Sanara MedTech Inc. — Q3 2023 Form 10-Q
Business context and period. This unaudited report covers the quarter and nine months ended September 30, 2023, compared with the same 2022 periods. Sanara develops and commercializes medical technologies for surgical, chronic wound-care and skincare markets. Product revenue is primarily from soft tissue repair products, particularly CellerateRX Surgical, and bone fusion products.
Key financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net revenue | $16.0 million | $13.0 million | $47.3 million | $30.5 million |
| Gross profit | $14.3 million | $10.8 million | $41.2 million | $26.5 million |
| Gross margin | 89.1% | 82.9% | 87.2% | 86.9% |
| Operating loss | $0.9 million | $3.2 million | $4.0 million | $9.4 million |
| Net loss attributable to Sanara shareholders | $1.1 million | $1.5 million | $4.1 million | $3.8 million |
| Basic and diluted loss per share | $0.13 | $0.18 | $0.49 | $0.49 |
| Cash used in operating activities | Not separately stated for the quarter | Not separately stated for the quarter | $2.4 million | $4.9 million |
- Revenue and margins: Revenue increased 23% in Q3 and 55% for the nine-month period. Management attributed growth primarily to greater soft tissue repair sales, with contributions from bone fusion products, market expansion and Scendia. Nine-month gross margin was broadly stable year over year; Q3 margin improved, in part because the Applied acquisition eliminated CellerateRX royalty expense at the consolidated level from August 1.
- Expenses and earnings: Nine-month SG&A rose to $40.7 million from $31.9 million, mainly due to higher sales and marketing costs and commissions. R&D increased to $3.5 million from $2.3 million, primarily for Precision Healing diagnostic development. Nine-month operating loss narrowed, but shareholder-attributable net loss increased; 2022 included a $5.8 million income-tax benefit that did not recur in 2023.
- Balance sheet and liquidity: At September 30, cash was $6.2 million, current assets $19.4 million and current liabilities $13.2 million, implying working capital of approximately $6.1 million. Total assets were $75.5 million and total liabilities $31.4 million. Cash declined from $9.0 million at December 31, 2022.
- Debt: The company had $9.75 million principal outstanding under a Cadence Bank term loan, bearing interest at 8.3% as of quarter-end, with monthly principal amortization scheduled to begin in August 2024 and maturity in August 2028. The loan is secured by substantially all SMAT assets and guaranteed by Sanara. The company reported compliance with financial covenants at quarter-end after an immaterial cash contribution to SMAT.
- Cash flows and financing: Nine-month investing cash use was $10.2 million, primarily for the Applied asset purchase. Financing provided $9.8 million, including $9.7 million of net loan proceeds and approximately $1.0 million of net ATM proceeds; cash ended the period down $2.7 million. The ATM program permits up to $75 million of shares; $1.0 million of net proceeds had been raised in the first nine months.
Material changes, outlook and risks
- Applied asset purchase: On August 1, 2023, Sanara acquired assets including the intellectual property and manufacturing and sales rights for CellerateRX Surgical and HYCOL. The stated initial purchase price was $15.25 million: $9.75 million cash, $3.0 million agreed value of stock and $2.5 million in installments. The accounting purchase consideration was $16.8 million, including other defined and contingent amounts. Sellers may also receive up to $10 million tied to collections from a collagen product under development.
- Other acquisition obligations: Sanara paid approximately $693,000 for the first Scendia earnout in August 2023 and expects the second payment in Q3 2024. Precision Healing earnout consideration of up to $10 million is contingent on performance thresholds; the company said it does not anticipate a payment before January 2025.
- Management outlook: The filing provides no specific revenue or earnings guidance. Management said current cash, expected operating cash flows and term-loan proceeds should fund its growth strategy and anticipated operating expenses and capital expenditures for at least the next 12 months. Management expects SG&A to decline as a percentage of revenue if sales growth outpaces expansion costs, and expects R&D spending to increase as products are developed.
- Operations and risks: ALLOCYTE supply constraints had negatively affected sales growth; Sanara reported first sales of ALLOCYTE Plus in October 2023 and said supply was sufficient for currently expected demand. The Applied acquisition brings manufacturing-process transition and integration risks. Other significant risks include dependence on key products and third-party technologies, market acceptance and product development, acquisition execution, and variable-rate debt, restrictive covenants and potential required cash contributions to SMAT. A covenant breach could accelerate debt.
- Unusual items and governance: The nine-month results include a $1.5 million noncash benefit from a decrease in the fair value of earnout liabilities. The Applied transaction also entails a services agreement with the seller’s owner, including monthly compensation, potential royalties and milestone payments. The filing reports related-party arrangements, including Catalyst and Rochal relationships. Management concluded disclosure controls were effective; it reported no material pending legal proceedings known to the company.
Investor facts to verify
- Whether revenue growth can continue and how much depends on CellerateRX and other concentrated product lines.
- Whether ALLOCYTE Plus supply and the Applied manufacturing transition support expected demand and margins.
- Cash generation, working-capital needs and the availability of additional ATM financing relative to acquisition, development and debt-service obligations.
- Term-loan covenant headroom, future required cash contributions, interest-rate exposure and restrictions on moving SMAT cash to the parent.
- Potential cash or stock dilution from acquisition earnouts, Applied installments and services-agreement royalties or milestones.
- Progress, regulatory milestones and commercialization prospects for Precision Healing products and other development programs.