Business context and reporting period
This Form 10-Q covers the quarter and six months ended June 30, 2014. The filing identifies the registrant as Wound Management Technologies, Inc. (WMT), not Sanara Medtech Inc. WMT markets CellerateRX wound-care products and develops resorbable orthopedic products through subsidiaries. CellerateRX accounted for approximately 97% of second-quarter revenue; royalties accounted for the balance. The company reported FDA 510(k) clearance for its resorbable orthopedic hemostat in February 2014.
Financial performance and liquidity
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $544,350 | $415,693 | $1,226,644 | $790,417 |
| Gross profit | $274,904 | $185,998 | $788,475 | $345,632 |
| Gross margin | 50.5% | 44.7% | 64.3% | 43.7% |
| Operating loss | $(751,746) | $(257,225) | $(1,165,384) | $(660,320) |
| Net loss | $(775,924) | $(32,336) | $(1,321,887) | $(974,601) |
| Net loss available to common stockholders | $(835,837) | $(32,336) | $(1,431,917) | $(974,601) |
Revenue rose 31% in Q2 and 55% year to date. Q2 gross margin improved, while the six-month margin also increased substantially. General and administrative expense grew 136% in Q2 to $1,012,633 and 98% year to date to $1,925,867, which management attributed to expanded staffing, consulting, legal work, and product-development and strategic initiatives. Approximately $90,000 of damaged and expired inventory was recorded in Q2. Cost-of-goods-sold comparisons were also affected by reclassifying external commissions to G&A in 2014.
At June 30, cash was $1,134,592, current assets were $1,915,177, and current liabilities were $2,356,024, implying a current ratio of about 0.81. Current liabilities included $1,586,758 of notes and convertible notes payable and $172,424 of accrued royalties. Total assets were $2,214,561 and stockholders’ deficit was $141,463. Six-month operating cash use was $1,091,082; investing cash use was $4,689; financing provided $2,185,810, primarily from Series C preferred-stock sales. Ending cash was $1,134,592, compared with $136,307 a year earlier. The filing states that current liabilities exceeded current assets and raises substantial doubt about the company’s ability to continue as a going concern.
Material changes, outlook, and risks
- Management said sales growth reflected new accounts, expansion into hospitals, operating rooms and wound centers, and the launch of CellerateRX Surgical powder. It described sales and marketing initiatives as early-stage and planned further investment, but gave no quantified financial guidance.
- WMT reported financing commitments made in December 2013 involving $2.4 million of Series C preferred shares and conversion of more than $1.5 million of existing debt. During the first half of 2014, it issued 32,179 Series C shares for $2,252,510 cash. Series C carries accruing dividends and conversion and liquidation rights; $110,030 of dividends accrued in the first half and none had been declared or paid by June 30.
- Management said shareholders would be asked to consider increasing authorized common shares from 100 million to 250 million, authorizing a possible 1-for-10 reverse split, and adopting a 2014 stock incentive plan. These proposals could affect capital-raising capacity and dilution. Common shares outstanding were 87,778,231 as of August 13, 2014.
- The company has a three-year WellDyne marketing-consulting and product-delivery agreement. A July 2014 investor-relations engagement and service agreement were reported as subsequent events.
- The company disclosed a disputed lawsuit by Ken Link, with trial reset for the week of September 29, 2014. WMT says its usury counterclaims offset the claim, but states that the outcome and potential financial effect cannot be determined.
- Disclosure controls were deemed ineffective as of June 30, 2014 because of deficiencies in controls over valuation of embedded derivatives. Management reported no material change in internal control over financial reporting during the quarter.
- WMT’s exclusive CellerateRX license requires a minimum aggregate annual royalty of $375,000 if sales-based royalties do not meet that amount. Accrued current-year royalties were $172,424 at June 30.
- Derivative liabilities fell from $1,040,850 at December 31, 2013 to $30,712 at June 30, 2014, largely after debt-related derivatives were converted, paid off, or ceased to qualify for derivative accounting. Fair-value changes are non-cash and affected reported results.
Most important facts for investors to verify
- Confirm the filing issuer and its relationship, if any, to Sanara Medtech Inc.; this document names Wound Management Technologies, Inc.
- Assess whether cash, future operating receipts, and additional financing can cover current liabilities and ongoing cash burn, given the stated going-concern substantial doubt.
- Review the status and terms of the proposed share authorization and reverse split, and the dilution and dividend implications of preferred stock, warrants, and equity awards.
- Track the Link litigation and the September 2014 trial setting, including any subsequent resolution or potential liability.
- Evaluate remediation of the embedded-derivative valuation control deficiencies and the effects of inventory write-offs and royalty obligations.