Sanara MedTech Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. The company develops and commercializes medical technologies and products for surgical and chronic wound and skin care. Financial statements are unaudited.
Financial performance and liquidity
| Metric | Q2 2022 | Six months 2022 | Comparable 2021 period |
|---|---|---|---|
| Net revenue | $9.67 million | $17.48 million | Q2: $6.28 million; six months: $11.29 million |
| Gross profit | $8.71 million | $15.72 million | Q2: $5.74 million; six months: $10.28 million |
| Gross margin | Approximately 90% | Approximately 90% | Six months: approximately 91% |
| Operating loss | $3.19 million | $5.97 million | Q2: $1.03 million; six months: $2.11 million |
| Net loss | $3.26 million | $6.41 million | Q2: $1.21 million; six months: $2.39 million |
| Net loss per share, basic and diluted | $0.42 | $0.83 | Q2: $0.16; six months: $0.33 |
- Q2 revenue increased 54% year over year; six-month revenue increased 55%. Management attributed growth primarily to increased surgical wound-care sales, market penetration, geographic expansion, and a larger independent distribution network.
- Six-month operating expenses were $21.69 million, up from $12.39 million. SG&A rose to $19.80 million from $11.97 million; R&D rose to $1.27 million from $0.22 million. Q2 R&D included approximately $826,000 for Precision Healing technology.
- Gross margin was approximately 90% for the first half, compared with 91% in 2021. Management cited approximately $130,000 of noncash inventory obsolescence charges as a factor in the decline.
- Six-month operating cash use was $3.27 million, versus $1.60 million in 2021. Investing cash use was $2.38 million, and financing cash use was $0.32 million. Cash declined to $12.68 million from $18.65 million at year-end 2021.
- At June 30, current assets were $19.83 million and current liabilities were $6.93 million. Total liabilities were $11.03 million, including a $3.95 million long-term earnout liability and lease liabilities. No line-of-credit borrowings were outstanding; the $2.5 million facility was terminated in March 2022.
Material changes and notable items
- On April 4, 2022, Sanara acquired Precision Healing, which is developing a wound and skin diagnostic imager and biomarker assay. The transaction was accounted for as an asset acquisition; the company recorded $13.0 million of in-process R&D and $3.85 million for an assembled workforce. Precision Healing had not generated revenue.
- Precision Healing consideration included shares, assumed options and warrants, cash, transaction costs, and contingent earnout consideration. The recorded earnout liability was approximately $3.95 million; potential payments can total up to $10 million, subject to performance thresholds.
- On July 1, 2022, after quarter-end, Sanara acquired Scendia Biologics for stated consideration of $7.4 million, comprising $1.4 million cash and 291,686 shares, with potential earnouts of up to $10 million. Purchase accounting was not complete at filing. The transaction also gave Sanara full ownership of Sanara Biologics.
- Stock-based compensation was $1.29 million for the first half, compared with $0.62 million a year earlier. The company issued 165,738 shares in the Precision Healing transaction and reported 8,015,401 shares outstanding at June 30.
- Sales of CellerateRX products comprised the majority of sales in 2021 and the first half of 2022. The related sublicense is with an affiliate of Catalyst, whose founder and managing partner is Sanara’s Executive Chairman. Related-party royalty expense under the sublicense was $812,966 for the first half of 2022.
Outlook, risks, and contingencies
- Management said cash on hand, 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 specific revenue or earnings guidance.
- Management expects R&D expense to increase as it supports product enhancements and development. It also described plans to expand sales, develop its product and technology pipeline, and pursue acquisitions.
- Key disclosed risks include achieving forecast revenue growth; commercializing products and gaining market acceptance; competition; reliance on licensed products and third parties; supply, distribution, and inventory management; product quality and regulatory requirements; and the ability to fund growth and realize acquisition benefits.
- COVID-19 had negatively affected sales in certain markets during the second half of 2021; management said it did not believe restrictions on elective procedures materially affected the business in the first half of 2022. The pandemic’s future effects remain uncertain.
- Inventory obsolescence expense was $159,717 for the first half, versus $29,834 in 2021. Bad-debt expense was $195,000, versus $51,536. The company reported no material pending legal proceedings and no material changes to the risk factors in its 2021 Form 10-K.
- The company reported effective disclosure controls as of June 30, 2022 and no material quarter-on-quarter changes in internal control over financial reporting.
Important facts for investors to verify
- Whether revenue growth can continue while SG&A and R&D costs rise faster and losses widen.
- Cash consumption and the assumptions supporting management’s statement that liquidity is sufficient for at least 12 months, particularly after the Scendia acquisition.
- The sales concentration in CellerateRX and the terms, costs, and related-party governance of its sublicense.
- Precision Healing and Scendia earnout triggers, potential cash or share dilution, and final purchase accounting for Scendia.
- Progress, regulatory and commercial prospects, and potential impairment risk for acquired and internally developed technologies, including Precision Healing’s in-process R&D.