Sanara MedTech Inc. — Q3 2020 Form 10-Q
Business context and period. This unaudited quarterly report covers the three and nine months ended September 30, 2020. Sanara develops, markets and distributes wound- and skin-care products, primarily in North American surgical and advanced wound-care markets. The filing was signed November 13, 2020.
Financial performance and position
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $4.31 million | $2.91 million | $10.80 million | $8.41 million |
| Gross profit / margin | $3.86 million / 89.6% | $2.62 million / 90.2% | $9.67 million / 89.6% | $7.50 million / 89.2% |
| Operating expenses | $5.17 million | $3.42 million | $13.85 million | $8.78 million |
| Operating loss | $(1.31) million | $(0.80) million | $(4.18) million | $(1.28) million |
| Net loss | $(1.21) million | $(0.84) million | $(4.18) million | $(1.36) million |
| Net loss attributable to common shareholders | $(1.15) million | $(0.84) million | $(4.11) million | $(1.35) million |
| Basic and diluted loss per share | $(0.18) | $(0.35) | $(0.72) | $(0.78) |
- Management reported record quarterly revenue, up 48% year over year; nine-month revenue increased 28%. Product sales were $10.65 million and royalty revenue was $151,000 for the nine months.
- SG&A was $5.08 million in Q3 and $13.61 million for nine months, versus $3.32 million and $8.65 million in the comparable 2019 periods. The increases primarily reflected sales-force expansion, commissions, corporate support and investment in the broader wound- and skin-care strategy.
- At September 30, cash was $2.12 million, down from $6.61 million at December 31, 2019. Current assets were $5.28 million and current liabilities $3.09 million, giving working capital of about $2.19 million. Total assets were $9.65 million and total liabilities $4.09 million.
- For the first nine months, operating cash use was $3.44 million, investing cash use was $1.66 million and financing provided $609,000. Cash declined by $4.49 million.
- Debt included a $583,000 Paycheck Protection Program loan, plus $2,559 accrued interest. The loan bears 1% interest, with payments scheduled to begin in May 2021; the company applied for full forgiveness. Operating lease liabilities totaled $512,000. The prior revolving credit facility matured in June 2020 and had no balance reported at quarter-end.
- Weighted-average common shares outstanding were 6.23 million in Q3 and 5.73 million for the nine months. At quarter-end, 6.28 million shares were outstanding; Catalyst and affiliates controlled 54.4% of those shares following conversion of preferred stock and related-party debt in February 2020.
Material changes and unusual items
- Revenue rebounded as elective-surgery restrictions eased; Q3 revenue was $1.3 million above Q2 2020. The company said the quarter returned to pre-pandemic sales levels.
- Net losses widened as SG&A growth exceeded revenue growth. Management attributed the higher spending to deliberate investments in sales capacity, operating support and telehealth-related capabilities.
- Inventory obsolescence expense rose to $259,000 for the nine months from $88,000 in 2019; the inventory obsolescence allowance was $231,000 at September 30.
- Intangible assets increased to $3.16 million, including a $500,000 FDA-clearance milestone payment for BIAKŌS wound gel and license-related payments. The company also invested $500,000 for a 2.9% interest in Direct Dermatology, receiving exclusive technology-use rights in specified care settings.
- Share-based compensation was $873,000 for the nine months, with $1.54 million of unrecognized expense expected to be recognized over a weighted-average 1.9 years.
Outlook, risks and contingencies
- Management expects SG&A as a percentage of revenue to decline over the next two years as newer sales representatives begin contributing meaningfully; new representatives generally take six to twelve months to generate significant revenue. No specific revenue or earnings guidance was provided.
- COVID-19 caused a substantial reduction in surgical-product demand beginning in March 2020 and a second-quarter sales decline. Management cautioned that renewed restrictions could again cause monthly sales volatility. The company reported no material COVID-related adjustment to estimates or impairment through September 30.
- The company had applied for forgiveness of the full PPP loan but noted forgiveness was not assured pending lender and Small Business Administration determinations. It may seek additional equity or debt financing; management said insufficient funding could require changes to planned expansion.
- License obligations include CellerateRX royalties and minimum royalties under certain Rochal agreements. The BIAKŌS, barrier-film and debrider arrangements include future payments, sales royalties and, in some cases, profit-based royalties. The debrider license includes potential payments of $600,000 at a manufacturing milestone and additional payments following FDA clearance. These agreements are with Rochal, a related party; the filing identifies company directors’ relationships with Rochal.
- A Sanara Pulsar arrangement may require payments to Wound Care Solutions if specified annual net-income allocations are not met, including a $200,000 target for 2020 that rises 10% annually through 2024.
- After quarter-end, UWSS agreed to invest $600,000 in Precision Healing and an additional $600,000 in February 2021, subject to milestone-based conversion terms. The arrangement also provides an exclusive, perpetual U.S. license for certain virtual wound- and skin-care assessment technology.
- The company reported no material pending legal proceedings, no off-balance-sheet arrangements, and effective disclosure controls as of September 30, 2020.
Important facts for investors to verify
- Whether PPP loan forgiveness was approved and how the resulting obligation affects liquidity.
- Cash runway and funding needs in light of operating cash use, planned investments, license milestones and the additional Precision Healing investment.
- Whether sales growth from the expanded sales force and new products can absorb higher SG&A and improve operating performance.
- COVID-19 exposure to elective-surgery volumes and access to post-acute-care customers, including the effect of any renewed restrictions.
- Terms, related-party governance and potential cash or equity costs of Rochal licenses and the Wound Care Solutions income-support arrangement.
- Potential dilution from equity compensation and future financing; also note Catalyst and affiliates’ reported 54.4% voting control at quarter-end.