Sanara MedTech Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023. Sanara MedTech develops and commercializes products and technologies for surgical, chronic wound-care, and skincare markets. The unaudited results are consolidated and should be read alongside the company’s 2022 Form 10-K.
Financial performance and position
| Metric | Q1 2023 | Q1 2022 or prior date |
|---|---|---|
| Net revenue | $15.52 million | $7.81 million |
| Gross profit / gross margin | $13.40 million / approximately 86% | $7.01 million / approximately 90% |
| Operating loss | $1.22 million | $2.78 million |
| Net loss | $1.22 million; $0.14 per share | $3.16 million; $0.41 per share |
| Cash used in operating activities | $1.74 million | $2.11 million |
| Cash and cash equivalents | $7.29 million at March 31, 2023 | $8.96 million at December 31, 2022 |
| Total assets / total liabilities | $59.97 million / $18.49 million | $61.04 million / $19.32 million at December 31, 2022 |
Revenue increased 99% year over year, including $3.0 million from Scendia, acquired in July 2022. Management attributed growth mainly to higher surgical wound-care sales, increased market penetration and geographic expansion, and Scendia sales. Product sales were $15.47 million; royalties were $50,250.
Cost of goods sold was $2.13 million, up from $0.81 million. Gross margin declined as Scendia products carried lower margins. SG&A rose to $12.97 million from $9.38 million, including $1.4 million related to Scendia and higher sales commissions and selling costs. R&D increased to $1.32 million from $0.20 million, principally for Precision Healing’s diagnostic imager and lateral-flow assay. Depreciation and amortization increased to $0.78 million from $0.20 million.
Operating cash use improved year over year, but cash fell by $1.67 million during the quarter. Investing cash use was $0.03 million; financing provided $0.10 million, including ATM equity proceeds partly offset by settlement of equity awards. The company reported $2.11 million of operating lease liabilities and $6.71 million of contingent earnout liabilities. No material borrowing balance is identified in the presented balance sheet; interest expense was $6.
Material changes and unusual items
- The $1.22 million Q1 net loss was lower than the prior-year $3.16 million loss. The prior-year period included a $0.38 million share of Precision Healing losses before its acquisition.
- A $0.45 million noncash benefit from the change in fair value of acquisition earnout liabilities reduced Q1 2023 expenses. The company attributed the decrease to valuation assumptions, projected amounts, and payment timing.
- Accrued bonuses and commissions declined by $1.95 million during the quarter, contributing to operating cash use.
- The company amended its primary office lease in March 2023 to add space and extend the term; it recorded $1.37 million of new right-of-use assets and related lease obligations.
- In February 2023, Sanara established an at-the-market equity program of up to $75 million. It sold 26,143 shares in Q1 for approximately $1.07 million gross proceeds and $1.03 million net proceeds; some proceeds were collected in early April.
Outlook, risks, and contingencies
Management said existing cash, together with expected operating cash flows, should fund its growth strategy, anticipated operating expenses, and capital expenditures for at least the next 12 months. The filing provides no numerical revenue or earnings guidance. Management expects SG&A to decline as a percentage of revenue if sales growth outpaces sales-force and corporate costs, and generally expects R&D spending to increase as development continues.
ALLOCYTE supply constraints, caused by limited qualifying donor tissue, prevented the company from filling some orders in Q4 2022 and Q1 2023. Management anticipated resolution in the second half of 2023. Sanara submitted an FDA 510(k) premarket notification for the Precision Healing diagnostic imager in Q1 and planned to submit one for the lateral-flow assay in 2023; regulatory outcomes are uncertain.
Potential earnouts of up to $10 million each relate to Precision Healing and Scendia. Management did not anticipate a Precision Healing earnout payment before January 2025 and anticipated the first potential Scendia earnout payment in October 2023. Payments may be in cash or, subject to agreement terms, company shares. The filing also describes recurring product-license royalties, including royalties to related parties. CellerateRX products comprised the substantial majority of sales, and related-party royalty expense for that sublicense was $0.52 million in Q1.
Key risks include revenue growth shortfalls, product adoption and competition, supply and distribution disruptions, acquisition integration and benefits, capital needs, product development and regulatory requirements, reimbursement policies, and dependence on licensed products and intellectual property. The company reported no material pending legal proceedings, no material changes to previously disclosed risk factors, and effective disclosure controls as of March 31, 2023.
Important facts for investors to verify
- Whether ALLOCYTE supply improved as anticipated and how any continuing constraints affected sales.
- How much of growth is organic versus attributable to Scendia, and the company’s continuing concentration in CellerateRX sales.
- Progress and timing of FDA review of the diagnostic imager and planned lateral-flow assay submission.
- Cash burn, liquidity runway, and any cash or share dilution from the $75 million ATM program.
- The timing, performance conditions, and possible cash-versus-share settlement of the Scendia and Precision Healing earnouts.
- The impact of lower Scendia margins, higher selling costs, and amortization on future profitability.
- Related-party arrangements, including royalties and the Catalyst advisory agreement; the filing says no advisory-agreement expenses were incurred in Q1.