Business context and reporting period
The supplied filing is Wound Management Technologies, Inc. and subsidiaries’ unaudited Form 10-Q for the quarter ended September 30, 2017; it does not identify Sanara Medtech Inc. as the registrant. The company marketed CellerateRX wound-care products and launched HemaQuell resorbable bone hemostat in early 2017, while also earning royalties from licensed orthopedic technology.
Financial performance and liquidity
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $1.549 million | $1.410 million | $4.607 million | $3.763 million |
| Gross profit | $1.319 million | $1.198 million | $4.039 million | $3.150 million |
| Gross margin | 85.2% | 85.0% | 87.7% | 83.7% |
| Operating income (loss) | $(28,775) | $216,153 | $148,205 | $(548,784) |
| Net income (loss) | $(48,562) | $181,487 | $83,539 | $(650,675) |
| Net income (loss) available to common stockholders | $(91,435) | $106,456 | $(17,138) | $(864,110) |
- Nine-month operating cash flow was $(411,503), investing cash flow $(126,453), and financing cash flow $(144,210); cash fell from $833,480 at year-end 2016 to $151,314.
- At September 30, current assets were $1.888 million and current liabilities $2.337 million, a $448,630 working-capital deficit. Total liabilities were $2.337 million; current liabilities included $1.2 million of related-party convertible notes, $223,500 of notes payable, and $460,956 of accrued interest.
- Inventory rose to $820,908 from $348,457 at December 31, 2016. Total assets were $2.108 million and stockholders’ deficit was $229,232.
- Common shares issued totaled 112.2 million at quarter-end. Series C preferred stock was also outstanding and convertible into common shares.
Material changes versus the prior comparable period
- Revenue rose 10% in Q3 and 22% year to date. Management attributed the increase to a larger distributor sales network and expanded hospital and surgery-center sales. Royalties contributed $50,250 per quarter and $150,750 year to date in both comparative periods.
- Nine-month gross margin improved, which management attributed to a greater share of higher-margin surgical sales. Nine-month cost of goods sold declined 7% despite revenue growth.
- SG&A increased 35% in Q3 and 34% year to date, primarily from commissions, payroll and strategic consulting. Q3 operating results also included sales and marketing costs, HemaQuell prelaunch expenses, a national sales meeting, advisory services and one-time consulting for an opportunity not pursued.
- Nine-month 2017 net income compared with a 2016 net loss that included $818,665 of one-time administrative expense, primarily a noncash warrant expense and professional fees. Q3 2017 nevertheless shifted to a net loss from year-earlier income.
- Cash used in operations increased from $10,091 to $411,503 year to date, with inventory purchases a significant use of cash. The company paid $190,838 of note principal and retired three non-related-party notes; it reported one remaining $223,500 note at quarter-end.
Outlook, risks, contingencies and unusual items
- Management said its 2017 operating plan anticipated that cash on hand and cash generated from operations would cover foreseeable working-capital, debt-repayment and capital-expenditure needs for at least 12 months, but acknowledged possible interim funding needs, particularly around inventory purchases. No quantified revenue or earnings guidance was provided.
- The filing notes continuing operating losses historically, a working-capital deficit and dependence on the ability to obtain financing or equity and achieve profitable operations. Management stated it believed additional funding could be obtained if required.
- After quarter-end, the company agreed to settle a dispute with Ken Link by issuing 1.2 million common shares; the $223,500 note payable was canceled. The filing does not state the settlement’s recorded value.
- A warrant for 60 million shares held by Evolution Venture Partners was canceled in exchange for 750,000 common shares under an October 2017 termination agreement. No incremental compensation expense was recorded. Most other warrants outstanding at the start of the year expired or were forfeited; 5.92 million remained at September 30.
- The company had an exclusive CellerateRX license with a minimum aggregate annual royalty obligation of $375,000 when royalty payments do not meet that amount; accrued royalties were $232,511 at September 30. The filing also discloses related-party secured convertible notes, bearing 10% interest, due June 2018 under their stated terms, while presenting $1.2 million as a current liability.
- Management reported effective disclosure controls as of September 30 and no material changes in internal control over financial reporting. No legal proceedings were reported in the filing.
Most important facts for investors to verify
- Confirm the issuer’s identity: this source is a Wound Management Technologies, Inc. filing, not a filing under the Sanara Medtech Inc. name.
- Review cash runway and financing needs against the $151,314 cash balance, $448,630 working-capital deficit, operating cash use and management’s 12-month liquidity expectation.
- Clarify the classification and repayment terms of the $1.2 million related-party notes and the accrued interest balance, given the notes’ stated 2018 maturity and current balance-sheet classification.
- Assess dilution from Series C preferred conversion, common shares issued for settlements and services, and remaining warrants and options.
- Track whether growth in surgical sales and HemaQuell adoption can offset higher selling and administrative expenses and sustain improved gross margins.