our ALLOCYTE advance cellular bone matrix product and is processed by a well-established supplier with in-house processing capabilities and affords us greater control of our product supply. Sanara has a sufficient supply to meet current demand and we believe measures are in place to provide product for our future requirements. In addition to our first sale of ALLOCYTE -- ALLOCYTE Plus, the company also realized its first sale of BIASURGE Advanced Surgical Solutions in early November 2023. We believe both of these products are key in our growth initiatives. As you know, our ATM offering of common stock was paused at the end of Q1, and we do not currently have any plans to reactivate the ATM. Now Zach Fleming will provide more details on our business.

Thanks, Ron. I'd like to start my remarks with a discussion of our accomplishments over the past few years and how it has laid the groundwork for what we believe will be a very promising future for the company. In 2021, we acquired the assets of Rochal Industries. And since that time, we've achieved developing deep in-house technical capabilities for research and development. Our efforts have proved successful with the launch of BIASURGE and we currently have numerous other promising products at various stages of development. Over the past few years, we've executed on our strategy to extend our surgical bag, not only through the in-house development of BIASURGE but also through the acquisition of Scendia in license agreement with Cook Biotech. We have also focused on expanding our approved locations and recently, we were approved by a national GPO leading to a 67% increase in hospital approvals between March 31, 2023 to June 30, 2023. This has set the stage for what we believe will lead to growth in 2024. It will be driven by a focus on increasing cell rate usage in additional specialties outside of ortho and spine in an expanded product portfolio with the additional of BIASURGE multiple M&A opportunities and continued work by Rochal to develop new products. With that overview, I would like to now discuss our most recent results. ALLOCYTE supply issues negatively impacted our sales in Q3, but we believe we have resolved the supply issue with our new supplier of ALLOCYTE Plus. It will take some time to reengage with potential customers who we had put on hold and these have begun, and we are currently focused on our sales team along with BIASURGE. Concern over selling cost over cost of facilities due to surgeons’ significant use of the product negatively…

Thank you, Zach. As Ron mentioned earlier, we generated revenues of $16 million in Q3 compared to $13 million during the third quarter of 2022, a 23% increase over prior year. For the 9 months ended September 30, we generated revenues of $47.3 million compared to $30.5 million during the same period in 2022. This represented a 55% increase over the prior year period. The higher revenues in 2023 were primarily due to increased sales of soft tissue repair products and to lesser extent, bone fusion products as a result of our increased market penetration geographic expansion, additional revenues as a result of the Scendia acquisition and our continuing strategy to expand our independent distribution network in both new and existing U.S. markets. SG&A expenses for the third quarter were $13.9 million compared to $12.1 million during the third quarter of 2022. Year-to-date SG&A expenses through September 30 were $40.7 million compared to $31.9 million in 2022. The higher SG&A expenses in 2023 were primarily due to higher direct sales and marketing expenses, which accounted for approximately $6.8 million or 77% of the overall increase from prior year. Higher direct sales and marketing expenses in 2023 were primarily attributable to an increase in sales commissions of $5.9 million as a result of our higher product sales. Year-to-date SG&A also included $0.8 million of increased costs as a result of sales force expansion and operational support. R&D expenses for the quarter ended September 30, 2023, were $1 million compared to $1.1 million for the same period last year. Year-to-date R&D expenses were $3.5 million compared to $2.3 million for the same period in 2022. The higher R&D expenses in 2023 were primarily due to costs related to the Precision Healing Diagnostic Image related elevate R&D expenses also included costs associated with the ongoing development for projects currently on our currently licensed products. We had a net loss -- we had a loss before income tax of $1.1 million for the third quarter compared to $3.2 million during the same period in 2022. Our year-to-date loss before income taxes through September 30 was $4.2 million compared to $9.8 million in 2022. The lower loss before income tax in 2023 was due to operating expenses increasing at a slower rate than net sales in addition to the benefit recorded as a result of the change in fair value of earnout liabilities. For the quarter ended September 30, we had a net loss of $0.1 million compared to a net loss of $1.5 million during the same period last year. For the 9 months ended September 30, we had a net loss of $4.2 million to $3.9 million during the same period last year. Our cash on hand at the end of the quarter was $6.2 million, a slight increase from $6.1 million we had on hand at the end of the second quarter. With that, I'll turn it back over to Ron for some closing remarks.

