Sanara Medtech Inc. (then Wound Management Technologies, Inc.) — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. The filing covers the wound-care and resorbable orthopedic products business, including CellerateRX and HemaQuell. Financial statements are unaudited.
Financial performance and liquidity
- Revenue: Q2 revenue was $2.262 million, up 56% from $1.453 million in Q2 2017. First-half revenue was $4.224 million, up 38% from $3.058 million. CellerateRX Powder was the largest disclosed first-half product stream at $3.877 million; CellerateRX Gel contributed $265,462 and HemaQuell $25,183.
- Profit and margins: Q2 gross profit was $2.104 million (about 93.0% gross margin); operating income was $30,980 (about 1.4% margin) and net income was $31,173. First-half gross profit was $3.855 million (about 91.3% margin); operating income was $97,688 (about 2.3% margin) and net income was $37,382. First-half net income available to common shareholders was a loss of $93,876 after preferred dividends and an inducement dividend.
- Cash flow: First-half operating cash flow was $2,089, compared with $117,432 used in the prior-year period. Investing cash use was $5,749 versus $116,183; financing cash flow was zero versus $143,061 provided. Cash declined $3,660 to $459,529.
- Liquidity and debt: Working capital was $1.592 million, versus a $77,964 deficit at year-end 2017; current assets were $2.155 million and current liabilities $562,721. The company reported no debt at June 30 after related-party notes and accrued interest totaling approximately $1.586 million were converted to common stock in Q1. The filing reports no long-term liabilities.
- Other balance-sheet items: Accounts receivable rose to $1.086 million from $786,250, while inventory fell to $494,551 from $711,397. Total assets were $2.299 million and shareholders’ equity $1.736 million.
Changes versus prior comparable periods
- Revenue growth was accompanied by higher selling, general and administrative expense: up 79% in Q2 to $2.048 million and up 48% in the first half to $3.703 million. Management attributed the increase to sales commissions, payroll and infrastructure expansion, and consulting fees for strategic initiatives.
- Operating income declined to $30,980 from $118,721 in Q2 and to $97,688 from $176,980 for the first half, despite higher revenue. Net income also declined in both comparisons; management cited higher SG&A and the prior-year debt-forgiveness gain.
- Q2 cost of goods sold decreased to $157,982 from $164,320, while first-half cost of goods sold increased to $368,894 from $338,022, primarily with higher sales volume.
- First-half interest expense was $60,608, versus $95,614 in 2017; Q2 interest expense was zero. The 2018 first-half amount included additional interest recognized before the related-party debt conversion.
- Common shares outstanding increased to about 236.6 million from about 113.4 million at December 31, 2017, primarily from conversion of preferred stock, dividends, related-party debt and interest.
Outlook, commentary, risks and unusual items
- Management described Q2 revenue as an all-time quarterly high and said growth reflected expansion of the sales force, new surgical-product customers, renewed focus on long-term care, and case studies by key opinion leaders. It planned continued investment in sales, marketing, product development and clinical support. No numerical guidance was provided.
- The CellerateRX licensing agreements expired February 27, 2018; the filing says sales and distribution may continue for up to six months after termination, with post-termination sales subject to a 3% royalty. The filing does not clearly explain the commercial arrangements after that sell-through period.
- Management reported conversion of all convertible debt and Series C preferred stock to common shares, leaving one class of common shares outstanding and no balance-sheet debt. The conversions substantially increased the share count. A preferred-stock conversion inducement included $103,197 of extra shares for accelerated dividends.
- Commitments include CellerateRX royalties, including a stated minimum aggregate annual royalty of $375,000 when percentage royalties fall short, and an 8% royalty on net revenue from products using acquired Resorbable technology. A Fort Worth office lease runs through June 30, 2021.
- The company adopted ASC 606 on January 1, 2018, with no reported impact on opening accumulated deficit or Q2 revenue. Management believed ASC 842 would not have a material impact. No legal proceedings or off-balance-sheet arrangements were reported. The filing states the company was not required, as a smaller reporting company, to provide risk factors or market-risk disclosures.
Important facts for investors to verify
- What rights, supply terms and royalty obligations applied to CellerateRX after the disclosed six-month post-termination sales period, and whether alternative licensing arrangements were secured.
- Whether revenue growth can translate into sustained operating profitability given the sharp increase in SG&A and low operating margins.
- Collection of the higher accounts receivable balance and the effect of inventory reductions on product availability and future sales.
- The dilutive impact of the increased common share count and remaining warrants and options.
- The continuing cost of royalty commitments and related-party consulting fees, including the $120,000 first-half fee to an entity controlled by the board chairman.