Sanara Medtech Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The company develops, markets and distributes wound- and skin-care products for surgical and post-acute care markets. Its 2019 results are not fully comparable with 2018: following the March 15, 2019 acquisition of the remaining interest in Cellerate, LLC, the 2019 statements include Cellerate for the full year, while other operations are included for different portions of the year. The company also notes that about $34,000 of predecessor revenue and $348,000 of predecessor expenses for January 1–March 15, 2019 are excluded from reported 2019 results.
Financial performance and position
| Metric | 2019 | Prior comparable period / context |
|---|---|---|
| Revenue | $11.77 million | $8.78 million for combined 2018 periods; up 34% |
| Gross profit and margin | $10.56 million; approximately 89.7% | 2018 gross profit $7.93 million on combined periods |
| Operating expenses | $13.30 million | $7.72 million in combined 2018 periods; increase mainly reflected sales-force expansion, commissions and marketing |
| Operating loss | $2.74 million | 2018 combined operating income was approximately $212,000 |
| Net loss attributable to Sanara | $2.81 million; $1.32 per share | 2018 combined periods reported net income attributable to Sanara of approximately $176,000 |
| Cash from operations | Used $2.17 million | Provided $517,079 in combined 2018 periods |
| Cash from investing | Used $1.20 million | Used $27,770 in combined 2018 periods; 2019 spending primarily included product licenses |
| Cash from financing | Provided $9.80 million | No financing cash flow in combined 2018 periods; 2019 included approximately $10 million from an equity placement |
| Cash and current assets | $6.61 million cash; $8.86 million current assets | Cash was $176,421 at December 31, 2018 |
| Debt and liquidity | No line-of-credit balance at year-end; $1.50 million related-party convertible note and $103,557 accrued interest | The $2.20 million revolver balance was repaid in October 2019; facility maximum was $2.50 million and matured June 2020 |
Current liabilities were $2.64 million and total liabilities were $4.72 million at year-end. The balance sheet reported $6.39 million in total equity. Management said cash, expected operating cash flows and available revolving credit were expected to fund operations for at least 12 months. No cash dividends have been paid, and none were planned in the foreseeable future.
Material developments and management outlook
- Revenue growth reflected expansion of the sales force and independent distribution network. The field sales organization more than doubled, from eight to eighteen. Management expected new representatives to take six to twelve months to generate significant revenue and anticipated SG&A to decline as a percentage of revenue over the next two years as sales ramped.
- The company launched PULSAR II advanced wound irrigation, BIAKŌS antimicrobial cleanser and HYCOL hydrolyzed collagen during 2019. First sales of the cleanser occurred in July. It paid $1.5 million for worldwide rights to products developed by Rochal Industries.
- Management reported FDA clearance of BIAKŌS antimicrobial wound gel in the first quarter of 2020 and expected a 2020 launch; it also expected to introduce BIAKŌS antimicrobial barrier film later in 2020. These are expectations, not reported results.
- The October 2019 private placement issued 1,204,820 shares at $8.30 per share for $10 million. Purchasers were related-party entities associated with three directors; the company said disinterested directors approved the transaction and an independent valuation informed pricing.
- COVID-19 had moderately affected the business by the filing date. Management expected revenue pressure because elective surgeries were delayed, and said it was cutting costs and managing cash flow. It suggested postponed procedures might later lead to higher orders, but the duration and severity of the effect were uncertain.
- On February 7, 2020, Catalyst converted its note and Series F preferred stock into 2,452,731 common shares. Catalyst then controlled 56.7% of outstanding common shares, according to the filing.
Risks, contingencies and controls
- Despite strong revenue growth, the company remained loss-making and used cash in operations. Continued growth depends on market adoption and on controlling expenses while expanding sales and clinical programs.
- Management identified risks from competition, product acceptance, regulatory clearances, reimbursement changes, product liability, intellectual-property claims, distribution partners and access to future capital. One customer represented approximately 10% of 2019 sales; one customer represented 10% of year-end receivables. A single vendor supplied raw materials for the principal product.
- Related-party ties are material: Rochal, whose directors and significant shareholders included Sanara directors, received $1.66 million from Sanara in 2019, including $1.5 million for product licenses. License agreements include royalties and potential milestone payments.
- The company disclosed no outstanding legal proceedings and no off-balance-sheet arrangements. Its CellerateRX sublicense includes minimum royalties of $400,000 annually for the first five years.
- Management concluded disclosure controls and internal control over financial reporting were not effective at December 31, 2019, citing the company’s small size and limited segregation of duties. Management was evaluating steps to address the material weakness; the auditor did not attest to internal-control effectiveness.
Key facts for investors to verify
- Reconcile reported 2019 performance with the accounting-period differences, reverse-merger accounting and predecessor results excluded from the year’s statements.
- Track whether the expanded sales force and new products convert into revenue and whether operating expenses and operating cash use improve as management expected.
- Review cash needs, revolver availability and maturity, the related-party note’s subsequent conversion, and any remaining license payments or royalty obligations.
- Assess the terms, pricing and governance oversight of Rochal-related transactions and the control implications of Catalyst’s majority ownership.
- Monitor COVID-19 effects on elective procedures, FDA and commercialization milestones, reimbursement, and remediation of the disclosed controls weakness.