Thanks, Mike. In summary, we are very, very proud of our continued record quarters as well as the introduction of another impactful proprietary product for surgery and BIASURGE. We will continue to work on executing our strategy to achieve improving growth rates and expect to be aided by ample supply of ALLOCYTE Plus. The key strategic acquisition of assets related to our collagen business will improve our financial results by eliminating the royalty we pay as we continue to grow Cellerate and HYCOL. And this also allows us to develop new proprietary products based on these assets through Sanara's research team. That concludes our remarks. And we look forward to any questions you may have. Operator, we're ready to open the call for questions. Thank you.

Thank you, sir. Before we go to our phone lines, we've had a question sent in. Could you please add more color to decelerate sales slowdown? And did I understand correctly that certain hospitals have capped salary purchases because surgeons were buying too much of it?

I can take that. This is Zach. Yes. So we -- you're correct. There were a few hospitals where usage was outpacing what procurement preferred. And so they limited usage, and that's where we've seen a little bit of slowdown. And we've responded by training up our sales representatives to make sure everybody is educated on the reasons that, that product should be used and that there's a initial evidence and additional evidence that can be provided to support the usage. And then as further, we wanted to -- we put people on to additional specialties, so you'd have a broader reach into the surgeon specialties and opposed to being focused on maybe just a few specialties in the building, and that helps to standardize the usage so that the hospitals allow the continued usage.

But I'd also like to say what I like to say in addition to what as Zach just said, Sanara has spent a lot of money on gathering the evidence -- clinical evidence on numerous studies, some of those of which have just recently come out to support what the value of our products are in terms of the overall value proposition of lowering overall cost and improving outcomes. We see that data as being very impactful. We'll continue to do more studies to support that to just keep using evidence as our basis for why these products are so impactful in surgery as opposed to just a preference by a surgeon.

[Operator Instructions] Our first question is coming from Ross Osborn with Cantor Fitzgerald. Your line is open.

So starting off and apologies for a couple of calls, but would you provide some more color on the unique market challenges you called out in your press release, any foresight into those fading this year or early next?

Did you say fading?

Yes.

Yes. We think we've achieved that. So in terms of those facilities where they were impacted, it was limited to just a few 4 markets and where the product was utilized beyond what procurement was comfortable procurement pushback on that spend and very situational. And in those -- each of those instances, obviously, we've remedied that and moving forward, we'll be able to pick up additional facilities to cover the slight slowdown in those areas as well as regain those markets with additional effort and that would include in servicing, making sure everybody is educated on the use of the product and, of course, additional surgeons, as I mentioned a minute ago.

And then maybe turning to some of your recent product launches. How should we think about ALLOCYTE and BIASURGE's market opportunity in terms of annual dollars and adoption there, realizing you can use a variety of surgeries? But where do you think the low-hanging fruit is? And how would you rate market awareness?

I think the low-hanging fruit is any patient where there's a risk for potential infection, and that's very broad. A lot of surgeries that there's a risk based on the patient's comorbidities, different statuses of disease state, et cetera. And of course, all surgeries have some risk of a complication or infection. So what we're trying to do is place that product in a prophylactic position where it could be used to prevent any of those types of infection events or complications. So you can imagine really every surgery could potentially be appropriate for that. And certainly, it's going to be focused on those patients where there's a risk factor, and that would be where we would start. In terms of just the acceptability, I think that's a commonly used practice that in historical sense, they have used an antimicrobial wash of some type, usually one that's made in-house by the pharmacy but that's not very standardized and not consistent. So in recent years, there's been a few market entrants where they've come in and offered a consistent manufactured wash like by a surge. Our offers benefits that the others don't, such as it's a leave-in rents, also a product that has a low cytotoxicity and it allows for leave-in usage means they don't have to wash it out with saline. So we think we have a market position there and of course, an attractive value to the facility.

And remember that Ross, you may remember this from past data that we have provided. We have tested the BIASURGE-based formula against numerous of our competitors and it out performed them for biofilm kill, as well as the kill VRE [indiscernible] and other types of bad actors out there from the microbe standpoint. And so therefore, we see a significant market opportunity for this product, as Zach mentioned, and it will be a key core product for us as we move forward, we believe.

And then lastly, in train your aspirations to be a comprehensive wound company. Is there any more color you can provide on the types of partners you're looking for that could add a value-based component and lastly, any update on Precision?

