Sanara MedTech Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020; filed August 13, 2020. Sanara develops, markets, and distributes wound- and skin-care products, including CellerateRX, HYCOL, BIAKŌS, and PULSAR II. All reported revenue was generated in the United States.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $2.97 million | $3.02 million | $6.49 million | $5.50 million |
| Gross profit | $2.62 million | $2.68 million | $5.81 million | $4.88 million |
| Gross margin | 88.2% | 88.9% | 89.5% | 88.7% |
| Operating expenses | $3.70 million | $3.01 million | $8.69 million | $5.36 million |
| Operating loss | $1.08 million | $0.32 million | $2.88 million | $0.48 million |
| Net loss | $1.13 million | $0.35 million | $2.97 million | $0.52 million |
| Loss per share | $0.18 | $0.15 | $0.54 | $0.37 |
- Q2 revenue declined 2% year over year, while first-half revenue rose 18%. First-half product sales were $6.39 million and royalty revenue was $100,500.
- First-half operating cash outflow was $2.73 million, versus $1.24 million in 2019. Investing activities used $1.16 million; financing provided $583,000, from the Paycheck Protection Program (PPP) loan.
- Cash fell to $3.31 million at June 30 from $6.61 million at December 31, 2019. Current assets were $6.11 million and current liabilities $3.59 million. Total assets were $10.09 million and total liabilities $4.48 million.
- The PPP loan had $583,000 principal outstanding, at 1% interest, with payments scheduled to begin November 2020; forgiveness was not yet established. The prior $1.5 million related-party convertible note and accrued interest were converted to common stock in February 2020. The former revolving credit facility matured June 19, 2020; the company reported no balance and was considering financing alternatives.
Material changes versus prior period
- SG&A rose to $8.53 million in the first half from $5.33 million, principally due to sales-force expansion, operational support, and commissions. The field sales organization grew from nine in June 2019 to 21 in June 2020.
- Despite higher first-half revenue and gross profit, the larger cost base drove the first-half net loss to $2.97 million from $515,043. Q2 net loss was $1.13 million versus $352,471.
- Common shares outstanding increased from 3.57 million at year-end to 6.20 million at June 30. The increase included conversion of preferred shares and related-party debt into common stock. Catalyst and affiliates controlled 55.1% of outstanding shares after conversion.
- Intangible assets rose to $3.23 million from $1.47 million, reflecting product-license additions and milestone payments. The company paid Rochal $600,000 in cash for a debrider license and recorded a further $750,000 payable in stock; it also paid a $500,000 BIAKŌS wound-gel clearance milestone.
Outlook, risks, and notable items
- COVID-19 restrictions on elective procedures and facility access reduced demand, particularly from mid-March. Management reported a rebound during Q2 as restrictions eased and virtual training expanded; monthly product sales rose from approximately $0.60 million in April to $1.46 million in June, a company record.
- Management cautioned that renewed restrictions could cause monthly sales volatility. It expected most postponed surgeries eventually to occur, but provided no quantified revenue or earnings guidance. Management expected SG&A as a percentage of revenue to decline over the next two years as newer sales representatives contribute more revenue.
- The company reduced payroll, consulting, travel, and discretionary spending and said it would continue adjusting expenditures. It believed the PPP loan would be fully forgiven and noted it might seek additional equity or debt financing; inability to obtain funding could require changes to planned operations.
- License agreements entail continuing royalties and potential milestone or contingent payments. The debrider agreement includes additional payments tied to manufacturing and FDA clearance, plus sales- and profit-based royalties. Rochal is a related party: the executive chairman is a Rochal director and significant indirect shareholder, and another Sanara director is also a Rochal director and significant shareholder.
- The company reported no impairment charges or outstanding legal proceedings. It said COVID-19 had not materially affected its estimates as of June 30, while acknowledging future effects remained uncertain.
- Management reported disclosure controls were effective and said a previously identified material weakness in internal control over financial reporting had been remediated after documentation and hiring an accounting professional.
Investor verification points
- Track sales and margins as elective procedures, facility access, and COVID-19 restrictions change; assess whether June’s rebound persisted.
- Monitor operating cash burn, cash balances, financing needs, and the status and terms of PPP forgiveness and any replacement credit facility.
- Verify execution and commercial contribution of the expanded sales force against higher SG&A, and review dilution from equity compensation and related-party conversions.
- Review Rochal-related license obligations, related-party approvals, stock issuance for the $750,000 payment, and future contingent milestones and royalties.
- Confirm sustained remediation of internal-control weaknesses and monitor receivables and inventory reserves, which increased during the period.