Sanara Medtech Inc. — Q3 2019 Form 10-Q
Business context and reporting period. This unaudited filing covers the quarter and nine months ended September 30, 2019. Sanara develops, markets, and distributes wound- and skin-care products. The Company’s name changed from Wound Management Technologies, Inc. in May 2019. In March 2019 it acquired the remaining 50% of Cellerate, LLC; the transaction was accounted for as a reverse merger and recapitalization. The filing cautions that successor and predecessor periods are not directly comparable. 2019 results also exclude the former registrant’s operations for January 1 through March 15, 2019; management estimates that omitted period included approximately $34,000 of revenue and $348,000 of expense.
Financial results and liquidity
- Revenue: Q3 revenue was $2.91 million, up 31% from $2.22 million in the comparable 2018 quarter. Nine-month revenue was $8.41 million, up 31% from $6.45 million on management’s combined comparison. Growth was attributed primarily to expansion of the sales force and distribution network. Q3 2019 revenue included $50,250 in royalties.
- Profit and margins: Q3 gross profit was $2.62 million (about 90.2% gross margin); operating loss was $797,219 and net loss was $843,233. For nine months, gross profit was $7.50 million (about 89.2% gross margin), operating loss was $1.28 million, and net loss was $1.36 million. The prior comparable periods were profitable, though comparisons are affected by the successor/predecessor basis and periods described above.
- Expenses: Nine-month SG&A increased to $8.65 million from $5.68 million in management’s comparison, primarily due to payroll and commissions from sales-force expansion and increased marketing. Cost of goods sold also increased, including inventory obsolescence charges.
- Cash flow: For the nine months, operating activities used $1.33 million and investing activities used $681,832, including the BIAKŌS license payment; financing provided $2.00 million from line-of-credit draws. Cash declined $15,710 to $160,711.
- Liquidity and debt: At September 30, current assets were $2.49 million and current liabilities were $4.15 million, a working-capital deficit of approximately $1.66 million. Debt included $2.00 million drawn on the bank line and a $1.50 million related-party convertible note; accrued interest on the note was $83,760. The $2.50 million revolving facility was secured by substantially all Cellerate assets and had a June 2020 maturity. The Company reported total shareholders’ deficit of $1.93 million.
Material changes, outlook, and risks
- On October 15, 2019, the Company completed a private placement of 1,204,820 shares at $8.30 per share, described as providing approximately $10 million in cash proceeds. On October 16 it repaid the full $2.00 million bank-line balance. The offering was purchased by entities related to three directors and approved by disinterested directors.
- In July 2019, Sanara paid Rochal Industries, a related party, $1.00 million for an exclusive license to specified antimicrobial products, with additional potential payments and royalties. A further Rochal license was signed October 1, 2019, including a $500,000 payment and contingent future payment and royalties.
- Management expects SG&A to decline as a percentage of revenue over the next two years as sales-force investments generate revenue. The Company planned to launch BIAKŌS Antimicrobial Barrier Film and CuraShield in Q2 2020. No quantitative earnings or revenue guidance was provided.
- The Company stated that additional capital may be needed and that failure to obtain funding could require changes to its business plan or curtail operations. The bank facility required at least $5 million of additional equity issuance by December 31, 2019; the subsequent $10 million placement appears to address this covenant, subject to verification of the facility terms and proceeds.
- Management concluded internal control over financial reporting was not effective as of September 30, 2019 because of the Company’s small size and limited segregation of duties. No outstanding legal proceedings were reported. The filing identifies related-party arrangements and the need for future funding as matters investors should monitor.
Important facts for investors to verify
- Reconcile the successor/predecessor reporting basis and the omitted January–March 2019 predecessor results when assessing growth and year-over-year performance.
- Confirm the net proceeds, share issuance, use of proceeds, and covenant compliance associated with the October private placement and repayment of the bank line.
- Review liquidity needs, operating cash use, and the terms and potential dilution from the related-party convertible note and preferred shares.
- Assess the economics, milestones, royalties, and related-party governance protections for the Rochal licenses and other supplier arrangements.
- Track sales-force productivity, product launches, inventory obsolescence, and progress in remediating the disclosed control weakness.