Yes. So I didn't hear the very last part. I heard about what the profile of the partners that we would seek out for the value-based arrangement would be, but I didn't hear what you said after that.

That's correct. And then just any update on Precision imaging?

So two things. I'll take that, Zach. Two things on that, Ross. One, when do you think about our overall value-based strategy, it involves everything through the post-acute. So I'd go from the discharge at the hospital, it would be down through the entire post acute, which would include the skilled nursing facilities, home health and then ultimately at home when they're not on a care plan -- plan care. So what we would -- what we're looking at is who else could we team with that would really provide that level of service at the home and there's numerous home health care companies that we know exceedingly well that are interested in the value-based plan. . We also know that this is a focus on skilled nursing facilities because, as you know, with the passing of legislation for SNF at home and other programs like that, everybody is looking to be able to pick up efficiencies and lower costs and improve outcomes. So there's going to be way more focus on that as we move forward with at the value-based arrangements being front and center. More and more CMS dollars are being allocated to these value-based arrangements. So we see fee-for-service shrinking CMS and numerous other payers have responded by saying we have got to get a value-based strategy for these difficult specialties like Wound Care, where they are having very high increasing rates and not great outcomes for their patients. So people that would be in the SNF and the post-acute or people that bring technology or other things or payers that understand the risk that they're taking could even be a part of that as well as providers of the services themselves. So we've got a broad array of potential partners, and we've obviously been in discussions with numerous of these over the last year as we prepare. And then secondly, on Precision and Precision Healing on its -- on the lateral flow assay and on the imager, we're going a different pathway with that, and it's a pathway that we'll achieve more from the standpoint of an FDA approval. And so we've taken our time and decided that let's get the better pathway that will achieve greater outcome and greater potential acceptance of the product. So that's what we're doing.

Our next question is coming from Ian Cassel with IFCM. Your line is live.

Maybe as a follow-on to Ross' question. You mentioned in the presentation that you spent about $5 million in the Tissue Health Plus strategy year-to-date. Do you expect that number to increase, decrease as you start to commercialize that over the next 24 months?

Yes. For Sanara itself, we don't expect that number to increase. We would expect that number to decrease over the next 12 to 24 months and that would be by executing our strategy with the right kind of partners that would start to carry some of that load themselves.

And maybe getting back to BIASURGE, I know you just launched BIASURGE back in, well, just earlier this month. Can you give us some color on sort of the -- just the early indications you're getting from the surgeons as you launched it?

Zach would you might

Great indicator that we got 41 approvals before launch, so that was really encouraging to see that these hospitals as well as surgeons felt like there was a need and there was demand and so we were able to get the approval. And then since launched the American Association of the Knee Surgeons called AAHKS, as we call it, really great response. Just the booth was packed every day. There was a lot of questions about our scientists in the booth. We had our medical science team in the booth and a lot of interest in terms of just the ability for this product to have an impact on their surgeries. And that momentum has continued. We've seen a lot of uptake, a lot of surgeons. We've also seen a lot of distributors asking to add that product into their bag and their product mix. So we're really excited about it.

And maybe when you think about -- when investors think about BIASURGE, what is the kind of type of revenue for surgery on a product like that? I know accelerates several hundred dollars per surgery or somewhere around there. How should we think about BIASURGE? Is that $30 a surgery, 100 to 200, what range should we be thinking about?

Yes. We have just started pricing on that in those first facilities. And I'd tell you we're averaging somewhere around $200 a unit right now. And that unit is one leader, and that would be -- yet to be determined how many they use for surgery.

Okay. Excellent. And

That's a pretty quick sample, but I just would share that with you here early.

And maybe switching to ALLOCYTE. How would you kind of characterize the demand you're seeing now that you have supply again for that product? I mean is it -- is the demand you're seeing kind of back to the levels you saw before the supply disruption? And maybe just give us an indication of that.

Yes. The demand is there. It's just a little bit of -- little bit of a process to get back added to facilities. We did have to create the line extension ALLOCYTE Plus, and that needs to be added to the contract. So that's really the biggest kind of stop gap of why we haven't gotten back completely where we were, but we are selling -- we are seeing a lot of pickup to that product. So we're really okay with that.

Our next question is coming from Stephen Reed with Pitch Investments.

I think more to follow on Ian and Ross' question. They had to most of them, but mine will be around Precision Healing on the imaging, what you've learned, if you learned anything from the FDA? And then what the process you see going forward on the lateral flow SA submission and approval?

