Sanara Medtech Inc. annual report, FY2012

Business context and reporting period

This is Wound Management Technologies, Inc.’s Form 10-K for the fiscal year ended December 31, 2012—not a quarterly filing. The request identifies Sanara Medtech Inc.; the supplied filing is for Wound Management Technologies, Inc., so the entity match should be verified. The company marketed CellerateRX collagen-based wound-care products through its wholly owned subsidiary, Wound Care Innovations. It also held a resorbable bone-wax patent. The filing was signed April 12, 2013.

Financial results and condition

Revenue declined 47%. Management attributed much of the comparison to $926,860 of 2011 revenue from distribution-rights proceeds, a subsidiary sale, and patent licensing; none recurred in 2012. Cost of goods sold was nearly unchanged, reducing gross profit. G&A rose 24%, including approximately $1.2 million related to the Juventas settlement and transition. Bad-debt expense increased primarily from reserves against related-party notes and interest. Net loss narrowed substantially, mainly because debt-related expense and derivative-liability charges were lower; this improvement did not reflect positive operating cash flow.

At December 31, 2012, current assets were $1.044 million and current liabilities were $5.010 million, implying a working-capital deficit of approximately $3.966 million. Total liabilities were $5.199 million, including $1.337 million of derivative liabilities and $2.004 million of current notes payable and debentures, net of discounts. Stockholders’ deficit was $3.806 million. The company reported $803,238 in accrued unpaid royalties at year-end. The filing states that additional capital would be needed in 2013 and that the auditor’s report raises substantial doubt about the company’s ability to continue as a going concern.

Material changes versus the prior year

• Shares issued increased from 58.75 million at year-end 2011 to 68.78 million at year-end 2012. The filing reports 72.48 million outstanding at March 31, 2013.
• Warrant liabilities and embedded conversion features were classified as derivative liabilities because the company lacked enough authorized common shares to cover potential exercises and conversions. The reported fair-value change materially affected 2012 earnings.
• The company reacquired North American CellerateRX powder distribution rights after terminating the Juventas agreement in March 2012. It paid $880,000 to settle the secured note, and recorded approximately $1.2 million of related expenses.
• The Middle East distributor failed to meet minimum sales requirements; WCI terminated the agreement in August 2012 and wrote off the remaining marketing-contact intangible asset.
• The company fully reserved its $1.5 million Private Access note receivable and accrued interest, contributing to the elevated bad-debt charge.

Outlook, risks, contingencies, and unusual items

• Management said quarterly product sales rose from $100,000 in Q1 2012 to $439,000 in Q4 2012. These figures are management commentary and are not a substitute for the annual reported revenue.
• Management anticipated introducing resorbable orthopedic products in 2013, subject to progress on an FDA 510(k) submission, and planned a 2013 launch in at least one additional potential market with a strategic partner. These are forward-looking plans, not assured outcomes.
• The company said it expected to raise additional capital in 2013. Financing to date relied primarily on debt and equity; further funding was not assured. The 2012 cash balance and operating cash use underscore liquidity risk.
• Key operating exposures include dependence on Applied Nutritionals as the sole product manufacturer, competition from larger wound-care companies, Medicare reimbursement changes, and customer concentration: two customers accounted for 23% of 2012 sales. The company also owed minimum royalties of $375,000 annually when sales-based royalties fell short.
• In February and March 2013, the company paid $420,000 and $107,500, respectively, toward past-due royalties under a standstill arrangement; further monthly payments were contemplated. It also settled delinquent 2004–2005 payroll-tax liabilities under an IRS offer in compromise, with a final $16,000 payment in March 2013.
• The company settled the SEC action with a permanent injunction and a $20,000 civil penalty; final judgment was entered January 15, 2013. A separate note-related lawsuit by Ken Link remained unresolved, and the company said the outcome and potential effect could not be determined.
• Convertible debt, overdue notes, forbearance extensions, stock-based debt conversions, and warrants created refinancing, default, and dilution risks. The filing also describes subsequent 2013 financing and additional share issuances.
• The auditor gave an unmodified opinion on the financial statements but highlighted going-concern uncertainty. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor did not audit internal control effectiveness.

Important facts for investors to verify

1. Confirm the issuer’s identity: the supplied report names Wound Management Technologies, Inc., not Sanara Medtech Inc.
2. Review cash runway, financing availability, and the status and terms of debt and forbearance arrangements after March 31, 2013.
3. Verify collection prospects for receivables and the basis for the full reserve on the Private Access note, as well as the status of the royalty-payment schedule.
4. Check regulatory progress and actual commercialization of the bone-wax products and any planned new-market launches.
5. Assess potential dilution from outstanding warrants, convertible instruments, and subsequent share issuances; reconcile the filing’s warrant disclosures, which report a weighted-average exercise price of $0.53 in one section and $0.50 in another.
6. Follow the unresolved Link litigation, the completed SEC settlement, and any remaining tax or other contingent obligations.