Sanara MedTech, a Fort Worth, Texas-based medical technology company, boasts a compelling narrative: record-breaking revenue quarters, innovative wound care products, and a promising value-based care strategy. Their recent earnings calls paint a picture of relentless growth and a bright future. But lurking beneath the surface, a disquieting trend emerges—one that might be giving even the most seasoned Wall Street analysts pause.

While revenue climbed an impressive 19% year-over-year in the first quarter of 2024, reaching $18.5 million, a closer look at the financial statements reveals a potential phantom gnawing at the company's bottom line. Sanara experienced a net loss of $1.8 million for the quarter, despite achieving positive adjusted EBITDA of $300,000. This financial disparity raises a critical question: is Sanara MedTech's growth fueled by a potentially unsustainable level of spending?

The most striking evidence for this hypothesis lies in the dramatic increase in SG&A (Selling, General, and Administrative) expenses. In the first quarter of 2024, these expenses reached $16.2 million, compared to $13 million during the same period in 2023. This 25% increase, outpacing even the company's robust revenue growth, suggests that Sanara is aggressively investing in its sales force and operational infrastructure. While such investment is understandable in a growth-oriented company, the question remains: at what cost?

Digging deeper, we see that direct sales and marketing expenses accounted for a staggering 69% of the SG&A increase, primarily driven by a surge in sales commissions. This figure raises concerns about the efficiency of Sanara's sales force and the long-term viability of their commission structure. Are they paying a premium to drive sales, potentially sacrificing profitability for short-term gains?

The company's leadership, now under the seasoned guidance of Executive Chairman Ron Nixon, acknowledges the need for profitability. They've emphasized that Sanara is "not a revenue play" and are "striving to seek profitability." However, their actions might tell a different story.

Sanara recently secured a $15 million loan with CRG, a move they describe as "non-dilutive to equity holders" and providing "flexibility in the event of a transaction." While this could be interpreted as a prudent step to shore up their cash position and pursue strategic acquisitions, it also raises questions about their internal cash flow generation.

Moreover, their ambitious "Tissue Health Plus" (THP) value-based care strategy, while promising, requires substantial investment. Nixon acknowledged that Sanara is currently seeking partners to "share the development cost of our strategy," which has already cost the company $5.2 million in operating expenses in 2023 alone. This quest for partnerships signals a potential cash drain and highlights the significant financial burden of THP development.

Revenue vs. SG&A Expenses

The following chart compares Sanara MedTech's revenue growth to the increase in SG&A expenses, highlighting the disparity between the two.

Sanara's situation isn't unique. Many high-growth companies prioritize revenue expansion over immediate profitability, betting on future market dominance. But sustained high spending, particularly in SG&A, can quickly erode investor confidence if not accompanied by a clear path to profitability.

The ghost of unsustainable spending, therefore, haunts Sanara MedTech's otherwise impressive growth story. The company's leadership must carefully balance their growth ambitions with prudent financial management, ensuring that their spending doesn't eclipse their potential for long-term profitability. Wall Street will be watching closely, and only time will tell if Sanara can exorcise this financial phantom and solidify its position as a truly profitable medical technology powerhouse.

"Key Highlights"

"Record Revenue: Sanara MedTech achieved its 10th consecutive record revenue quarter in Q1 2024, reaching $18.5 million."

"Net Loss Despite Positive EBITDA: The company experienced a net loss of $1.8 million in Q1 2024, despite achieving positive adjusted EBITDA of $300,000."

"Soaring SG&A Expenses: SG&A expenses increased by 25% year-over-year, reaching $16.2 million in Q1 2024."

"High Sales Commissions: Direct sales and marketing expenses, primarily sales commissions, accounted for 69% of the SG&A increase."

"New Loan Facility: Sanara secured a $15 million loan with CRG, raising questions about internal cash flow generation."

"Seeking Partnerships for THP: The company is actively seeking partners to share the development costs of its Tissue Health Plus strategy, which has already cost $5.2 million in 2023."

"Fun Fact: The term "ghost in the machine" was coined by philosopher Gilbert Ryle to criticize the idea of a mind-body dualism, suggesting that mental processes are not separate from physical processes. In the context of Sanara MedTech, the "ghost" represents the potential for unsustainable spending practices to haunt their financial performance, despite seemingly robust growth."