Sanara Medtech Inc. — 2017 Form 10-K Summary
Filing identity and period: The supplied filing is for Wound Management Technologies, Inc. (the issuer named in the 10-K), for the fiscal year ended December 31, 2017. The filing text does not explain the difference from the requested company name, Sanara Medtech Inc.
Business context
The company markets collagen-based wound-care and surgical products, principally CellerateRX/CRXa, and began first sales of its HemaQuell resorbable bone hemostat in the fourth quarter of 2017. CellerateRX products were manufactured by Applied Nutritionals under licensed rights. The company had 18 staff, including contractors, as of March 31, 2018.
Financial performance and liquidity
| Metric | 2017 | 2016 |
|---|---|---|
| Revenue | $6.305 million | $5.508 million |
| Gross profit / margin | $5.499 million / 87.2% | $4.564 million / 82.9% |
| Operating income (loss) | $120,444 / 1.9% margin | ($272,133) / (4.9%) margin |
| Net income (loss) | $331,309 | ($415,747) |
| Net income (loss) available to common stockholders | $192,303 | ($677,463) |
| Interest expense | $126,825 | $174,493 |
| Cash from (used in) operations | ($139,862) | $409,245 |
- Revenue increased 14%. Cost of goods sold fell 14%, while selling, general and administrative expense rose 34% to $5.275 million as the company expanded sales and marketing capacity.
- 2017 net income included a $286,873 gain on settlement of debt and $50,646 of debt forgiveness. In 2016, operating expenses included $818,665 of unusual expense, primarily a noncash warrant charge of $758,665. Management stated that 2016 operating income would have been $342,918 without that expense.
- Year-end cash was $463,189, down from $833,480. Current assets were $2.037 million and current liabilities $2.115 million, a working-capital deficit of about $78,000 and a current ratio of approximately 0.96. Inventory increased to $711,397 from $348,457.
- At year-end, total liabilities were $2.115 million, including $1.2 million of related-party convertible notes and $324,986 accrued interest. Other notes payable were reported as repaid or settled. The related-party notes were secured, bore 10% interest, and matured June 15, 2018.
- Management said existing cash and expected operating cash would cover requirements for at least 12 months, while noting that additional financing might be needed if cash flow proved insufficient. Despite the CEO’s statement about two years of positive operating cash generation, the cash-flow statement reports negative operating cash flow in 2017 and positive operating cash flow in 2016.
Material changes, outlook and risks
- Management reported its first annual net income, revenue growth, a larger sales and marketing leadership team, and implementation of cloud-based enterprise software. The first HemaQuell sales occurred in Q4.
- The company’s exclusive CellerateRX license expired February 27, 2018; the agreement allowed sales and distribution for up to six months after termination, with a 3% royalty on post-termination sales. The related patent also expired in February 2018. The company said it had stock to supply customers through August 2018.
- On March 26, 2018, the company submitted an FDA 510(k) application for internally sourced hydrolyzed collagen. Management expected, subject to clearance, to sell internally sourced products by September 2018. This was an expectation, not an approved product or assured timeline.
- Management described an aggressive 2018 forecast and said January and February sales targets had been met; the filing provides no clear numerical forecast. Its plans included revenue growth, additional products, continued product development and sales-force expansion.
- Key risks include reliance on a single vendor for raw materials for the principal product; customer concentration (one customer represented about 16% of 2017 sales); competition from larger companies; reimbursement and regulatory uncertainty; market acceptance and execution risks; and possible future financing needs and dilution.
- At year-end, two related-party convertible notes remained outstanding. Subsequent to year-end, $1.2 million of debt was converted into common shares on March 6, 2018, and all Series C preferred shares and related dividends were converted into common stock in February and March. Management also reported that all debt had been retired in Q1 2018.
- The Ken Link litigation was settled in November 2017 by issuing 1.2 million common shares valued at $84,000; the company recorded a $286,873 gain and the claims and counterclaims were dismissed with prejudice. In a separate consolidated dispute, a March 2018 jury found no fraud on the defendants’ counterclaim; the filing does not clearly establish the final disposition of all other claims.
- The independent auditor issued an unqualified opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective as of December 31, 2017; the auditor did not express an opinion on internal control effectiveness.
Most important facts to verify
- Confirm the relationship between the requested Sanara Medtech Inc. and the filing issuer, Wound Management Technologies, Inc.
- Review the subsequent conversion of the $1.2 million related-party notes and preferred stock, resulting share issuance and dilution, and the claimed Q1 2018 debt retirement.
- Track FDA clearance and commercialization of internally sourced collagen, and the effect of the expired CellerateRX license and patent on supply, royalties and sales.
- Reconcile management’s positive-operating-cash-flow commentary with the reported 2017 operating cash outflow of $139,862; assess liquidity, inventory growth and financing needs.
- Confirm the final status of the Fox Lake/Rudawski litigation and evaluate customer and single-supplier concentration.