Sanara MedTech Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Unaudited consolidated results. Sanara develops and commercializes medical technologies for surgical, chronic wound and skincare markets.
Financial performance and position
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net revenue | $15.75 million | $9.67 million | $31.28 million | $17.48 million |
| Gross profit | $13.57 million | $8.71 million | $26.96 million | $15.72 million |
| Gross margin | 86% | 90% | 86% | 90% |
| Operating loss | $1.87 million | $3.38 million | $3.08 million | $6.16 million |
| Net income (loss) | $(1.87) million | $0.76 million | $(3.08) million | $(2.40) million |
| Net income (loss) attributable to Sanara shareholders | $(1.83) million | $0.77 million | $(3.01) million | $(2.36) million |
- Revenue increased 63% in Q2 and 79% in the first half. Growth reflected greater market penetration and geographic reach, expanded independent distribution, and Scendia sales of $3.0 million in Q2 and $6.2 million in the first half.
- Soft tissue repair products generated $13.25 million in Q2 and $26.12 million in the first half; bone fusion products contributed $2.45 million and $5.05 million, respectively. CellerateRX Surgical made up the substantial majority of sales.
- Lower gross margin year over year was attributed primarily to lower margins on certain Scendia products. SG&A rose to $13.81 million in Q2 and $26.78 million in the first half, principally from sales commissions and sales and marketing costs. R&D was $1.18 million and $2.49 million, respectively.
- Operating results included a noncash benefit from lower estimated earnout liabilities: $0.36 million in Q2 and $0.81 million for the first half. The first half of 2022 included a $4.14 million income-tax benefit tied to deferred tax liabilities from the Precision Healing merger; this did not recur in 2023.
- Six-month operating cash use was $3.46 million, compared with $3.27 million in 2022. Investing cash use was $0.04 million versus $2.38 million, while financing provided $0.60 million, including $1.03 million net proceeds from equity sales.
- At June 30, cash was $6.06 million, current assets $18.18 million, current liabilities $9.88 million, and total liabilities $17.31 million. Current liabilities included $6.60 million of accrued royalties, expenses, bonuses and commissions. The balance sheet reported $6.35 million of earnout liabilities and $2.05 million of operating lease liabilities; it showed no term-loan debt at quarter-end. Working capital was approximately $8.30 million.
- Shares outstanding at June 30 were 8,439,745; 8,521,872 were reported outstanding as of August 14, 2023.
Material developments, outlook and risks
- Applied asset purchase after quarter-end: On August 1, 2023, the Company acquired assets including rights to manufacture and sell CellerateRX Surgical and HYCOL for $15.25 million upfront: $9.75 million cash, $3.0 million in stock and $2.5 million in installments over four anniversaries. Sellers may receive up to an additional $10 million based on product collections. The purchase transfers manufacturing control to Sanara; the filing cautions that failure to maintain or replace the sellers’ process could jeopardize sales.
- New borrowing: The acquisition was partly funded by a $9.75 million advance under a new Cadence Bank term loan of up to $12 million. The loan bears interest at one-month Term SOFR plus 3%, subject to a maximum rate, is secured by substantially all SMAT assets and guaranteed by Sanara. Principal amortization begins August 2024; maturity is August 2028. Financial covenants, restrictions on cash transfers and other operating limits apply; Sanara may have to contribute cash to SMAT if it fails covenant tests.
- The Company said existing cash, expected operating cash flows and loan proceeds were expected to fund operations and planned expenditures for at least 12 months. This outlook is subject to execution, revenue and liquidity risks; no specific revenue or earnings guidance was provided.
- Management reported ALLOCYTE supply constraints from donor-tissue screening that had prevented fulfillment of some orders since late 2022, negatively affecting sales; it anticipated resolution in the second half of 2023. The Company also reported submitting a 510(k) notification for the Precision Healing diagnostic imager in Q1 and planned an LFA submission in 2023.
- Other stated risks include acquisition integration and realizing anticipated benefits, product acceptance and competition, supply and inventory management, product development and regulatory matters, and dependence on licensed products. The filing reported no material pending legal proceedings and no material changes to other previously disclosed risk factors.
- Related-party matters include royalties on CellerateRX sales under a sublicense associated with the Executive Chairman’s Catalyst affiliation, licenses and consulting involving Rochal and Company directors, and $72,986 of first-half expenses under a Catalyst advisory agreement. The Applied purchase subsequently changed the CellerateRX/HYCOL arrangement by assigning the license to a Company subsidiary.
Most important facts for investors to verify
- Whether the anticipated ALLOCYTE supply recovery occurred and how supply availability affected subsequent sales.
- Post-acquisition CellerateRX/HYCOL manufacturing continuity, integration costs, product margins and realized benefits of the Applied purchase.
- Term-loan balance, interest expense, covenant compliance and the potential need for parent cash contributions or equity financing.
- Performance and possible cash or share dilution from earnouts: the Scendia agreement allows up to $10 million, with a first payment of approximately $693,000 made in August 2023 and a second expected in Q3 2024; other acquisition earnouts also remain possible.
- Progress on FDA submissions and product commercialization, and the impact of related-party fees, royalties and other contractual obligations.