It appears Mr. Nixon's line has gone down for a moment, but he is dialing back in as we speak.

Well, if you want to repeat that real quick, Stephen, I was thinking Ron was going to feel that. But if you'd repeat that, I'll answer.

Yes, sure. Really around the Precision Healing, what you've learned so far from your submission if you received any feedback and then going forward on the lateral flow assay or molecular assays, where you're at with that, what you've learned and what the process would be for you to go forward with that technology?

We are working closely with the FDA on the multispectral imager. So we've gotten feedback on that and working for another submission and should have that feedback again shortly. So we're working with them to resubmit LA, we have not announced, so I'm going to withhold comments on that particular component.

And have you received any feedback yet on going out looking for your appropriate partners for the Tissue health Plus -- is the in a diagnosis that's a critical piece of the process before you see that to materialize?

Yes. We're -- I'll take that. This is Ron. The interest is high out there because everybody recognizes the potential opportunity of this -- from our perspective, we believe that the market is much greater than what is reported in the market because it's hard to capture the complete cost of loans because of all the comorbidities that they've got. But with most of the people that have the payer data, they understand that the complications from wounds related to diabetes, related to COPD, CHF, mobility with pressure ulcers, all types of things like that. When you look at the OEM costs, cost of amputation, cost of readmission back into the hospital, cost of these complications that may be associated with diabetes, but not labeled as the wound. When you really look at all those and you think about our prevention program and then better solutions for treating these and avoidance of these, having people go to the wrong location to get their rooms taken care of, meaning higher call centers. All of that is going to be very appealing to the audience that we're talking to. So at this time, we're not prepared to talk about who those partners are, but there are numerous partners out there that would be interested in joining us with the effort that we put in over the last many years of building this platform.

Our next question is coming from Niraj Gupta with GCI Partners.

A couple of questions, all related to BIASURGE. Could you guys just speak more broadly on BIASURGE? My understanding was that the product was applicable to virtually any surgery involving stealing the wound cavity, Zach, Ron. Could you guys just speak a little bit to just the broadness of the potential applicability for BIASURGE product?

Yes. I think let me clarify one thing. I'll let Zach answer, but it's to kill the bacteria in the room bed not to seal anything. It's not a sealant but -- I'll exactly answer the question about the opportunity.

Yes. I think you're right, Niraj. I think you could imagine this product being used on any surgery. So if you are thinking about the OR, OR is a sterile environment, however, microbes do get introduced inadvertently. And so they want to protect that surgical margin, area where they've been doing the work for, say, an implant or any other type of surgery you might think and so they typically will wash that area throughout the surgery usually with saline and then they will close with a product like this, where it's antimicrobial nature and cleanses or sterilizes the field that they were working in. And then that would reduce surgical site complication.

Just to add to that, we think the data that we have historically already gathered on this product doing a number of studies, one of which has not come out yet, but we'll be out shortly that was used in the post-acute market. I think you'll see that the applicability to that is going to yield lots of results because all of the surgeons are always interested in making sure to minimize the potential from surgical site infection. And so we believe that they have released that study that was a retrospective study that is on the focus on reduction of surgical site infections, not related to BIASURGE but to accelerate. And so it's a perfect complement to accelerate, but it also is stand-alone because of just the impact it's got on microbes in terms of its kill rate. So I think there's just significant opportunity for this product as we move forward.

So I guess the thought then is initial strategy is to leverage your existing presence with [Indiscernible] as you've done with the 40-some-odd locations. But as we think longer term, the strategy in terms of marketing and surgeon penetration is much broader than what you would -- what you sell in today is for salary. Is that fair?

We're learning about the product today in terms of who's -- who has the appeal for the product. And our impression is, yes, it could be better than Cellerate because it's really for any surgery as opposed to those that maybe are just people who have trouble healing with Cellerate cell rate has a massive market, obviously, because they don't -- aren't able to predict always which patients will have complications or challenges healing. So we've seen Cellerate be a tremendous grower because there's so many patients that are benefited from it. And we think that BIASURGE is very similar in that respect that it's going to complement the healing, it's going to complement the outcomes of the patient. And so when you think about the doctor's trouble of trying to keep patients healed post surgery, both these products serve a great purpose to do that. They allow that patient to have low microbes and then increase the biologic activity to support the healing Cellerate. So it's a nice one, two punch. You clean the area, and then you complement the healing with Cellerate.

