Sanara Medtech Inc. (formerly Wound Management Technologies, Inc.) — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. The quarter reflects a major accounting and ownership change: on March 15, the company acquired CGI’s remaining 50% interest in Cellerate, LLC, issuing 1,136,815 Series F convertible preferred shares. Cellerate is treated as the accounting acquirer in a reverse merger/recapitalization. As a result, Q1 2019 includes Cellerate for the full quarter but Wound Management Technologies and its other subsidiaries only from March 16; the 2018 comparison excludes Cellerate. The filing cautions that the periods are not comparable.
Financial results and liquidity
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $2.487 million | $1.962 million |
| Gross profit / margin | $2.198 million / 88.4% | $1.751 million / 89.2% |
| Operating income (loss) / margin | ($157,147) / (6.3%) | $66,708 / 3.4% |
| Net income (loss) | ($162,572) | $6,209 |
| Net loss attributable to common shareholders | ($162,572), or ($0.39) per share | ($125,049), or ($0.08) per share |
| Cash used in operating activities | $436,143 | $200,446 |
- Revenue rose about 27%, while SG&A increased to $2.350 million from $1.654 million. Management attributed the increase primarily to commissions, sales-force expansion and sales-growth initiatives. Cost of goods sold was $289,340 versus $210,912.
- At March 31, cash was $742,457; current assets were $2.938 million and current liabilities $2.313 million, implying working capital of approximately $625,000. Current assets included $1.219 million of net receivables and $346,000 of inventory.
- Total liabilities were $3.990 million versus assets of $3.257 million, leaving a shareholders’ deficit of $733,338. Debt included a $500,000 draw on a $1 million revolving credit facility and a $1.5 million related-party convertible note bearing 5% interest; accrued interest was $44,878. The revolver’s initial rate was 6.25%.
- Cash increased by $566,036 to $742,457. The increase included $508,973 of cash received in the reverse acquisition and $500,000 borrowed on the credit line; operating activities used $436,143. Capital expenditures were $6,794.
Material changes, outlook and risks
- Management cited sales-force growth, expansion of surgical sales to new customers and a renewed focus on long-term care as drivers of revenue growth. It attributed the operating loss to higher initial costs to accelerate sales growth. No quantified financial guidance is provided.
- The company adopted lease accounting guidance effective January 1, 2019, recording $216,077 in operating-lease right-of-use assets and $227,837 in lease liabilities at March 31.
- After quarter-end, the company completed a 1-for-100 reverse stock split effective May 10, 2019 and changed its name to Sanara MedTech Inc. It also formed Sanara Pulsar, LLC, with a 60% company interest, to distribute certain wound-care products exclusively in the United States. First sales were expected in Q3 2019. The agreement includes advances to its partner and payments if specified income targets are not met, with targets escalating for 2021–2024.
- Management stated that additional financing may be needed and that there is no assurance it can be obtained; failure to secure funding could require changes to the business plan, curtailment or cessation of operations. Internal control over financial reporting was deemed ineffective due to the company’s small size and limited segregation of duties. The filing reports no outstanding legal proceedings and no off-balance-sheet arrangements.
Important facts for investors to verify
- Assess underlying growth and profitability using comparable periods: the reported 2019 and 2018 results cover different entities and periods, and the 2019 statements omit WMTI’s January 1–March 15 operations. Management separately estimates that omitted period had approximately $35,400 of revenue and $378,400 of expenses.
- Reconcile royalty disclosures: the revenue disaggregation reports $8,375 of 2019 royalty revenue, while the MD&A says royalties were $50,250 in each quarter.
- Review cash burn, financing availability and terms, including the related-party convertible note, the secured revolving facility and potential dilution from Series F preferred shares. The filing says Series F shares were convertible into two common shares each, subject to subsequent reverse-split adjustment.
- Evaluate the Sanara Pulsar income-target provisions and related payment exposure, as well as progress toward the expected Q3 2019 launch.