Business context and reporting period
This Form 10-Q covers the quarter and nine months ended September 30, 2012. The filing identifies the registrant as Wound Management Technologies, Inc. (WMT), not Sanara Medtech Inc.; investors should verify the company and filing identity. WMT marketed CellerateRX advanced wound-care products, including gel and powder, and reported a focus on hospitals/operating rooms, wound-care centers, and long-term-care/home-health markets.
Key financial results
| Metric | Three months ended Sept. 30, 2012 | Nine months ended Sept. 30, 2012 | Comparison |
|---|---|---|---|
| Revenue | $360,245 | $734,191 | Q3 up 169% year over year; nine-month revenue down 43% |
| Gross profit (margin) | $150,822 (41.9%) | $212,822 (29.0%) | Prior-year gross profit: $(239,664) in Q3 and $744,293 for nine months |
| Net loss | $(1,397,869) | $(1,140,014) | Prior-year restated losses: $(337,837) and $(7,588,460), respectively |
| Operating cash flow | $(1,300,221) for nine months | $(583,305) in prior-year period |
Q3 loss included $783,239 of bad-debt expense, primarily for related-party notes and interest receivable, and $672,734 of noncash employee/contractor warrant compensation. Nine-month results also included a $3.36 million gain from changes in derivative-liability fair value. The 2011 comparative results were restated for derivative liabilities.
Balance sheet and liquidity at September 30, 2012
- Cash was $19,414; current assets were $822,854 versus current liabilities of $6,077,123, a working-capital deficit of approximately $5.25 million.
- Total liabilities were $6,364,692; stockholders’ deficit was $3,602,136. Current notes payable, net of discount, were $1,859,080; related-party notes payable were $291,920; and long-term debentures, net of discount, were $287,569.
- Derivative liabilities were $2,641,462. The company reported $946,248 of financing cash inflows for the first nine months, while ending cash remained very limited.
- Accounts receivable was $213,147 and inventory was $566,639. Related-party notes and accrued interest were fully reserved; the $1.5 million Private Access note remained on the balance sheet, while its $514,021 accrued interest was fully reserved.
Material changes versus prior comparable periods
- Q3 revenue rose to $360,245 from $133,841, while nine-month revenue fell to $734,191 from $1,296,951. The filing attributes the prior-year nine-month comparison partly to a $500,000 2011 payment for CellerateRX powder distribution rights.
- Nine-month general and administrative expense declined 54% to $1,021,399, which management attributed mainly to lower marketing, consulting, and payroll costs and greater reliance on distributors.
- Nine-month net loss narrowed substantially from the restated 2011 loss, primarily with lower debt-settlement and warrant expenses and a larger favorable derivative-liability fair-value change. Q3 loss, however, increased year over year.
- Shares issued increased from 58.75 million at December 31, 2011 to 64.66 million at September 30, 2012; warrants outstanding totaled 14.97 million.
Outlook, risks, contingencies, and unusual items
- Management said Q3 sales were 33% above Q2 and expected momentum to continue; it stated that sustained positive operating cash flow by year-end was possible if sales growth continued in line with projections. This was an expectation, not a reported result.
- CellerateRX Surgical powder began introduction to hospitals in September. Management was pursuing a CE Mark and international partners, and studying possible dental, dermatology/plastic-surgery, and sunburn-relief markets.
- FDA review of a Bone Wax submission required additional studies; management expressed confidence in a possible early-2013 market entry, subject to FDA approval.
- The filing states that current liabilities exceeded current assets, operations had not generated a reliable funding source, and substantial doubt existed about the company’s ability to continue as a going concern. Management said continued operations depended on additional funding and successful future operations.
- At September 30, $1.075 million of third-quarter secured subordinated notes had an October 12 maturity date; the filing says they remained due as of that date. Other notes were past due, and the company relied on debt and equity financing. Subsequent-event disclosures report further borrowing and payments.
- The company had an SEC enforcement action concerning alleged 2009 stock-related conduct. It agreed in principle to a permanent injunction and paid a $20,000 penalty; required SEC Commission and court approval remained pending. Separate litigation by Ken Link was disputed, and Tonaquint litigation was subject to a forbearance arrangement and payment/conversion terms.
- Approximately $208,142 of IRS fees and interest remained under negotiation. Accrued royalties payable to Applied Nutritionals were $709,488. The filing also reported a $92,500 settlement expense and a $907,872 reacquisition-of-distributorship amount in cash-flow reconciliations.
- Management concluded disclosure controls were effective as of September 30, 2012 and reported no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether the filing is correctly associated with Sanara Medtech Inc., given that the registrant named throughout is Wound Management Technologies, Inc.
- The status and repayment terms of past-due notes, particularly the $1.075 million secured subordinated notes, Tonaquint obligations, and related-party debt.
- Actual cash needs and financing availability in light of the $19,414 cash balance, $5.25 million working-capital deficit, and going-concern disclosure.
- Collectability and accounting treatment of the Private Access note and fully reserved related-party receivables.
- Final SEC settlement approval, the outcomes of the Ken Link and Tonaquint matters, and the IRS settlement amount.
- Whether product sales growth, FDA review, and other stated commercialization plans materialized; reported nine-month revenue remained below the prior year.