Sanara MedTech Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. The company develops and commercializes wound- and skin-care medical technologies and products for acute and post-acute settings. Results are unaudited.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net revenue | $13.04 million | $5.82 million | $30.53 million | $17.11 million |
| Gross profit | $10.82 million | $5.31 million | $26.53 million | $15.58 million |
| Gross margin | 82.9%* | 91.1%* | 86.9% | 91.1% |
| Operating expenses | $13.94 million | $7.16 million | $35.76 million | $19.55 million |
| Operating loss | $3.12 million | $1.85 million | $9.22 million | $3.96 million |
| Net loss | $1.53 million | $2.05 million | $3.93 million | $4.44 million |
| Net loss attributable to Sanara shareholders | $1.47 million | $2.02 million | $3.83 million | $4.37 million |
| Loss per share, basic and diluted | $0.18 | $0.27 | $0.49 | $0.60 |
*Approximate, calculated from reported revenue and gross profit. Management reported nine-month gross margins of approximately 87% and 91%, respectively.
- Q3 revenue increased 124% year over year; nine-month revenue increased 78%. Q3 2022 included $3.04 million of Scendia revenue following its July acquisition. Management also cited increased surgical wound-care sales, market penetration, geographic expansion, and distribution-network growth.
- Lower gross margin reflected lower margins on Scendia products. Nine-month cost of goods sold rose to $3.99 million from $1.53 million, including increased sales volume and acquired Scendia costs.
- Nine-month SG&A rose to $31.87 million from $18.89 million, driven primarily by sales and marketing costs, including higher commissions and sales-force expansion, as well as increased travel, equity compensation, and payroll. Q3 SG&A included approximately $1.5 million of Scendia operating costs.
- Nine-month R&D was $2.33 million versus $0.26 million; approximately $1.7 million related to Precision Healing’s wound-assessment technology. Higher depreciation and amortization reflected acquired intangible assets.
- The nine-month net loss improved year over year, but the loss before taxes increased to $9.77 million from $4.44 million. A $5.84 million income-tax benefit, driven by reduced valuation allowance after acquisition-related deferred tax liabilities were recorded, substantially reduced the reported net loss.
Cash flow, liquidity, and debt
- Cash was $10.29 million at September 30, 2022, down from $18.65 million at December 31, 2021. Current assets were $20.57 million and current liabilities $9.21 million.
- For the first nine months, operating cash use was $4.91 million versus $3.03 million in 2021; investing cash use was $3.13 million versus $3.79 million. Financing used $0.32 million, compared with $28.74 million provided in 2021, when the company completed a public offering.
- The company reported no outstanding borrowings at quarter-end. Its $2.5 million Cadence revolving credit facility was terminated in March 2022, with no principal, interest, or fees owed upon termination.
- Management said cash on hand, combined with expected operating cash flows, should fund its growth strategy and anticipated operating expenses and capital expenditures for at least the next 12 months. The filing provides no numerical revenue or earnings guidance.
Material changes, transactions, and risks
- Scendia: Acquired in July for reported purchase consideration of approximately $10.27 million in the purchase accounting schedule, including $1.24 million cash, $6.03 million stock, and $3.0 million estimated contingent consideration. The agreement permits up to $10 million of additional earnouts over two years, payable in cash or shares subject to performance thresholds. Purchase accounting remained preliminary. The company recognized $3.28 million of goodwill and $7.16 million of customer-relationship intangibles.
- Precision Healing: Acquired in April; its diagnostic imager and smart pad remain in development and had generated no revenue. The merger includes up to $10 million of contingent earnout consideration. The company reported a $7.06 million long-term earnout liability at September 30.
- Acquisition consideration and equity compensation increased share count: 8,303,729 shares were issued and outstanding at September 30, compared with 7,676,662 at December 31, 2021.
- The company revised previously issued second-quarter 2022 interim financial information for acquisition-accounting errors it deemed immaterial to those statements as a whole. Changes included deferred taxes and reclassification of acquired intellectual property; the filing reports a $4.01 million increase to second-quarter net income versus the prior presentation.
- Risk factors include achieving forecast revenue growth and acquisition synergies, funding capital needs, product acceptance and development, competition, distribution and supply disruptions, inventory management, reliance on third-party licensed products and intellectual property, regulation and reimbursement, and potential impairment of goodwill and intangible assets. CellerateRX products comprised the majority of sales in 2021 and the first nine months of 2022; the related sublicense is with an affiliate of the Executive Chairman’s firm.
- The filing reports related-party arrangements involving Rochal, Catalyst/CGI Cellerate RX, and a consulting agreement with a company director. No material pending legal proceedings were reported. Management concluded disclosure controls were effective and reported no material control changes during the quarter.
Important facts for investors to verify
- How much revenue growth is organic versus acquired, and whether Scendia’s lower margins persist or improve.
- Cash burn, working-capital needs, and the assumptions supporting management’s at-least-12-month liquidity assessment.
- Performance conditions, potential cash-versus-stock settlement, and dilution exposure from both acquisition earnouts and equity awards.
- Progress, commercialization timing, and funding needs for Precision Healing and the wider product-development pipeline.
- Acquisition purchase-accounting adjustments, intangible-asset amortization, and possible goodwill or intangible impairment.
- Terms and economics of related-party licenses and agreements, including the CellerateRX royalty structure and Rochal arrangements.