Sanara Medtech Inc. (filing issuer: Wound Management Technologies, Inc.) — Q3 2016 Form 10-Q
Reporting period: Quarter ended September 30, 2016; filed November 10, 2016. The company markets CellerateRX advanced wound-care products and is developing/launching HemaQuell resorbable bone wax through its orthopedic products business.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $1.410 million | $0.906 million | $3.763 million | $2.665 million |
| Gross profit | $1.198 million | $0.708 million | $3.150 million | $2.045 million |
| Gross margin | 85.0% | 78.2% | 83.7% | 76.7% |
| Net income (loss) | $181,487 | ($178,711) | ($650,675) | ($894,427) |
| Net income (loss) available to common stockholders | $106,456 | ($249,892) | ($864,110) | ($1.093 million) |
Quarterly revenue grew about 56%; management attributed growth to an expanded sales force and sales into hospitals, operating rooms, and wound centers. About 96% of Q3 revenue came from CellerateRX and 4% from royalties. Quarterly G&A rose 17% to $963,738, primarily on payroll and consulting costs. Interest expense declined 10% to $42,433. Nine-month G&A increased to $3.646 million from $2.566 million.
Cash, liquidity, and debt
- At September 30, cash was $442,960; current assets were $1.608 million and current liabilities $1.299 million. The balance sheet therefore shows working capital of approximately $309,000 and a current ratio of about 1.24.
- Nine-month operating cash use was $10,091, versus $999,771 in 2015; investing cash use was $3,029. Financing provided $273,743, including $450,000 from Series C preferred stock sales, partly offset by debt repayments. Ending cash increased to $442,960 from $182,337 at year-end 2015.
- Total liabilities were $2.499 million. Debt included $442,000 of current notes payable and $1.2 million of long-term related-party convertible notes; accrued interest was $351,302. Current convertible notes fell from $170,000 at year-end to zero.
- Stockholders’ deficit was $700,402. Common shares outstanding were 108.54 million at quarter-end. The company reported 67.75 million warrants outstanding, including 60 million granted at a $0.12 exercise price during the period.
Outlook, risks, and notable items
- Management described continued investment in CellerateRX sales and marketing and anticipated initial HemaQuell sales before year-end 2016. It reported limited HemaQuell use in cardiac, spine, and orthopedic cases and said it was working with strategic partners on clinical studies. No quantified financial guidance was provided.
- The filing states that recurring operating losses, a working-capital deficit, and a significant accumulated deficit raise substantial doubt about the company’s ability to continue as a going concern and that additional financing and profitable operations are needed. This stated working-capital deficit does not align with the reported September 30 balance-sheet totals, which indicate positive working capital.
- Disclosure controls and procedures were deemed ineffective because of deficiencies in controls over valuation of embedded derivatives. Management reported no material quarterly change in internal control over financial reporting.
- CellerateRX carries a minimum annual royalty commitment of $375,000 if earned royalties do not meet that amount. Prior-year unpaid royalties of $323,062 were paid in March 2016; accrued current-year royalties were $222,301 at September 30.
- Series C preferred stock carries dividends and is convertible into common shares; substantial warrant and preferred-stock conversion potential may dilute common holders. The filing also reports a $30,592 debt-forgiveness gain for the nine-month period and a $758,665 noncash cash-flow adjustment related to issuance of debt for warrants.
- The company reported no legal proceedings. In October 2016, after quarter-end, it granted 1.15 million common shares to four employees, vesting immediately.
Important facts for investors to verify
- Reconcile the going-concern disclosure of a working-capital deficit with the balance sheet’s positive working capital.
- Review the scale, terms, and potential dilution from the 60 million new warrants and Series C preferred-stock conversions.
- Assess funding needs, debt repayment terms, accrued interest, and the company’s ability to meet royalty obligations while expanding sales.
- Evaluate the status of HemaQuell clinical studies, launch timing, and whether anticipated sales materialized.
- Follow remediation of the disclosed derivative-valuation control deficiencies.