Sanara Medtech Inc. — 2016 Q2 Form 10-Q Summary
Registrant and period: The filing is under the name Wound Management Technologies, Inc. and covers the quarter and six months ended June 30, 2016. The company markets CellerateRX wound-care products and was preparing to launch HemaQuell, a resorbable bone-wax product. Financial statements are unaudited.
Financial performance
| Metric | Q2 2016 | Q2 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $1.258 million | $745,117 | $2.353 million | $1.759 million |
| Gross profit | $1.048 million | $539,767 | $1.952 million | $1.337 million |
| Gross margin | 83.3% | 72.4% | 83.0% | 76.0% |
| Net loss | $922,437 | $582,320 | $832,162 | $715,716 |
| Net loss attributable to common stockholders | $987,572 | $646,504 | $970,566 | $843,378 |
- Revenue increased 69% for the quarter and 34% year to date, which management attributed to an expanded salesforce and increased sales into hospitals, operating rooms and wound centers. About 96% of revenue was from CellerateRX; the remainder was royalties.
- General and administrative expense rose 123% in Q2 to $1.936 million and 54% year to date to $2.682 million. The increase included $758,665 of warrant-based compensation and consulting fees, including $260,000 of one-time cash fees, as well as higher sales commissions.
- Q2’s reported net loss included these strategic-growth expenses. Management stated that excluding the identified one-time expenses, Q2 would have produced net income of $96,228; this is a non-GAAP management comparison, not reported net income.
- Six-month operating cash use was $282,581, versus $601,312 in 2015. Investing cash use was $703; financing provided $325,836. Cash was $224,889 at June 30, 2016, compared with $182,337 at year-end 2015.
Liquidity, debt and financial position
- Current assets were $1.365 million and current liabilities $1.251 million, implying working capital of approximately $114,296 and a current ratio of about 1.09. The filing’s going-concern note nevertheless states that the company has a working capital deficit; this conflicts with the presented balance-sheet amounts and merits verification.
- Current notes payable and convertible notes totaled $492,900; long-term related-party convertible notes were $1.2 million. Accrued interest was $333,200. Total liabilities were $2.453 million, exceeding total assets of $1.569 million; stockholders’ deficit was $883,801.
- Management said the company historically financed operations through debt and equity sales. During the half year it received $450,000 from Series C preferred stock and repaid $121,800 of debt. The company reported substantial doubt about its ability to continue as a going concern, citing recurring operating losses, accumulated deficit and dependence on additional financing or equity and future profitability.
Material changes, outlook and risks
- Cost of goods sold was 17% of revenue in both the quarter and first half, down from 26% and 24%, respectively, in the comparable 2015 periods. Management cited product mix, including higher-margin surgical sales, as a factor.
- HemaQuell received FDA 510(k) clearance in February 2016. The company said packaging, manufacturing and initial marketing materials were being finalized; it provided no quantified sales forecast or formal financial guidance.
- A consulting and strategic-advisory agreement carries a $60,000 initial fee, transaction success fees, and financing fees. The filing reports a grant of 60 million warrants to the advisor at $0.12 per share, with a five-year term and vesting tied partly to performance conditions. The recorded fair value of the portion without performance conditions was $758,665. The agreement also includes potential dilution and transaction-related costs.
- The company’s CellerateRX license requires royalties, including a minimum aggregate annual payment of $375,000 when earned royalties do not meet that amount. Prior-year accrued royalties of $323,062 were paid in March 2016; current-year accrued royalties were $161,830 at June 30.
- Management concluded disclosure controls were not effective because of deficiencies in controls over valuation of embedded derivatives. The filing reports no legal proceedings and no changes in internal control during the quarter that materially affected, or were reasonably likely to materially affect, internal control over financial reporting.
Important facts for investors to verify
- Reconcile the going-concern note’s stated working-capital deficit with the balance sheet, which shows positive working capital of approximately $114,296.
- Confirm the terms, vesting conditions and potential dilution of the 60 million advisor warrants, and distinguish the 12 million immediately vested portion from the full grant.
- Assess financing needs and liquidity given the going-concern warning, limited cash, recurring losses and dependence on additional capital.
- Verify the status and timing of HemaQuell’s commercial launch and whether CellerateRX growth and margins are sustainable.
- Review the company’s royalty obligations and the reconciliation of current-year royalties payable with cash requirements.