Sanara Medtech Inc. — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; filed March 30, 2021. The filing is an annual report, not a standalone fourth-quarter report. Dollar figures are U.S. dollars.
Business context and reporting period
Sanara is a medical technology company focused on surgical and chronic wound and skin care products. It markets seven products, with substantially all product revenue from surgical wound care. During 2020, it formed United Wound and Skin Solutions (UWSS) to develop wound and skin telehealth, electronic medical record, and diagnostic services. The business relies on third-party product licenses and contract manufacturers.
Financial results and liquidity
| Metric | 2020 | 2019 |
|---|---|---|
| Revenue | $15.59 million | $11.77 million |
| Gross profit | $13.97 million | $10.56 million |
| Gross margin | 89.6% | 89.7% |
| Operating expenses | $19.00 million | $13.30 million |
| Operating loss | $(5.03) million | $(2.74) million |
| Net loss | $(4.45) million | $(2.84) million |
| Net loss attributable to common shareholders | $(4.36) million | $(2.81) million |
| Basic and diluted loss per share | $(0.76) | $(1.32) |
| Net cash used in operating activities | $(4.03) million | $(2.17) million |
| Net cash used in investing activities | $(2.74) million | $(1.20) million |
| Net cash provided by financing activities | $0.62 million | $9.80 million |
Revenue rose 32%. Surgical revenue increased to $14.46 million from $10.60 million, while wound-care revenue declined to $0.92 million from $1.01 million. Royalty revenue was $0.20 million. Operating expenses grew 43%, primarily from sales-force expansion, commissions, operational support, and investments in the broader wound-care strategy. The operating loss therefore widened despite higher sales. The 2020 net loss included $586,174 of PPP loan forgiveness income; the fourth-quarter net loss was $266,453, and quarterly revenue was $4.79 million, up 43% year over year and a company record.
Cash was $455,366 at year-end, down from $6.61 million. Current assets were $4.48 million and current liabilities $3.54 million. Total assets were $9.83 million, total liabilities $3.99 million, and total shareholders’ equity $5.84 million. The $1.5 million related-party convertible note plus accrued interest was converted into common shares in February 2020; no related-party promissory note remained at year-end. Lease liabilities totaled $481,384. The filing reports no material off-balance-sheet arrangements.
Subsequent to year-end, Sanara raised approximately $28.9 million net in a February 2021 public offering. It also entered into a $2.5 million secured revolving credit facility maturing in January 2023; no amount was outstanding as of March 30, 2021. The facility includes a minimum $1.0 million liquidity covenant, a minimum tangible net worth covenant, and, from the quarter ending June 30, 2021, a minimum interest coverage ratio of 1.5 to 1.0.
Material changes versus 2019
- Revenue grew 32%, but operating expenses rose substantially faster, increasing the operating loss to $5.03 million.
- Cash used in operations increased by $1.87 million, reflecting investment in sales capacity, infrastructure, and telehealth-related start-up costs.
- Investing activity included product-license payments and $1.1 million of equity investments in DirectDerm and Precision Healing.
- Share-based compensation was $1.40 million in 2020, versus none reported in 2019. Common shares outstanding increased from 3.57 million to 6.30 million, including conversions of preferred stock and related-party debt.
- Management reported that an internal-control material weakness identified at December 31, 2019 was remediated by June 30, 2020. Management concluded internal control over financial reporting and disclosure controls were effective at December 31, 2020; the auditor did not attest to internal-control effectiveness.
Outlook, risks, contingencies, and unusual items
- Outlook: Management expected to launch UWSS services and begin commercializing three Cook Biotech biologic products in 2021. It expected sales-force investments to support growth and SG&A to decline as a percentage of revenue over the following two years, while acknowledging execution and funding risks. No numerical revenue or earnings guidance was provided.
- COVID-19: Suspended elective procedures and restricted access to skilled nursing facilities reduced demand and impeded product training, contributing to a second-quarter sales decline. Management reported a strong sales rebound in the third and fourth quarters as restrictions eased in key markets; the future impact remained uncertain.
- Profitability and funding: The company reported a history of losses and negative operating cash flow. Year-end cash was low relative to current liabilities, though the subsequent equity offering materially strengthened reported post-year-end funding. Revolver covenants and continued cash burn warrant attention.
- Product, supplier, and licensing concentration: Most revenue came from surgical products, and a principal revenue-producing product was sourced from one manufacturer. Sanara does not own patents for its marketed products; CellerateRX Surgical has no unexpired patent protection. Minimum royalties and other milestone commitments apply to certain licenses.
- Product quality issue: A potential overheating issue with the PULSAR II pump led Sanara to suspend its full-scale launch. The supplier agreed to redesign the product and credit existing inventory; a relaunch was only anticipated, if at all, in late 2021.
- Related-party exposure: Rochal is a licensor, manufacturer, and technical-services provider, and certain directors have significant relationships with Rochal. Sanara incurred $285,155 of manufacturing costs and $364,881 of technical-services costs with Rochal in 2020. Verify the terms, oversight, and approval of these related-party arrangements.
- Regulatory and service expansion: Medical-device regulation, reimbursement, telemedicine state rules, corporate-practice-of-medicine restrictions, healthcare fraud-and-abuse laws, and patient-data privacy/security requirements may affect product commercialization and planned UWSS operations. The filing identifies no material pending legal proceedings.
- Other notable items: Inventory obsolescence expense was $318,076, compared with $120,442 in 2019; the allowance for obsolete and slow-moving inventory rose to $276,603. The company recorded a full valuation allowance against deferred tax assets and disclosed approximately $13.5 million of NOL carryforwards, subject to possible Section 382 limitations.
The independent auditor issued an unqualified opinion on the financial statements and reported no critical audit matters.
Most important facts for investors to verify
- Whether revenue growth—especially surgical sales—can support the expanded cost base and move the company toward operating profitability and positive operating cash flow.
- Post-offering cash, quarterly cash burn, and compliance with the revolver’s liquidity and other financial covenants.
- Actual launch timing, regulatory status, adoption, reimbursement, and economics of UWSS services and Cook Biotech products.
- Customer and product concentration, availability of the single-source supply, inventory aging, and any further PULSAR II design or quality issues.
- License economics, minimum royalty and milestone obligations, related-party arrangements with Rochal and Catalyst affiliates, and the ownership/control implications of significant shareholders.
- Evidence supporting product efficacy and market acceptance, and whether reimbursement or regulatory changes affect sales or pricing.