Sanara Medtech Inc. annual report, FY2022

Business context and reporting period

Sanara MedTech Inc. filed this Form 10-K for the fiscal year ended December 31, 2022. The company develops and sells surgical, chronic-wound and skincare products, and is building a broader platform that includes diagnostics, virtual consultations and wound-care software. Substantially all revenue came from product sales, principally surgical products; CellerateRX Surgical represented a substantial majority of sales.

2022 included the acquisitions of Precision Healing (April) and Scendia (July). Scendia added regenerative and orthobiologic products; Precision Healing is developing a wound-imaging device and lateral-flow assay. The company also announced a wound-care partnership with InfuSystem in November.

Financial performance and liquidity

Revenue rose 90%, reflecting organic sales growth, geographic and market expansion, and $6.0 million of Scendia revenue after acquisition. Gross margin declined mainly because Scendia products had lower margins. SG&A rose to $46.0 million from $28.1 million, driven largely by sales commissions, sales-force expansion and operating costs; R&D increased to $3.4 million from $0.6 million, including approximately $2.5 million related to Precision Healing. The tax benefit arose from deferred tax liabilities recorded in the acquisitions and a related reduction in the valuation allowance; the company retained a full valuation allowance on remaining net deferred tax assets.

At year-end, cash was $9.0 million, down from $18.7 million. Current assets were $20.6 million and current liabilities $12.8 million. Total liabilities were $19.3 million, including $7.2 million of contingent earnout liabilities and $0.8 million of operating lease liabilities; the company reported no outstanding borrowings. Its $2.5 million revolving credit facility was terminated in March 2022 with no amounts due. Management stated that cash on hand and expected operating cash flows should fund planned operations and capital needs for at least 12 months.

Operating cash use increased year over year. Investing activities used $3.5 million, versus $5.3 million in 2021; financing activities used $0.6 million, compared with $28.3 million provided in 2021, principally from the 2021 public offering. In February 2023, the company established an at-the-market offering of up to $75 million; through March 17, it had sold 17,878 shares for approximately $710,000 net proceeds.

Material changes and unusual items

• Scendia contributed $6.0 million in revenue and $1.0 million in net income from acquisition through year-end. Scendia and Precision Healing acquisitions included contingent earnouts of up to $10 million each, subject to performance thresholds and payable in cash or, in certain cases, stock.
• ALLOCYTE supply constraints began in the third quarter after an industry-wide reduction in eligible donor tissue. Unfilled orders reduced fourth-quarter sales; management expected improvement in the second half of 2023.
• Sanara Pulsar was dissolved in December 2022 after limited sales and failure to obtain an additional reimbursement code. The company recorded a $1.0 million noncash loss on disposal.
• Intangible assets increased to $31.5 million from $4.7 million, and goodwill of $3.6 million was recorded, primarily reflecting acquisitions. No goodwill or long-lived-asset impairment was recorded.
• Shares outstanding were 8,299,957 at December 31, 2022, versus 7,676,662 a year earlier. Additional potential dilution includes earnouts, equity awards and the ATM offering.

Outlook, commentary and principal risks

Management’s priorities include expanding product penetration and distribution, developing new products, integrating diagnostics and software with virtual-care services, and pursuing partnerships and selective acquisitions. The company planned to submit 510(k) notifications for the Precision Healing imager and assay in 2023. It provided no quantified revenue or earnings guidance. Management expects SG&A to decline as a share of revenue if sales growth outpaces sales-force and corporate costs.

Key risks include continued operating losses and cash consumption; dependence on licensed products, third-party manufacturers and a principal supplier; ALLOCYTE and other supply or inventory disruptions; intense competition; reliance on CellerateRX and its lack of patent protection; uncertain product adoption, clinical validation, reimbursement and FDA clearance; and execution, integration and funding risks associated with acquisitions and the planned virtual-care and technology platform. Telehealth operations also carry state licensing, corporate-practice-of-medicine, fee-splitting and privacy/security risks. The company disclosed no material pending legal proceedings.

Related-party arrangements warrant attention: the CellerateRX sublicense is with an affiliate of Catalyst, whose founder is Sanara’s Executive Chairman; directors also have relationships with Rochal, a licensor and asset seller. In March 2023, the company entered a Catalyst advisory-services agreement, with Audit Committee approval for up to $250,000 of 2023 fees. The independent auditor issued an unqualified opinion on the financial statements; its critical audit matter concerned valuation of acquired intangible assets. Management concluded disclosure controls and internal control over financial reporting were effective, but the auditor did not attest to internal-control effectiveness.

Important facts for investors to verify

• Whether revenue growth and customer adoption continue, and how much remains dependent on CellerateRX Surgical.
• Whether ALLOCYTE supply recovered as expected and whether other supplier constraints affect sales or margins.
• Cash burn, working-capital needs and any further ATM sales or other financing; management’s 12-month liquidity assessment is forward-looking.
• Progress, regulatory submissions and commercialization timing for Precision Healing and other pipeline products, including clinical evidence and reimbursement access.
• Earnout performance thresholds, resulting cash obligations or share dilution, and the final purchase-accounting valuations.
• Related-party payments and governance oversight, including royalties, consulting/advisory fees and the Catalyst agreement.