Business context and reporting period
Wound Management Technologies, Inc. (the registrant named in this filing; identified in the request as Sanara Medtech Inc.) filed this unaudited Form 10-Q for the quarter ended March 31, 2013. The company markets CellerateRX advanced wound-care products, including surgical powder, gel and powder products, with a focus on hospitals, operating rooms, wound centers and long-term care.
Financial performance and condition
| Metric | Q1 2013 | Q1 2012 / comparison |
|---|---|---|
| Revenue | $374,724 | $104,133; up approximately 260% |
| Gross profit (loss) | $159,634; gross margin approximately 42.6% | $(14,206) |
| General and administrative expense | $546,311 | $1,498,229 |
| Loss from continuing operations | $(403,096) | $(1,528,573) |
| Net income (loss) | $(942,266) | $287,505 |
| Operating cash flow | $(610,857) | $(656,611) |
Q1 2013 net loss included a $577,805 expense from the change in fair value of derivative liabilities. Q1 2012 results instead included a $2.05 million derivative-liability gain, which helped produce reported net income. Q1 2013 also recorded a $167,142 gain on debt settlement, primarily associated with the IRS compromise. Interest expense was $78,090, versus $45,788; debt-related expense was $50,417, versus $227,936. Interest income was zero, compared with $47,875 in Q1 2012.
Cash at March 31 was $398,739, compared with $45,861 at year-end 2012. Current assets were $1.28 million and current liabilities were $5.92 million, indicating a substantial working-capital deficit; total liabilities were $6.09 million and stockholders’ deficit was $4.47 million. Current notes payable, net of discount, were $2.24 million, related-party notes payable were $415,620, long-term debentures net of discount were $174,468, and derivative liabilities were $1.83 million. Financing activities provided $963,735, including $523,000 in note proceeds and $500,000 in stock-subscription advances; these inflows more than offset operating cash use. The company reported 72.48 million common shares outstanding at quarter-end.
Material changes and management commentary
- Management attributed revenue growth to its sales strategy, hospital and wound-center penetration, and the CellerateRX Surgical powder launch. It also reported an expanding customer base and a strengthening relationship with WellDyne, and emphasized continued efforts in long-term and home-health-care markets.
- G&A expense fell 64%; management said the prior-year quarter included costs to reacquire the Juventas distributorship and reorganize the sales force.
- Accrued royalties declined from $803,238 at year-end to $392,869 at March 31. The filing does not clearly explain the full cash-flow or settlement detail behind this balance movement.
- The company resolved its SEC action with a January 2013 final judgment, permanent injunctions covering specified securities-law conduct, and a $20,000 civil penalty. It also completed an IRS compromise, paying the final $16,000 in March and recording a settlement gain.
- Management gave no quantified revenue, earnings or cash-flow guidance. It described improving commercial traction and making stronger financial footing a priority; future results remain uncertain.
Guidance, risks and contingencies
The filing states that substantial doubt exists about the company’s ability to continue as a going concern. Current liabilities exceed current assets, the company has a stockholders’ deficit, and management says operations have relied on issuing stock and notes. Management expects capital needs to persist until additional funding or reliable revenue is achieved. The filing notes that additional capital may be needed to bring products to market.
Financing and dilution risks are significant: multiple notes were past due or subject to extensions, some convertible debt carries discounted conversion terms, and the company reported insufficient authorized common shares to cover all potential warrant exercises and debt conversions. The intended Series C preferred-stock offering was not yet approved by the board; $500,000 in advance subscriptions was recorded as a liability and would have to be returned if the offering did not proceed. The company also had 16.9 million warrants outstanding.
Other contingencies include the unresolved Ken Link note litigation, whose outcome and financial effect the company said it could not determine, and the Tonaquint dispute and forbearance arrangements. The company also had unpaid royalties and contractual minimum royalty obligations. Fair-value changes in derivative liabilities are based on Level 3 inputs and can materially affect reported earnings. Management concluded disclosure controls were effective as of March 31, 2013.
Important facts for investors to verify
- Whether revenue growth converts into sustained gross profit and positive operating cash flow.
- The company’s near-term funding plan, ability to meet debt maturities, and potential dilution from conversions, warrants or a Series C offering.
- The status and terms of past-due or extended debt, the Tonaquint forbearance, and the Ken Link litigation.
- The collectability and accounting for receivables and related-party balances; the filing reports full allowances against the Private Access note and related-party receivables.
- The basis for the substantial royalty-payable reduction and the company’s ability to meet ongoing royalty obligations.