Sanara MedTech Inc. — Form 10-Q summary
Reporting period: Quarter and six months ended June 30, 2019; filed August 14, 2019. Amounts are in U.S. dollars. Sanara develops and sells wound- and skin-care products, including CellerateRX, HYCOL, BIAKŌS and PULSAR II.
Comparability caveat: The March 2019 Cellerate acquisition was accounted for as a reverse merger and recapitalization. The 2019 “Successor” results include Cellerate for the full period, but include legacy Sanara only from March 16 and Sanara Pulsar from May 9. The 2018 “Predecessor” results reflect the former Sanara business and exclude Cellerate. The filing cautions that the periods are not directly comparable. The 2019 six-month results also omit legacy Sanara’s January 1–March 15 results, which management estimates included about $34,000 of revenue and $348,000 of expenses.
Financial performance
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | 2019: $3.02 million; 2018: $2.26 million, up 33% | 2019: $5.50 million; 2018: $4.22 million, up 30% |
| Gross profit / margin | 2019: $2.68 million / 88.9%; 2018: $2.10 million / 93.0% | 2019: $4.88 million / 88.7%; 2018: $3.85 million / 91.3% |
| Operating income (loss) | 2019: $(323,130); 2018: $30,980 | 2019: $(480,277); 2018: $97,688 |
| Net income (loss) | 2019: $(352,471); 2018: $31,173 | 2019: $(515,043); 2018: $37,382 |
| Net income (loss) attributable to common shareholders | 2019: $(351,417); 2018: $31,173 | 2019: $(513,989); 2018: $(93,876), including 2018 preferred-stock dividends |
Revenue growth was attributed primarily to expansion of the sales force and independent distribution network. SG&A rose to $2.98 million in Q2 and $5.33 million for the six months, driven by sales commissions, hiring and sales-support and promotional initiatives. Cost of goods sold also increased with volume, minimum royalty accruals and inventory-obsolescence charges. The six-month period included $85,838 of inventory-obsolescence expense; the June 30 inventory reserve was $81,196.
Cash flow: Six-month operating cash use was $1.24 million, versus $2,089 of cash provided in the 2018 predecessor period. Investing activities provided $482,306, including $508,973 of cash received in the reverse acquisition; financing provided $1.00 million from line-of-credit draws. Cash increased from $176,421 at year-end to $419,163 at June 30.
Liquidity and debt: At June 30, current assets were $3.19 million and current liabilities were $2.90 million, or working capital of approximately $298,000. The company had $1.00 million outstanding on its bank line of credit and $1.50 million of related-party convertible notes, plus $64,208 of accrued related-party interest. The notes bear 5% annual interest, compounded quarterly, and are convertible at the holder’s option. Operating lease liabilities totaled $204,651. Total liabilities were $4.57 million, compared with total assets of $3.48 million; shareholders’ deficit was $1.09 million.
Material developments, outlook and risks
- In March 2019, Sanara acquired Catalyst’s 50% interest in Cellerate, LLC for 1,136,815 Series F preferred shares. Each share is convertible into two common shares and carries voting rights tied to that conversion amount. The acquisition was treated as a reverse merger and recapitalization; the filing reports an approximately $12.5 million fair value for the preferred shares issued.
- In June, the Cadence Bank revolving facility was increased from $1.0 million to $2.5 million and its maturity extended to June 19, 2020. It is secured by company assets and bears interest at prime plus 0.75% (6.25% at June 30). A covenant requires a $5.0 million equity investment by December 31, 2019. Sanara drew another $700,000 in July to fund the initial BIAKŌS license payment.
- After quarter-end, Sanara entered an exclusive worldwide BIAKŌS license agreement with Rochal Industries. Terms include a $1.0 million payment, a further $500,000 upon specified FDA clearance, and a possible $1.5 million payment subject to financing conditions. Royalties and minimum annual payments also apply. A Sanara director and indirect principal shareholder was also a Rochal director and significant shareholder, creating a related-party consideration.
- Sanara Pulsar, formed in May and 60%-owned by Cellerate, is the exclusive U.S. distributor of certain Wound Care Solutions products. Management expected first sales in Q3 2019. The agreement includes advances to the 40% member and minimum net-income provisions that could require payments by Cellerate.
- Management said it was investing in sales-force expansion and product pipeline growth. No specific financial guidance was provided. The filing warns that additional financing may be needed and that inability to obtain funding could require changes to the business plan, curtailment of operations or cessation of operations.
- Management identified a material weakness in internal control over financial reporting due to the company’s small size and limited segregation of duties; it was evaluating steps to address it. No outstanding legal proceedings were reported, and the company reported no off-balance-sheet arrangements.
- First sales of BIAKŌS Antimicrobial Skin and Wound Cleanser occurred in July 2019. The company also amended its office lease after quarter-end, extending the term through June 2024.
Important facts for investors to verify
- How much of reported revenue growth reflects organic growth, given the reverse-merger accounting and differences in entities and periods included?
- Whether Sanara completed the required $5.0 million equity investment by December 31, 2019, and the resulting effect on liquidity and dilution.
- Subsequent line-of-credit borrowings, remaining availability, covenant compliance and the ability to fund operating cash needs.
- Actual sales, regulatory status and commercial performance of BIAKŌS and Sanara Pulsar, and the cash obligations and royalties under their agreements.
- Progress in remediating the material weakness in internal controls, and developments in receivables, inventory reserves and margins.