So 2 quick ones related to that. So one, on BIASURGE, you talked about rough pricing parameters per liter. Do you expect typical surgery would involve potentially more than one liter of usage?

Still learning, but yes, there are surgeries that will require more than one leader. And it's typically based on size, but certainly, if you had a patient that was a revision surgery where there's already an infection, that could be a surgery where they could potentially use some additional product than one leader.

And then the final one was just thinking about bundling pricing and just kind of maximizing the growth, your tool bag is growing, but you've got like 2 outstanding products and Cellerate and BIASURGE in terms of kind of the data about the efficacy and whatnot. Could you just speak to like how does it impact your ability to more broadly penetrate the combined product offering by having both to go to market with? And what is -- how does that help reinforce the value proposition accelerate as you think about ultimately where we are in the life cycle of that product relative to where it can ultimately get to?

Well, I think it just really starts more conversations because of the broad appeal, we saw this in the booth at Hip and Knee Surgery Conference. There's just a nice starting point either product and then you can end the conversation with the other product. And I think when you're able to broaden the conversation to meet the needs of the surgeon and the patient, I think that's a good thing. So having [Indiscernible] it really talks about the antimicrobial action and reducing those microbes into surgery that then starts to [Indiscernible] once you finish that, then you want to start to support the healing and that's where Cellerate would then enter the picture in the conversation. So I think it's really beneficial. And of course, for the hospitals, they really appreciate the sole sourcing of products like this. So they don't have to go to multiple vendors in order to get these products. So it certainly helps with our strength in the hospital in our staying power because they then say, Sanara is an approved vendor. We have great products. They support the case as well, et cetera, et cetera. And so it puts us in more situations, more shots on goal.

Yes. And to add to that, Niraj, I believe that what we're demonstrating not only with Cellerate, but any of the new products that we've come out, we've said from the very beginning of Sanara that we're going to provide advanced solutions that are proprietary for our surgeons, our hospitals, our post-acute market everywhere we are, we want to provide unique solutions that are going to do 2 things. We say stayed the course on this from the very beginning, improve outcomes and lower costs. And if we can continue to do that and we demonstrate that with multiple products, we believe that the brand scenario will actually continue to expand where we get more and more confidence from whoever our customer is that -- they know what they're doing. They're backed by strong research. They've got a lot of capabilities to be able to come in and impact what we do to achieve those 2 goals of the lower cost and improving outcomes.

Our next question is coming from Bill Brewster, who is an investor.

I wanted to ask a question just going through the efficient structure and how the business works, from an SG&A perspective, should I be thinking that commission like -- the real question that I had at the core of it is what kind of operating leverage are we going to get on the sales base 3, 4, 5 years out? And I guess that the question that I keep coming up with is how should I think about how the commissions are paid here? And are they recurring commissions? Or are these commissions typically that are paid out and then sort of decline over the life cycle of a relationship with a hospital or a doctor?

Yes. So Bill, we don't actually disclose any of the information on our commissions separated out from SG&A. But what I would just tell you is there are always going to be opportunities as we grow this business to think about the leverage of your SG&A expenses relative to the growth. So we -- as we see more growth, you will see more reduction in -- or what I would just say, improvement in efficiency from that but you're -- as we expand, as Zach mentioned, we were just sort of going into the 33rd state. As we continue to expand, you're still going to be having a similar construct where you've got people that you're paying in the field, there's going to be a reward system for them achieving goals, which means commissions, and that's just the way that, that will be moving into perpetuity but it doesn't mean we might not be able to gain some additional efficiencies where we've also gained efficiencies by doing things that accomplished our margins continuing to go up. And so that helps us as well. And our most -- as we just explained earlier in the call by buying the end, the royalty stream that we were paying out. So that's where we see how we're picking up our efficiencies.

As we currently have no further questions in queue at this time, I will hand it back to Mr. Nixon for his closing comments.

Yes. Thank you very much. We appreciate everybody being on the call today. Thank you for all the very good questions that you've asked. We're enthused about where we're headed with the company. And as I think all of you know, we're in it for the long term. We want to really build this around our goal of lowering costs and improving outcomes. We want to reach every possible ASC or hospital or any place that we can utilize our proprietary products. And our services as it relates to our post acute. So thank you guys for all the support. We appreciate that, and that will be the end of our call. So thank you all again for being a shareholder of Sanara.

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