Sanara MedTech Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Financial statements are unaudited. Sanara develops and commercializes products and technologies for surgical and chronic wound and skin care.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $5.82 million | $4.31 million | $17.11 million | $10.80 million |
| Gross profit | $5.31 million | $3.86 million | $15.58 million | $9.67 million |
| Gross margin | 91.1% | 89.6% | 91.1% | 89.6% |
| Operating expenses | $7.16 million | $5.17 million | $19.55 million | $13.85 million |
| Operating loss | $1.85 million | $1.31 million | $3.96 million | $4.18 million |
| Net loss | $2.05 million | $1.21 million | $4.44 million | $4.18 million |
| Net loss per share, basic and diluted | $(0.27) | $(0.18) | $(0.60) | $(0.72) |
- Revenue mix: Nine-month surgical revenue was $16.36 million, wound-care revenue $603,453, and royalty revenue $150,750. All revenue was generated in the United States.
- Cash flow: For the first nine months, operating cash use was $3.03 million, investing cash use $3.79 million, and financing cash provided $28.74 million. Cash increased by $21.92 million to $22.37 million.
- Liquidity and debt: At September 30, cash was $22.37 million and current assets were $27.23 million versus current liabilities of $4.16 million. No balance was outstanding on the $2.5 million revolving credit facility. Operating lease liabilities totaled $482,856.
- Equity and investments: Total shareholders’ equity was $33.42 million. The company’s equity investments totaled $3.81 million, including a $1.23 million equity-method investment in Precision Healing.
Changes versus comparable periods
- Revenue rose 35% in Q3 and 58% year to date. Management attributed growth primarily to greater surgical-product penetration, sales-force additions, and expansion of its independent distribution network.
- Gross margin improved about 1.5 percentage points in both comparisons. Despite higher gross profit, Q3 net loss widened by about $840,000, primarily because SG&A rose $1.85 million and the company recorded a $193,843 share of Precision Healing’s losses.
- Year-to-date net loss increased about $259,000. Operating loss improved, but the $472,747 equity-method investment loss and other expense contributed to the higher net loss.
- SG&A increased year over year, reflecting sales-force expansion, higher commissions, operational support, and Rochal personnel added effective July 1. The company had 29 field sales managers at quarter-end, ten more than a year earlier.
- Cash increased substantially following a February 2021 public offering of 1.265 million shares, generating $28.9 million in net proceeds. Shares issued and outstanding rose from 6.30 million at December 31, 2020 to 7.63 million at September 30, 2021.
Outlook, risks and unusual items
- Management said existing cash, expected operating cash flows, and credit-facility availability should fund its growth strategy and anticipated expenses and capital spending for at least the next 12 months. Planned cash needs include sales-force expansion, product and technology development, clinical studies, working capital, and acquisitions. No formal revenue or earnings guidance was provided.
- Management reported that the Delta-variant surge negatively affected Q3 sales in Texas, the Northeast, and other markets. The duration and effects of COVID-19 remain uncertain; management expects most delayed surgical procedures ultimately to be performed, subject to geographic hotspots.
- The Rochal asset acquisition, effective July 1, had total purchase consideration of $1.16 million, including $496,100 cash and 14,369 shares. It added intellectual property and product-development capabilities, including four FDA 510(k) clearances. Rochal retained certain product licenses, and the agreement includes potential future payments tied to new products and grants.
- Related-party matters merit attention: Rochal is affiliated with the Executive Chairman and a company director; the company paid Rochal $496,100 and issued shares for the asset acquisition, and entered into a three-year consulting agreement with a director who chairs Rochal’s board. The company also accrued $756,951 in nine-month royalties under its CellerateRX sublicense, whose affiliate is associated with the Executive Chairman.
- The company disclosed that it will assume more responsibility for developing certain products and obtaining regulatory approvals, exposing it to FDA requirements, including applicable manufacturing and quality regulations. It cautioned that it may not comply successfully or commercialize products independently.
- The credit facility’s covenants were amended: through year-end 2021, minimum tangible net worth is $10 million and minimum cash is $3 million. The company reported compliance at September 30. The minimum interest-coverage covenant begins in March 2022.
- No material pending legal proceedings, off-balance-sheet arrangements, or material changes to other reported risk factors were disclosed. Management judged disclosure controls effective as of September 30, 2021.
Important facts for investors to verify
- Whether revenue growth and high gross margins persist, particularly given Q3 COVID-related disruption and the reliance on surgical-product sales.
- Whether expanding sales and operating costs can translate into improved profitability and operating cash flow.
- The performance, carrying values, and strategic benefits of Precision Healing, Pixalere, and other investments; Precision Healing generated a $472,747 year-to-date equity-method loss.
- The economics, regulatory status, potential future obligations, and related-party terms associated with Rochal assets, licenses, royalties, and consulting arrangements.
- Liquidity and covenant compliance as cash is deployed for growth, and the timing and cost of product development, clinical work, and regulatory approvals.