Sanara MedTech Inc. — Q1 2024 Form 10-Q
Business context and reporting period. This unaudited filing covers the three months ended March 31, 2024, with comparisons to Q1 2023. Sanara develops and sells medical technologies for surgical, chronic wound-care and skincare markets. Sales are concentrated in soft-tissue repair products, particularly CellerateRX Surgical. The August 2023 Applied asset purchase gave Sanara rights to manufacture and sell CellerateRX Surgical and HYCOL, eliminating the related intercompany royalty expense in consolidation.
Financial performance and liquidity
| Metric | Q1 2024 | Q1 2023 / comparison |
|---|---|---|
| Net revenue | $18.54 million | $15.52 million; up 19% |
| Gross profit / gross margin | $16.65 million / approximately 90% | $13.40 million / approximately 86% |
| Operating loss | $1.53 million | $1.22 million |
| Net loss | $1.80 million | $1.22 million |
| Net loss attributable to Sanara shareholders | $1.76 million; $0.21 per share | $1.18 million; $0.14 per share |
| Net cash used in operating activities | $1.59 million | $1.74 million |
| Cash at quarter-end | $2.83 million | $5.15 million at December 31, 2023 |
Soft-tissue repair revenue increased to $16.08 million from $12.87 million; bone-fusion revenue was $2.45 million versus $2.60 million. Royalty revenue was zero versus $50,250. SG&A rose to $16.19 million from $12.97 million, primarily on higher sales commissions and sales-force expansion. R&D declined to $0.95 million from $1.32 million; depreciation and amortization increased to $1.11 million from $0.78 million, mainly due to Applied-acquired intangibles. Q1 interest expense and other was $0.27 million.
At March 31, 2024, current assets were $17.19 million and current liabilities $12.75 million. Debt principal was $9.75 million under the Cadence term loan, with $9.70 million reported net of unamortized issuance costs. Total liabilities were $27.90 million and shareholders’ equity $43.01 million. The company used $0.07 million in investing activities and $0.66 million in financing activities during Q1; financing use was principally net settlement of equity awards.
Material changes, outlook and risks
- Revenue growth and gross-margin expansion reflected greater soft-tissue product sales, market penetration and geographic expansion, as well as elimination of the CellerateRX royalty expense following the Applied acquisition. Sanara reported that CellerateRX made up the substantial majority of sales.
- Management said cash on hand, expected operating cash flows and proceeds from the subsequent CRG loan should fund its growth strategy and anticipated operating expenses and capital expenditures for at least 12 months. This is subject to execution and loan conditions; the filing does not provide formal revenue or earnings guidance.
- On April 17, 2024, after quarter-end, Sanara entered a senior secured CRG loan facility of up to $55 million. The initial $15 million borrowing was used in part to repay the Cadence loan; up to $40 million may be drawn in later borrowings subject to conditions. The loan matures March 30, 2029, bears 13.25% interest (8% cash-pay and up to 5.25% deferrable), and carries upfront and back-end fees, collateral over substantially all assets subject to exceptions, and potential prepayment premiums.
- CRG covenants require liquidity above $3 million (or a higher amount if required by certain permitted debt) and minimum annual revenue of $60 million for 2024, rising to $75 million in 2025, $85 million in 2026, $95 million in 2027 and $105 million in subsequent years. Covenant breaches may trigger default, acceleration and increased interest.
- On May 10, CEO Zachary Fleming resigned; on May 12, Executive Chairman Ronald Nixon was appointed CEO. The company said it intended to negotiate a separation agreement with Fleming.
- Other risks include reliance on a concentrated product portfolio, commercialization and adoption of new products, competition, third-party licenses and supply, inventory management, regulatory requirements, and the ability to meet capital needs. The company disclosed related-party relationships involving Catalyst and Rochal. It reported no material pending legal proceedings and concluded disclosure controls were effective as of March 31, 2024.
Important facts for investors to verify
- How much of revenue and growth remains attributable to CellerateRX, and whether sales growth and approximately 90% gross margin are sustainable.
- Cash position and liquidity after the initial CRG borrowing, actual cash-pay interest and fees, and capacity and conditions for any additional draws.
- Progress toward CRG’s 2024 minimum revenue covenant and ongoing compliance with liquidity and other covenants.
- Sales-force spending, commissions, operating cash burn and the path to profitability.
- Potential cash obligations from acquisition earnouts, Applied installments, royalties and the Petito services agreement.
- Effects of the CEO transition, including any separation benefits and leadership or execution changes.